I have a reader, who first contacted me to ascertain whether the amount she requires to attain the status of Financial Security is correct.
So she has a follow up question, after I helped her with that figure:
I have decided on buying the exchange traded funds (ETF) but I am not sure what’s the process of buying it and which one I should go for. I am thinking of putting one lump sum first before investing a fixed monthly sum. Can you advise me how I should go about doing it? I read some articles online but seem to be very complex and was confused. It seems I also have to sit through some kind of test as well?
This seem to be a common question, judging that it seems to be repeated a lot in other discussion forum, so I thought I will try to address it today.
Her question can be broken up into a few parts:
How to go about setting up to buy and sell exchange traded funds (ETF)?
Which ETF should she purchase?
How should she start of building her ETF portfolio?
Accumulating wealth through ETF is one of the most passive approach to building wealth. Compare to many others, which I find lean closer to active management then passive management.
There are some positives of this method:
Your portfolio is diversified. This guards against the blow up of one specific stock or bonds
Retail investors can readily form a portfolio with the ETFs available in Singapore, Hong Kong and London Stock Exchanges
We do not know whether the future will be the same as the past, but the components that you use to form your portfolio can have a positive expected return. This is important because if you put in an asset A and historically at different rolling periods, the compounded average growth is negative, then why do we invest in something like that?
Exchange traded funds are lower in expense cost then unit trust, investment linked policy (and cost matters a lot in investment)
Exchange traded funds that tracked traditional benchmark indices are not actively managed, and you do not run into the problem of your unit trust fund manager under-performing the benchmark index (because you are buying the index!) and charging you an exorbitant management fee for that
An ETF portfolio is low effort. You need to put in upfront effort to learn how to manage an ETF portfolio, and after that your recurring maintenance effort is to inject capital, re-balance your portfolio and then continue to read up on index investing, behavioral aspect of finance
Like all investments, there are always negatives.
Some of them are:
In terms of available ETF that you can form the core of your portfolio, there isn’t a lot in Singapore. This means that you need to venture to overseas stock exchange such as London Stock Exchange, Hong Kong stock exchange, USA stock exchange, to find these more robust, low cost ETF. Fortunately, your local stock brokers allow you to invest in them
When you venture overseas, you have to contend with dividend withholding taxes. This could shave your returns. You may also have to contend with estate duty or death taxes. For example, if a non-US citizen passes away, there run a likelihood that 50% of his assets will go to the USA government as estate tax (excluding US$60,000). There are inheritance tax in UK as well. There are non in Hong Kong
Future conditions could change. Historical returns in the future may not mirror that in the past
In the short run, the value of your assets can be volatile. And you might not be ready for how volatile it is. So much so that it makes the investor make stupid decisions
