Index funds have boarded ships and airplanes to find happy homes outside of the United States. In this section, I’ll give you examples of how to build a portfolio of index funds whether you live in the United States, Canada, Great Britain, Australia, or Singapore. Feel free to check out the section relating to your geographic area, or read with interest how our international brothers and sisters can create indexed accounts. Even if you live in a country not mentioned here, as long as you have the ability to open a brokerage account in your home country, you can build a portfolio of indexes.

This chapter shows how to invest on your own. Going solo is the cheapest (and potentially most profitable) way to invest in index funds. It’s simple. But if hell has to freeze before you go solo, you’ll prefer the next chapter. It describes how to get help through a financial advisory firm.

Still with me? Great! Before getting into the profiles of some real people and how they’re investing, let’s answer a few important questions.

What’s the Difference between an Index Fund and an ETF?

Index funds and ETFs (exchange traded funds) are like identical twins in the same royal family. If they wore t-shirts they would say “Same Same” on one side, “But Different” on the other. They each contain stocks that track a given market. For example, the Vanguard 500 Index fund (VFINX) is an index fund that holds 500 large American stocks. It’s available to Americans who open an account with Vanguard. There are no commissions to buy or sell it.

Each trading day, stocks fluctuate. Anyone buying an index fund can place an order to purchase such a fund. They pay the closing price at the end of the trading day.

ETFs are different. They trade on a stock exchange, much like individual stocks. Theoretically (although this would be foolish) a trader could buy and sell them throughout the day. An ETF, like Vanguard’s S&P 500 ETF (VOO) would earn almost the same return as Vanguard’s 500 Index Fund (VFINX) because it holds the exact same shares in the same proportions. How could returns differ? Vanguard’s 500 Index Fund (VFINX) has an expense ratio of 0.16 percent per year. Costs drop to 0.05 percent per year when the investor has more than $10,000 invested in the fund.

Vanguard’s S&P 500 ETF (VOO) has an expense ratio cost of 0.05 percent, regardless of the amount invested. In theory, investors with less than $10,000 to invest would have a slight cost edge if they bought the S&P 500 in its ETF form.

How Do You Buy an ETF?

An ETF that tracks the entire global market is an excellent choice. Most of the model portfolios that I’ve listed later in the book include such a product. It would include stocks from each of the world’s geographic regions. Its weightings are usually broken down into something called global market capitalization. For example, the US stock market makes up nearly half of the total worth of all global stocks. That’s why a global stock market ETF would have nearly half of its exposure in US stocks. Other countries’ stocks would also be represented based on their global market capitalization.

Investors could buy a Global ETF from any variety of different stock exchanges. Whether an investor buys an ETF off the US stock market, UK stock market, Australian, Canadian, or virtually any other market, the process is similar.

Step 1: Open a Brokerage Account

The first step is to open a brokerage account and send cash into that account.

Step 2: Identify the ETF symbol

If you want to buy an ETF, you need to identify the ticker symbol representing such a product on that given stock exchange. Table 6.1 lists some ETF ticker symbols for global stock market ETFs.

Stock Exchange	ETF Name	ETF Symbol	Annual Expense Ratio
US	Vanguard Total World Stock ETF	VT	0.14%
Canadian	Vanguard FTSE Global All Cap ex Canada Index ETF	VXC	0.25%
UK	Vanguard FTSE All World UCITS ETF	VWRL	0.25%

For example, Americans would buy the ETF that trades on the US stock exchange. Its symbol is VT. Canadians would buy the ETF that trades on the Canadian stock exchange. Its symbol is VXC.

Step 3: Identify the Price Per Share

Find the unit price (also known as the share price) for your ETF. Your online brokerage platform should show a price. If it doesn’t, look it up. Americans could use Morningstar USA, Canadians could use Morningstar Canada, and Australians could use Morningstar Australia. When purchasing an ETF, enter the ETF’s symbol where it asks for ticker, unit, or symbol.

