Jack Bogle was the founder of the Vanguard Investment Group - one of the two largest fund managers in America. Vanguard also pioneered the concept of the indexed funds - funds which are invested to mirror the stock market index, such as the S&P index and carry very low expense ratios.
He explained the difference between investing in stocks and investing in companies. The stock investor takes a short term view and trades on the price of the stocks. The investor in companies takes a long term view and looks at the profits earned and dividends distributed by the companies, and is not bothered with the daily price movement of the stocks.
It is difficult for an investor to pick the right companies to invest in. Jack Bogle advise them to invest in the indexed fund, which is invested in a large number of companies that represent the economy. For example, the S&P Index contains the top 500 companies in America that has operations around the world.
The Vanguard S&P funds have an expense ratio of about 0.3%. This is very low compared to an expense ratio of 2%t o 3% charged by many actively managed funds, including the unit trusts available in Singapore.
It may be difficult to find a fund that charges as low as Vanguard. But it is acceptable to invest in a fund with an expense ratio of 0.5% (such as the STI ETF). Here is the accumulated amount from investing $500 a month over 30 years:
Net yield of 5.5% (i.e. 6% - 0.5%), total of $459,517
Net yield of 3.5% (i.e 6% - 2.5%), total of $320,577
You give away 29% of your accumulated savings of $459,517 to get a reduced amount of $320,577 when you invest in a fund that has an expense ratio of 2% higher.
When you invest in companies, you should not bother about any the temporary y fluctuation in the share prices. Although the dividend may be cut during an economic recession, it will be restored when the economy recovers. You only need to make sure that your investments are well diversified, i.e. the fund is invested in many companies, so that any failure of a single company will have a small impact on the fund.
Tan Kin Lian
Dear Mr Tan,
ReplyDeleteLion Capital has 3 index funds called Infinity Global stock index fund, Infinity Eurpoean stock index fund and Infinity US 500 stock index fund. All have quite low expense ratios and lower sales charge as compared to other unit trusts.
http://www.lookforlion.com/default.asp?action=category&ID=24&order=rank&sort=asc&limit=0
Replyto 8:48 AM
ReplyDeletePlease ask Lion Capital representative to contact me at kinlian@gmail.com
Looking for low cost funds in Singapore is like looking for a nanomachine in a haystack.
ReplyDeleteThe "low costs" are at 1.5% p.a., with 1% sales charge on top!
When a local bank launches a new product, banks congratulate eachother with big ads in the newspaper (more complex, expensive products mean more money for them, after all)
CPF should make the requirement to qualify even more stringent.
The 3 Lion Global (asset mgmt group of OCBC) Infinity funds are actually feeder funds into 3 Vanguard funds.
ReplyDeleteAt the Vanguard level, the mgmt fees are all less than 0.3%pa. Unfortunately, Lion Global tacks on an extra 0.48%pa for each of the funds. I don't see why Lion should charge more when they are not even the people running the funds. They are merely doing admin work to facilitate the feeder fund structure.
Hence for all 3 Infinity funds, the expense ratios all greater than 1%pa. Which is too high for indexed funds -- Jack Bogle himself will not be able to recommend these in good faith.
Below are snapshots of the 3 funds. Charges and expense ratios taken from the funds' latest annual or semi-annual reports.
Infinity US 500 Stock Index
Infinity Global Stock Index
Infinity European Stock Index
STI ETF yield less then 2.8% at current level. FYI.
ReplyDeleteBy the way, the title "Investing in companies" is how Warren Buffett invest.
ReplyDeleteHi Mr Tan,
ReplyDeleteWith the high sales charge and expense ratio of the 3 Infinity index fund, what is your opinion of buying the Vanguard index fund ETFs direct from US market through local brokerages instead?
Doing this incur a 1-time brokerage commission of around 0.4% seems to be a better deal than the 1% sales charge and recurring >1% expense by the Infinity funds.
Downside would be the whopping 30% withholding tax on dividends by Uncle Sam. The brokerage chosen must also be one of few that do not charge monthly custodian fees for holding US securities (DBS Vickers etc).
Appreciate your opinions on this.