This is a slightly edited post written by blogger 15-Hour-Work-Week, which explains his first 3 Guiding Principles underpinning his new investing philosophy.
It’s definitely possible for a hardworking and savvy investor to beat the market’s return. However, the caveat is that you really need to enjoy prospecting businesses.
For me, instead of putting in tons of hours reading annual reports of companies, I would very much prefer spending time preparing for my lessons, reading or improving my writing.
And this is where index funds or ETFs come in. Here in Singapore, we have the STI ETF listed on the local SGX. Anyway, here are some points on why I believe in the STI ETF:
- The STI is suitable to represent the Singapore stock market because the 30 companies account for around 75 percent of the total market value of listed companies on SGX. Investing in STI ETF is essentially investing in the future of Singapore.
- As of early 2016, we are officially in a bear market. An individual investor is likely to be much more confident averaging down on a basket of the 30 biggest and baddest companies listed in SGX rather than just one stock. If all 30 companies fail at the same time, there’s probably not much value holding on to a Singapore property or even the Sing dollar.
- Singapore appears to be in a good position as an East-meets-West hub and should benefit from the rising affluence of Asia in the future.
- There have been sufficient literature and statistics to show that most investors, including the fund managers, are not able to beat the index by picking stocks. Since even the professionals who do it full time are having difficulties to beat the index, the chance of a part time investor beating the market should be even lower.
Solution: To save trouble, instead of painstakingly research individual stocks, one can just invest in the STI ETF.
2. Diversify Beyond Singapore
Do you know how many percent you are invested in Singapore?
My guess is at least 90 percent and close to 100 percent. After all, the house that you live in is probably the biggest asset that you own. And this percentage wouldn’t change if you buy more SGX listed stocks or own multiple properties in Singapore.
If you’re in such a situation, can you then bear to imagine a day when Singapore is not doing as well?
That’s why I am looking at a little bit of geographical diversification as a hedge—owning some overseas assets to save my ass in case Singapore goes through a couple of decades like Japan (very small probability, admittedly).
My choice is to invest in the United States. Here’s why:
- The US enjoys several geopolitical advantages. First, it is flanked by the two great oceans, the Pacific and the Atlantic Oceans. Most trade is and will continue to be conducted over the sea routes and this will ensure the prosperity of the cities situated both in the West and East. And as the dominant military power in the American continents, there is little fear of an attack.
- And even though the US contributes an astonishing one-fifth of the world’s GDP, this can be improved further as the country is relatively under populated, as compared to China, India or Europe. The American economy still has plenty of room to grow.
- The US continues to be an attractive place for talented migrants and remains one of the most innovative countries in the world.
Before you shout Vanguard for US stocks, there is this one issue with investing in US stocks through an ETF or an index funds for foreigners like you and me: The dividend withholding tax of 30%, which is definitely not negligible.
I prefer something even cleaner. Since the tax only applies to dividends, this problem wouldn’t exist if no dividends were issued. Granted, this would pose a cash flow issue. However, I am still earning and saving and if total returns can be higher, I really do not mind having to sell some stocks once in a while as part of a drawdown strategy in the future.
Even though I am not looking to beat the Dow Jones Index or the S&P 500, I do think the odds could be in my favour with two of the best money allocators ever at the helm. Paying Buffett and Munger relatively small fees to help me manage my US portfolio seems like a no brainer. And as owner-managers, their interests are aligned with mine. No conflict of interest.
And honestly, Berkshire, which owns 9.5 companies that would be listed on the Fortune 500 were they independent, could likely be more diversified than the STI ETF although it’s just a single stock.
Since I probably can’t afford even one Berkshire Hathaway share (which costs over 200 thousand USD per share), the Berkshire Hathaway B share would do for now. It doesn’t make a difference since I have no intention of flying to Omaha to cast a vote.
Solution: Berkshire Hathaway B Shares
3. Ensure Bearable Volatility
Conventional wisdom dictates that I should have more than 80 of my investments in stocks, since I am 30 years young. However, most people, including yours truly, overestimate our risk tolerance. The worst thing to happen is to buy high and to sell low, when one cannot stomach the downward volatility of stocks.
I have previously talked about the Permanent Portfolio. One would have achieved a respectable 7 percent return per annum over the past 15 years by allocating 25 percent of funds into these 4 asset classes: equities, hard assets, cash and bonds. The theory is that at least one of the four different asset classes will do well in any economic environment, thus largely preserving the value of your portfolio.
I really like this concept. My only concern with it is that it is often touted just after a good run from hard assets that boost the permanent portfolio’s return. It was first touted in the 70s, died during the 80s and 90s as hard assets underperformed the stock market. It only resurfaced recently in the past few years due to the surging returns of bullion during the last decade.
I personally do own some silver and gold, but they are more of a component within my emergency funds and as an alternative currency, I do not forsee or believe that the long term returns of hard assets like gold and silver should exceed that of long term bonds. If hard assets go through a similar slump, the returns of the permanent portfolio could be massively underwhelming even against a traditional stock/bond portfolio.
To reduce the volatility of my portfolio, I prefer to cushion stocks with bonds and cash. With the recent introduction of the Singapore Savings Bonds (SSB), there might not even be a need for me to take higher risks through corporate bonds.
Solution: A permanent portfolio that is made up of STI ETF, Berkshire Hathaway, SSB and Cash
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My 15 Hour Work Week is a blog that will chronicle the author’s journey to create My 15 Hour Work Week and also illustrate an alternative path to guide others along, making it easier for anyone who is also aiming to attain semi-retirement earlier.