Unit prices for different ETFs will vary. But that doesn’t mean one ETF is cheaper than the other. If two ETFs track the exact same market (Vanguard isn’t the only ETF provider), then the underlying values of the ETFs would be the same, even if one trades at $10 per unit and the other trades at $15 per unit.

Think of two 20-inch pizzas. Each of them costs $20. You’re happy to buy $20 worth of pizza. One of the pizzas is cut into 10 different slices. The other is cut into 15 slices. Only a knucklehead would say, “I’m buying the pizza that’s cut into 15 different slices because I get more pizza for my $20.”

It’s the same for ETFs that track the same market. The true cost variations can only be seen when looking at each respective ETF’s expense ratio.

If I go to Morningstar Canada, I can see that Vanguard’s FTSE Global All Cap ex Canada Index ETF (try saying that with a mouthful of cheese and pepperoni) traded at $28.24 on June 29, 2016. It’s shown in Figure 6.1. The ticker symbol is VXC.

Ignore everything else that you see on the page. Just focus on the last price. In this case, it was $28.24 per share.

Step 4: How Many Shares Can You Buy?

Determine how much you’ll be investing. Keep commissions in mind. If you want to buy an ETF with $100 but the commission price is $9.99 per trade, you would be giving up almost 10 percent in commissions. Anyone who does that twice should be tossed in a padded room.

Try to keep commissions below 1 percent. If it costs $9.99 per trade, don’t invest less than $1,000 at a time. Let’s assume that a Canadian investor has $4,000 to invest in Vanguard’s global stock ETF. If the price is $28.24, the investor can afford 141 shares. The investor may want to round down to ensure that they have enough money to cover the commission for the trade. They should also determine a margin of safety in case the ETF’s price jumps before the trade is executed. To be safe, they could choose to buy 130 shares.

Using the Canadian brokerage QTrade Investor, here’s how it would look. Other international (and US) brokerages have similar looking trading platforms. When you understand how to make a purchase off one brokerage or exchange, you can do it anywhere. It’s just like riding a different bike.

You can see what the trading platform looks like in Figure 6.2

Because this ETF trades on the Canadian market, I entered Canada for the market.

I then entered the ticker symbol for the ETF, VXC.

I placed an action to Buy.

For the quantity of shares, I entered 130.

For Order Type, I selected Market. This means I am willing to accept the market price. I might also select Limit. Please see the sidebar explanation for the difference.

Then I selected submit or confirm.

Not everybody has to buy ETFs. Americans, for example, can invest just as cheaply with traditional index funds. Here’s an example.

Indexing in the United States—An American Father of Triplets

When Kris Olson’s wife, Erica, had triplets in 2006, she single-handedly gave birth to a quarter of a soccer team. Suddenly, there were three more mouths to feed, a minivan to buy, and three college educations to save for.

I’m not suggesting that anyone would hold a charitable benefit with accompanying violin music for a well-paid specialist in pediatrics and internal medicine. But if you’re American and suddenly more aware of your own financial obligations, Kris’s story of opening an indexed investing account could provide some direction.

The 46-year-old doctor realized that investing money was similar, in many ways, to the global health work he does in the poverty-stricken, tsunami-affected regions of Sumatra, Indonesia, where he occasionally flies to train midwives. This latest passion comes on the tail of his volunteer work along the Thai-Burmese border, as well as in Darfur, Cambodia, Kenya, and Ethiopia.

Realizing that donations to developing countries are best done in person, he and his wife Erica (a registered nurse) often brought their own medical supplies to the countries they visited. Simply sending supplies was an invitation for third-world middlemen to plunder the goods before they arrived.

In 2004, he recognized that something similar was happening to his investments at home, which had been laboring in actively managed mutual funds for years.

“My financial adviser was a really nice guy, but I realize that he skimmed money off me like guys at a third-world country border. I was flushing money down the toilet in tiny sums that were adding up,” he said.

