Saturday, July 20, 2013

Investing Basics - Low Cost Index Fund investing (Passive Investing)

I've heard of this term called passive investing and think that it is suitable for those who are starting out in investing or those with little knowledge on investment. In essence, this method works by you putting a fixed amount into an index fund and let the fund grow over time.

A recommended fund if you're investing in Singapore is the STI ETF. You can buy this ETF from SGX directly. However, currently the minimum investment for this ETF is $3000+. Most young investors who just started working will find it hard to invest $3000+ at a time. They will not have enough money to see the effects of dollar cost averaging which is investing on a regular basis.

The solution is to start a share builders plan from phillip securities. I've attended talks on this share builders plan and have also talked to a licensed broker from philip securities to understand on how this plan works.

Do note that an ETF is a listed as a specified investment product(SIP) and MAS requires all individuals to have certain knowledge before you can invest in SIP. If you do not have finance background, you can take a knowledge assessment by SGX and once you pass the requirements, you can start investing in it.


How the share builders plan works? 
The minimum sum to invest in is $200 every month. You can decide on a variety of counters to invest in. This includes blue chips like Capitaland, Capitamall Trust, DBS, Keppel Corp, OCBC, NOL, SIA, SGX, Singtel, SPH, ST Engineering, UOB etc. And not forgetting the STI ETF too. You can choose to invest in one counter only of you can invest in two or more counters. You can decide to allocate $200 every month to STI ETF and $100 every month to DBS. Total invested amount will be $300 per month in 2 different counters.

Charges
The charges are simple to understand. Fees of $6.42 if you invest less than $1000 per month in <=2 counters. Fees of $10.70 or 0.2%(whichever is higher) if you invest more than $1000 per month in more than 2 counters. So for example if you invest $200 per month in STI ETF, the fee will be fixed at $6.42 every month. A point to note is that if you just invest $200 per month, the fees/charges is already 3.21% which is not recommended. When investing, i always try to keep my fees as low as possible, best to be less than 1%. This is because fees can reduce your investment significantly overtime if kept at a high %. Therefore, the optimal investment amount should be more than $600 per month. This amounts to a fee of 1% which is manageable.


Why invest in STI ETF?
Or the question should be why invest in an index fund? The reason is an index fund offers a good diversification of stocks in that fund itself. For example, the STI, which is the straits times index, comprises of the 30 largest companies listed in the Singapore stock market. If you invest in an index fund, you do not have to pick stocks individually. The best thing is component stocks in an index is changed periodically. Bad companies are removed and replaced with another company. Index all over the world has been rising for the past 50 years. An exceptional case is Japan which has seen its Nikkei index fallen in the past 10 years. Japan has been in a deflationary economy which is a reason for its sluggish economy and stock market. Elsewhere in the world, we're still seeing growth in the past 10 years.

Performance of the STI ETF 
So how has the STI ETF performed over the past 10 years. From its fund factsheet, STI ETF has returned an annualized return of 8.04%. This is the return compounded over 10 years. Which means your money invested at the start has already doubled in the 10 years. STI does give dividends also. Adding the dividends, annualized return is about 11.31%. With performance like this, i'm sure this index funds has beaten most of the other funds out there in the market. You just have to invest monthly and let it compound over 10 years. No stock picking involved and no market timing needed. This is dollar cost averaging working in its power.


Will the Index continue to rise in the future? 
The stock market goes through cycles. There are ups and downs but overall the stock market rises in the long run. This coincides with the economy of the country. Unless we have a situation where a country like Japan goes through a deflationary cycle for a long time, then the stock market will not rise.

Conclusion
Passive investing is suitable for people who want to invest but do not know how to pick stocks. If you know how to pick stocks, your investment returns can be much higher. There are many ways to invest. You can be a value investor where you buy great companies at undervalued prices or you can be a passive investor where you invest regularly in an index fund. Its up to us to decide which one we want to be and to measure our own risk appetite. Start investing today to maximize the value of your money.


Update: POSB and OCBC each came up with their own version similar to the Philip share builders plan which also allows you to invest in index funds. Check out the POSB invest saver and OCBC blue chip investment plan. Make sure when choosing on what to invest, select the correct one. 


Related Posts:

1. Investing basics - How do I start investing?


22 comments:

  1. Hi,

    This a excellent post. I am sure many people will the info useful for ETF investing. Good effort.

    In my Humble opionion, i believe STI Index still belongs to high side currently. I will prefer to wait for a bigger correction to purchase the STI ETF when it is below $3. (STI index below 3000).

    Having said that, it is possible for STI index to above 3000 and begins another bull run for next couple of years. But at current valuation,
    i wouldn't want to increase exposure to STI ETF.