On a trip to Indonesia, Kris made a stopover in Singapore, where he purchased cardiopulmonary resuscitation (CPR) training material to take to midwives in Aceh. I met him for lunch at a Japanese restaurant. Over sushi, he asked me what indexes he should buy for his investment account.²

The largest index provider in the United States is Vanguard. If you go to their website, the array of indexes can be confusing. But I suggested that Kris—who was 35-years-old at the time—should keep things simple: buy the broadest stock index he could for his US exposure, the broadest international index he could for his “world” exposure, and a total bond market index fund that approximated his age. I call it the Global Couch Potato Portfolio. Here’s the allocation I recommended:

• 35 percent Vanguard US Bond Index (Symbol VBMFX)
• 35 percent Vanguard Total US Stock Market Index (Symbol VTSMX)
• 30 percent Vanguard Total International Stock Market Index (Symbol VGTSX)

I gave my advice on this basis: Vanguard doesn’t charge commissions to buy or sell; he would be diversified across the entire US stock market and the international stock markets; and he would have a bond allocation that would allow him to rebalance his account once a year.

“Kris,” I said, “Don’t listen to Wall Street, don’t read financial newspapers, and don’t watch stock-market-based news. If you rebalance a portfolio like this just once a year, you’ll beat 90 percent of investment professionals over time.”

When Kris got back home to the United States, he put his old mutual fund investment statements on the dining room table. He then logged on to the Vanguard site and telephoned the company from the website’s contact information.

A Vanguard employee walked Kris through the account opening process as they navigated the website together. She simply asked for his existing mutual fund account numbers—for both his IRA account (a tax-sheltered individual retirement account) and for his non-IRA mutual funds.

Over the telephone, the Vanguard representative then transferred his assets from his previous fund company to Vanguard where he diversified his money into the three index funds. Then, after taking his regular bank account information, she set up automatic deposits into Kris’s index funds according to the allocation he wanted.

At the end of each calendar year, Kris took a look at his investments. “It didn’t take much,” he said. “I just rebalanced the portfolio back to the original allocation at the end of each year [as seen in Figure 6.3], selling off a bit of the ‘winners’ to bolster the ‘losers.’ It was the only time I ever looked at my investment statements—just when it was time to consider rebalancing.” I was able to confirm Kris’s investment returns (in US dollars) using the fund-tracking function at portfoliovisualizer.com.

January 2016

If Kris had continued this process over the next five years, his portfolio would have grown by 73.09 percent over the 10-year period. That’s impressive, considering that the decade included the worst stock market crash since 1929.

Don’t Forget the Enemy in the Mirror

Some investors might notice that Scott Burns’ original Couch Potato portfolio (mentioned in Chapter 5) would have beaten Kris’s Global Couch Potato portfolio over the 10-year period ending December 31, 2015.

Table 6.2 shows how the portfolios compared.

	Average Annual Return	End Value
Kris Olson’s Global Couch Potato Portfolio (35% US stocks, 35% bonds, 30% International stocks)	5.64%	$17,309
Couch Potato (50% US stocks, 50% bonds)	6.09%	$18,148
Couch Potato (60% US stocks, 40% bonds	6.43%	$18,741
Couch Potato (70% US stocks, 30% bonds)	6.72%	$19,274

Source: portfoliovisualizer.com

Scott Burns’ Couch Potato portfolios won. That’s because the original Couch Potato portfolios didn’t contain international stocks. US stocks trounced international stocks for the decade ending December 31, 2015.

But that won’t always happen. The stock market is cheeky. It lures investors toward a “better performing” asset class or geographic sector. It waits. And it waits. Then it conducts a bait and switch. One decade’s better performing sector can become the next decade’s loser.

Check out the five-year period ending January 2016 in Figure 6.4. US stocks crushed international stocks.

During the five-year period ending December 31, 2015, Vanguard’s US Total Stock Market Index (VTSMX) gained 104 percent with dividends reinvested. Vanguard’s International Stock Market Index (VGTSX) gained just 33 percent.

It’s easy to give up on international stocks after seeing this performance. But investors shouldn’t. Every sector has its day. From December 2000 until January 2006, (as seen in Figure 6.5) US stocks were losers. Vanguard’s US Total Stock Market Index gained 10.2 percent. Vanguard’s International Index gained 32.9 percent.

Trying to guess which geographic sector will outperform another is a fool’s errand. Nobody can see the future. Results could be disastrous if investors try to guess. Whether investors choose one of Scott Burns’ Couch Potato portfolios or whether they choose a Global Couch Potato Portfolio, they should stick to their strategy like barnacles to a boat. Over an investment lifetime, results should be similar if you rebalance once a year and ignore the media’s sirens. The added diversification of an international stock market index can also reduce volatility.

Table 6.3 shows some model portfolios for investors with different risk tolerances. As investors grow older, many prefer balanced or cautious models, increasing their bond allocations to increase their portfolios’ stability as they age. Note that I’ve included Vanguard’s Short-Term Bond Fund instead of Vanguard’s Total Bond Market Index. As I mentioned in Chapter 5, such a fund should beat inflation over any 3-year period, no matter what happens to interest rates or bond prices.

Fund Name	Fund Code	Conservative	Cautious	Balanced	Assertive	Aggressive
Vanguard’s US Total Stock Market Index	VTSMX	15%	25%	30%	40%	50%
Vanguard’s International Stock Market Index	VGTSX	15%	20%	30%	35%	50%
Vanguard Short-Term Bond Index Fund	VBISX	70%	55%	40%	25%	0%

Investors with defined benefit pensions or trust funds (lucky devils) can afford higher-risk portfolios. Long-term, higher-risk allocations should produce higher returns.

Many investors, however, don’t want to spend any time thinking about investing. They would prefer to have somebody manage their money for them. Fortunately, Americans can do this far more cheaply than anyone else in the world.

Read about how in the following chapter.

Indexing in Canada

A Canadian Couch Potato Strips Down Costs

Dan Bortolotti is a Renaissance man. He has published books about blue whales, tigers, auroras, humanitarian aid, and baseball. But the 47-year-old father of two might be best known as the creator of the Canadian Couch Potato blog.

He launched it in 2010. It’s now the best online source for Canadian index fund investors.

Dan began investing in his 20s. But like most Canadians, his money languished in actively managed mutual funds. “I didn’t have much money at the time,” he says, “so my mistakes didn’t cost me much.”

In 2008, he was writing for MoneySense magazine when his editor asked him to cover a project called the “7-Day Financial Makeover.” The magazine had asked readers to write in and explain why they deserved a week-long financial boot camp. More than 200 readers applied.

The magazine sifted through the applicants, looking for financial train wrecks. They finally settled on three couples and one single person. “Our goal was to discover whether it’s possible for people to change their financial personality,” the magazine explained. “Can an impulse shopper become a bargain hunter? Can a couple who always argues about money live happily ever after?”

Dan’s job was to follow one of the couples and write about their experience. But during one of the workshops on investing, he had a revelation. “The presenter talked about the difference between investing in high-cost funds versus low-cost ETFs,” says Dan. “I had read about the merits of the Couch Potato strategy in MoneySense for years, but I always thought it sounded too good to be true. That was the beginning of my real education. Something inside me clicked.”

Dan began to read everything he could on the subject. In August 2008—just weeks before the beginning of the global financial crisis—he started his first ETF portfolio. Within six months, stock markets were down close to 50 percent. “It might have been the worst timing in history,” he recalls, “but I was lucky I’d read as much as I did. Everything I had learned primed me to hang on. I knew that there was nothing wrong with the strategy.”⁷

Dan started his blog to help other Canadians become DIY index investors. Then he took a step further. PWL Capital, a wealth management firm in Toronto, soon approached Dan about putting their skills together. In 2014, he became a licensed financial adviser. Now an associate portfolio manager and Certified Financial Planner at PWL, Dan and his colleagues build ETF portfolios for their clients. He continues to maintain the Canadian Couch Potato blog and write regularly for MoneySense.

ETFs make sense for investors with portfolios valued above $50,000. But they might not suit everybody with $50,000 or more. Unlike TD’s e-Series index funds, brokerages charge commissions for investors to buy ETFs; investors aren’t always able to reinvest dividends for free.