    ReplyDelete
    Replies
    1. Hi Solace,

      STI was at record high earlier this year. I agree with you that it is still on the high side. If we're able to time the market, then our returns can be better but most of the time market timing is difficult. The benefit of index fund investing is so that we can eliminate market timing and let dollar cost averaging work. If we did buy at a high, we can double our investment in the index fund if it goes lower.

      Delete
  2. Hey sg young investment, good post on passive investing and for comparing the different ways to do it (: I have a suggestion, a cheaper way to invest in the sti. Buy nikko sti etf via standard chartered(for the no minimum commission), and viola, a even lower commission cost. What do u think?(:

    ReplyDelete
    Replies
    1. Thanks for your appreciation of my post!

      Your suggestion sounds good. I haven't check out what's the difference between SPDR STI ETF and Nikko STI ETF. If its similar, then it shouldn't be a problem. :)

      Delete
    2. Hi,

      There is no minimum commission for Stand Chart, but the caveat is that you do not hold the stocks. The bank holds it. If you purchase from there, you will realize that you get no statement from SGX because it is not in your CDP.

      For me, I prefer to go by the Philips SBP way.

      Delete
    3. I wanted to open an account with stan chart a few years ago but because the stocks are not linked to cdp I didn't open it. Still prefer stocks to be in CDP.

      Delete
  3. Thank you for sharing this very informative post..I find this info very useful and informative post.
    http://www.fx-insights.com

    ReplyDelete
  4. Hi mak disuza,

    Glad you find it useful. Just sharing what I know :)

    ReplyDelete
  5. Good post for the young investors. It is quite safe and the investors will generate more experience before they can do invest by their own.

    ReplyDelete
    Replies
    1. Hi Josephine Flores,

      Thank you for your kind words. I hope you've understood better on index fund investing. All the best to your investments!

      Delete
  6. Good post. Index fund is a good choice if you don't have time to monitor the market closely or simply your experience is not strong enough.

    ReplyDelete
    Replies
    1. Hi Anonymous,

      Index fund is definitely a good start for investment.

      Delete
    2. Hi, Is there a recommended place to buy them?

      Delete
    3. Hi,

      You can check out philip securities share builder plan here: http://www.phillip.com.sg/stocks-a-shares/share-builders-plan.html

      Alternatively, POSB offers index fund investing also. Check it out here: http://www.posb.com.sg/personal/investments/invest-saver/default.page

      Delete
  7. Hi SGYI,

    Just wondering, does it matter if I start my Passive Investing plan now (even as the STI is overvalued)?

    ReplyDelete
    Replies
    1. Hi wengeleo,

      If you think sti is overvalued now it would be better to start when its cheaper. Always invest when its cheap to provide a margin of safety.

      Of course one can argue that its impossible to find out when its cheap and dollar cost averaging makes more sense. Its up to individual which strategy you want to take.

      Delete
  8. 'You can buy this ETF from SGX directly.'

    how would you go about doing so?

    ReplyDelete
    Replies
    1. Hi jun,

      If you have a brokerage account, search for the stock name STI ETF. The stock code is ES3. You can buy it like how you would buy stocks regularly.

      Delete
  9. Dear SGYI,

    Thank you very much for this post. I just wanted to ask you if you have taken into account the management fees that many of these plans have, and which often eat a lot into the gains of the plan.

    For example some funds/trusts in Singapore have management fees (i.e. yearly charges proportional to the value of the stock) in the region of 1.5%. Mentioning these fees is often forgotten for whichever reason. If you add buying fees of 0.5-1% (depending on the amount you buy could go even higher for smaller amounts), this can very well eat up over time a humongous amount.

    In the US you have beauty queens like the Vanguard VTSAX and the like, with micro costs and automatic reinvestment of the dividends... I hope some day we can have something like this in Singapore!

    Best regards,

    ReplyDelete
    Replies
    1. Hi,

      The management fee is mostly associated with mutual funds or unit trusts. Index funds generally don't have management fees which is why they are low cost.

      In US, the fees are definitely much lower. Probably due to their large market volume. In SG, our market is still quite small.

      Delete
  10. Hi,

    1. I am only 19 this year and is considering on investing in index funds. However, I do not have much experience and knowledge on investments yet, thus would I still be able to purchase the STI index fund (as you stated in the post that one would need to take on an assessment before he is able to invest in ETF)?

    2. SGX has recently reduced the min. buying cap to 100stocks, would it be a better idea to buy 400lots of the STI or to buy the S&P 500 instead?

    3. Do you know the differences between SPDR and Nikko STI?

    4. Do you have any advices and recommendations for young investors (below 21 and not financially capable) to start investing in?

    Sorry for the number of questions, but I'm fairly new to the investment world, but am planning to gain more experience before I reach 21. Thanks and have a good day! :)

    ReplyDelete
  11. This article provides me a clear and objective introduction to the pros and cons of index fund/etf. Thanks for the effort!

    ReplyDelete