To purchase an ETF, an investor has to open a discount brokerage account. In June 2016, MoneySense magazine listed their top picks.⁸ Four of their favorites were Scotia iTrade, Qtrade Investor, BMO InvestorLine, and Questrade. Many investors like the convenience of dealing with a brokerage that’s aligned with their bank. Such brokerages include CIBC Investor’s Edge, HSBC InvestDirect, National Bank Direct Brokerage, RBC Direct Investing, and TD Direct Investing.

Commission fees differ. But it’s a competitive market and fees keep falling. Today’s major online Canadian brokerages start at less than $10 per trade. Many of the brokerages charge a flat fee. RBC Direct Investing, for example, charges a flat $9.95 per trade. It’s the same, whether somebody invests $1,000 or $10 million.

Expense ratio fees for ETFs have also dropped. When I wrote the first edition of this book in 2011, Canadian ETF expense ratios usually cost between 0.25 and 0.50 percent per year. Vanguard Canada shook things up in late 2011. They introduced a variety of lower cost ETFs. Since then, iShares and BMO have slashed their ETF’s expense ratio fees as well.

Table 6.5 shows Dan Bortolotti’s sample portfolios with Vanguard’s ETFs.⁹ Dozens of other ETF combinations could get the same job done. Don’t sweat the small stuff. There’s genius in simplicity. With just three ETFs per portfolio, investors have fewer moving parts. That makes rebalancing easier. Note that I’ve made just one change to Dan Bortolotti’s portfolios. I’ve opted for a short-term bond market index. For an explanation on how such an ETF might be safer, see Chapter 5.

Vanguard’s Canadian Short-Term Bond ETF (VSB) contains about 335 government and corporate bonds. Vanguard’s FTSE Canada All Cap ETF (VCN) contains 216 Canadian stocks of various sizes (small caps, mid caps, and large caps). Vanguard’s FTSE All World ex Canada ETF (VXC) is made up of about 8,100 stocks. Almost half of them are American stocks. Developed world international and emerging market stocks make up the remainder.

Whether you buy the e-Series index funds or build a portfolio of ETFs, you’ll beat most professional investors—if you can harness your emotions.

That said, many Canadians don’t want to spend even an hour each year thinking about investing. They would prefer to have somebody do it for them. In the following chapter, I list some low-cost firms that build and manage portfolios of index funds.

Indexing in Great Britain

England’s national football team is about to play Germany at Wembley stadium. But a team of imposters shows up in their place. They all wear the uniform. On right wing, you can see your postman. Your former science teacher is the goalie. Your milkman plays midfield. Most people would have a pretty good laugh—before demanding that the real team take its place.

The United Kingdom’s financial institutions play a similar trick. But they aren’t doing it for kicks. Many offer “index funds.” But they’re just high-cost imposters who wear the official kit. Richard Branson’s Virgin Money was the first.

In his autobiography Losing My Virginity, Sir Richard says, “After Virgin entered the financial service industry, I can immodestly say it was never to be the same again. . . . We never employed fund managers . . . we discovered their best kept secret: they could never consistently beat the stock market index.”¹⁰

Virgin created its own index tracker funds. But they aren’t cheap. The company’s FTSE tracker fund costs 1 percent per year.¹¹ Such costs are low, compared to actively managed mutual funds. But it’s a stratospheric cost for a single index fund. In contrast, Vanguard UK’s FTSE equity index, when it was first introduced, cost just 0.15 percent. It costs even less today.

Vanguard charges low fees because, unlike Virgin, its investors (everyone who buys its funds) actually own the company. It’s run much like a nonprofit firm. Tracking errors are also low because the company is an experienced index fund builder. If the stocks in the FTSE All Share Index rise by 10 percent, Vanguard’s tracking index should earn roughly 9.85 percent, trailing the market by its 0.15 percent management fee. If it earned a result lower than 9.85 percent, in this case, the fund managers would be to blame. Any additional performance discrepancy would be called “tracking error.”

Virgin Money’s equivalent product would lag the market by at least its 1 percent annual fee. Any tracking errors committed would reduce profits further. Over time, high costs and tracking errors are compounding problems.

Virgin’s FTSE All Share UK index earned 19.7 percent in 2013. Vanguard’s FTSE UK Equity index earned 20.7 percent. They each track the same market. But Vanguard’s index cost 0.85 percent less. As such, Vanguard’s index should have beaten Virgin’s index by 0.85 percent. But this wasn’t the case. Vanguard outperformed Virgin by a full percentage point.

Virgin, living up to its name, lacks Vanguard’s experience. Accurately tracking an index requires skill that Vanguard has honed over many years. Virgin has had a few years to practice. But they’re still disappointing investors. And 2013 wasn’t a one-off miss.

As seen in Table 6.6, between 2010 and 2015, Virgin’s UK stock index underperformed Vanguard’s by an average of 0.97 percent per year.

Such differences look small. But over an investment lifetime, paying more for the same product has costly compounding consequences. In 2016, Vanguard reported even lower costs for its FTSE UK Equity Index. Costs dropped from 0.15 percent to 0.08 percent per year.

Virgin isn’t the only UK index fund provider with high expenses and poor tracking records. Kyle Caldwell, writing for The Telegraph, reported the UK stock market grew by 132 percent for the decade ending 2013. But the typical UK stock market index suffered zombie-like rigor mortis. Halifax’s UK FTSE All Share Index tracker earned just 92.6 percent. It lagged the market by nearly 40 percent for the decade. Scottish Widows UK tracker earned just 94.8 percent. It underperformed the market by nearly 38 percent over 10 years.¹²

Paul Howarth won’t trust his money to a poor index tracker. Nor does he want his money in actively managed funds. When he first started to invest he signed up with a Friends Provident Pension scheme. HSBC offered him the product. “I was advised to use the HSBC World Selection Funds,” he says. “I didn’t know about the many layers of fees involved. When I found out that I was paying more than 3.5 percent a year in fees, I jumped out.”¹³

Paul opened a brokerage account and invested 30 percent of his money in an iShares global bond ETF (SAAA) with the remaining 70 percent in Vanguard’s global stock ETF (VWRL). Vanguard and iShares both offer excellent index funds.

Once a year, Paul rebalances the portfolio. If global stocks rise, he sells some of his global stock index. He adds the proceeds to his bond market index to ensure that he gets back to his original allocation.

Originally from Manchester, Paul now lives in Dubai. He isn’t sure where he wants to retire, so his portfolio represents full global representation without a home country bias.

Most UK-based investors, however, will pay their future bills in pounds. For that reason, it pays to have a home country bias. In Table 6.7, I’ve listed some model portfolios for British investors, based on different risk tolerances.

As investors age, many prefer balanced and cautious allocation models with higher bond market exposure. Such portfolios don’t tend to perform as well, over long periods of time, but they are less volatile.

Those who expect a secondary source of retirement income (think sole heir to a millionaire’s estate) might choose to invest in a higher risk portfolio, regardless of their age.

The financial website Monevator published the following blog post, “Compare The UK’s Cheapest Brokers.”¹⁴ They continue to do a great job comparing and updating brokerage costs. It’s an excellent source for UK-based investors who are looking for a brokerage.

Some investors, however, don’t want to build their own portfolios. In the following chapter, I introduce some low-cost financial services companies that build portfolios of indexes for UK-based investors. They rebalance the holdings as well.

Indexing in Australia—Winning with an American Weapon

Andy Wang is a 37-year-old software developer. In 2016, he bought a home in Melbourne. He moved there from Adelaide in July of that year.

Many new investors start out with actively managed mutual funds. Andy’s story is different. “I started to invest in the stock market in 2007,” he says. “In the beginning I just bought stocks by recommendations from friends and relatives. But I soon realized that was crazy.”¹⁵

Andy began to read some investment books. He liked Benjamin Graham’s classic, The Intelligent Investor. Ben Graham taught at Columbia University. His best student was Warren Buffett, the man who many people consider to be the greatest investor of all time. Late in his life, Ben Graham also supported the index fund concept, much as Warren Buffett does today.

“I didn’t really catch on to index fund investing,” says Andy, “until I read some of John Bogle’s books.” Bogle, the founder of Vanguard, wrote a couple of classics. They include Common Sense on Mutual Funds and The Little Book of Common Sense Investing.

That’s when something dawned on Andy. “I realized I didn’t have the time and capability to do the fundamental analysis on individual stocks. And I didn’t think I could beat the professional analysts who run actively managed mutual funds.”

That’s when Andy decided that he was better off with index funds. Today, he has a globally diversified portfolio of ETFs. He invests with the brokerage Nabtrade. “My portfolio is split between an Australian stock index, an International stock index, and an Australian bond index. I also invest $1,000 in my superannuation every month. All my super is also invested on index funds.”

I’ve listed some model portfolios for Australians in Table 6.8. As investors age, many prefer balanced and cautious allocation models with higher bond market exposure. Such portfolios don’t tend to perform as well over long periods of time, but they are less volatile.

Those who expect a secondary source of retirement income (guaranteed pension income or a multimillion dollar inheritance) might choose to invest in a higher risk portfolio, regardless of their age. Just remember, if you’re banking on an inheritance from your old Aunt Matilda, she could end up creeping around until she’s older than 100. In a game of musical wills, she could also bequeath everything to her hairdresser if she starts to go gaga.

Not everyone, however, wants to build his own portfolio. In the following chapter, I introduce some low-cost financial services companies that build portfolios of indexes for Australian-based investors. They also rebalance the holdings.

Indexing in Singapore

Singaporeans looking to invest in low-cost indexes might Google their options online. But like hidden vipers in the jungles of the Lion City, there are snakes in the financial services industry. They wait to venomously erode your investment potential. Googling “Singapore Index Funds” will bring you to a company offering index funds that charge nearly 1 percent a year. That might seem insignificant. But paying one percent for an index fund can cost you hundreds of thousands of wasted dollars over an investment lifetime.

Singaporean index-fund retailer Fundsupermart flogs the Infinity Investment Series. It offers an S&P 500 Index that charges 0.90 percent per year. That includes Fundsupermart’s platform charge.¹⁶

Let’s assume that two Singaporean twin sisters decide to invest in a US index. One of them buys the S&P 500 Index Fund through Fundsupermart. The other chooses to go with Vanguard’s low-cost S&P 500 ETF that charges just 0.08 percent annually. She could buy the ETF through any number of Singapore-based brokerages, including DBS Vickers, Standard Chartered, or Saxo Capital Markets.

Before fees, each of the sisters’ funds would make the same return. That’s because each fund tracks exactly the same market. Costs, when presented in tiny amounts—like 0.9 percent—look minimal. But they’re not. Table 6.9 shows how seemingly small fees can kill investment profits. If the US S&P 500 index makes 5 percent a year for the next five years, an investor paying “just” 0.90 percent is giving away 18 percent of her profits, every year.

What would happen if the S&P 500 averaged an 8 percent compound annual return? The sister paying 0.9 percent in annual fees would average 7.1 percent per year. Her twin, if she paid just 0.08 percent in fees, would earn 7.92 percent per year.

Over time, this makes a massive difference.

Small fee differences pack very big punches. In the above example, somebody paying 0.82 percent more in annual fees would have $179,389 less money after 45 years. Costs matter. Don’t let the industry fool you into thinking differently.

The Next Step

Once you learn how to build indexed accounts, you won’t have to spend much time making investment decisions. It could take less than 1 hour a year.

Nobody knows how the stock and bond markets will perform over the next 5, 10, 20, or 30 years. But one thing is certain. If you build a diversified portfolio of index funds, you’ll beat about 90 percent of professional investors.

There are only two risks standing in your way. Most financial advisers are your biggest risk. They’ll try to convince you to buy actively managed funds. They’ll use tactics that I outline in Chapter 8. To them, index funds are plagues. Most advisers will do what they can to keep you from buying them.

The second risk faces you in the mirror each morning. Harnessing your emotions is tougher than it sounds, especially when markets go haywire. That’s why many investors need help. For them, the next chapter is a roadmap.