How to invest if you have $20k or more – Why we think The Straits Times is Wrong


21 Jul How to invest if you have $20k or more – Why we think The Straits Times is Wrong

The people at BigFatPurse found the article titled How to invest if you have $20k or more, published on The Sunday Times (19 Jul 2015)rather disturbing. This post is to respond to the very biased responses from so-called experts in the financial industry, who supposedly have the best interests for you than their own pockets.

Who am I to respond to experts? Because I am a retail investor myself whom the experts are peddling these instruments to me. I am sure I am on the same side as you.

WITH $20,000 – 100 % Unit trusts. Seriously?

This was the conclusion from the article. If you have $20k, put EVERYTHING in Unit Trusts.

I agree with the point that with $20k, it is difficult to achieve diversification by buying the stocks directly. Hence, it is easier to invest in a fund to achieve the diversification and lower the risk.

We know that trying to pick stocks can be very frustrating. Skip that frustration, get 21 ideas to finding profitable stocks in an instant. 

But my point is, why is Unit Trusts the only consideration? Why not invest in cheaper index Exchange Traded Funds (ETFs)?

It just reinforced my opinion that Unit Trusts fund the Maserati’s and Ferrari’s for the financial industry.

Let’s compare the cost structure between a typical unit trust versus a typical ETF:

Unit Trusts vs ETFs costs

Let me explain the fees to you.

When you buy a unit trust, you will normally have to pay an upfront fee known as the sales charge, and it can go up to 5%. Of course you wouldn’t really need to cough out the fee in cash, as the company will just deduct the amount from your investment. If you put in $20k and the sales charge is 1%, your actual invested amount will be $19,800 instead of $20k.

For ETFs, the sales charge is essentially the brokerage fee which you incur when you buy or sell stocks. The market rate is 0.28% with a minimum of $25.

There is an ongoing management fee that you need to pay for both unit trusts and ETFs. However, the former is much higher than the latter, usually by a few times.

The fee for an actively managed unit trust is around 1.5% per year while an ETF like the Straits Times Index ETF is at 0.3% per year. This means the unit trust is 5 times more expensive than the ETF. Talk about compounding costs, this will erode a sizeable profits over the long run.

All collective investment schemes should have separate trust accounts to hold clients’ money apart from the company’s funds. As such, the Trustees who custodise clients’ money must also be paid for the service. This is usually a small amount but nonetheless a cost. The custodian fees are similar between unit trust and ETF.

The switching fee may be incurred when you switch between unit trusts. This fee may not be incurred by some companies. For ETFs, take it as you sell one ETF to buy another. Either way you incur the normal brokerage charges of 0.28%

Let’s say you would want to sell your unit trusts, some companies charge you a redemption fee that can be as high as 5%. Some do not charge this fee so you must be very clear before you commit to any investments. For ETFs, selling means incurring brokerage fee of 0.28%.

To summarize, the ETF definitely beat unit trusts in terms of costs.

Are Unit Trusts Worth the Extra Costs?

The next question is to ask is that since unit trusts are expensive, are they worth the money? Can they deliver higher returns?

In the U.S. where financial data is very well collected, we have enough evidence that most unit trusts (or mutual funds as U.S. calls them) under-perform the benchmark they are trying to beat.

You can go on to read the works of John Bogle and Burton Malkiel.

I did a short study on the 10-year performance of the Unit Trusts that invest in Singapore, versus the STI ETF, as at 28 Feb 2015, and the results are as follow (performance excluding costs, data from Fundsupermart):

  1. Aberdeen Singapore Equity Fund: 8.3%
  2. STI ETF: 8.1%
  3. Schroder Singapore Trust: 8.0%
  4. Amundi Spore Dividend Growth: 7.7%
  5. Deutsche Singapore Equity: 7.7%
  6. Nikko AM HIF Spore Div Equity: 7.2%
  7. LionGlobal Singapore Trust:6.2%
  8. Nikko AM  Shenton Thrift: 6.0% 
  9. United Singapore Growth: 5.9%

STI ETF beat 7 unit trusts based on a 10-year performance. And the difference between STI ETF and the top fund is only 0.2%. If I were you, I would not bet my dollar on which fund will beat the STI ETF in the next 10 years because you and I both have a high degree of getting it wrong!

So if you ask BigFatPurse, we would put our money in low-cost index ETFs, in particularly a mixture of STI ETF and ABF Singapore Bond Index ETF in the portfolio. Period.

This just reminds me of the parable from Where are the Customers’ Yachts?

“Once in the dead dead days beyond recall, an out-of-town visitor was being shown the wonders of the New York financial district. When the party arrived at the Battery, one of his guides indicated some handsome ships riding at the anchor. He said, “Look, those are the bankers’ and brokers’ yachts.” “Where are the customers’ yachts?” asked the naive visitor.” – Ancient story.

And if you haven’t had enough, go on to see Dilbert’s comics.

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  • Adrian Tan
    Posted at 11:10h, 21 July Reply

    Thanks for sharing this.

    It sickens me to continue reading such “expert” peddling sales pitch which they package as advice. I can’t help but roll eyes whenever a FA tries to sell me ILP or UT.

    There are so many studies (Andrew Hallam, Tony Robbins) in the market that ETF is the way to go if you want to be a passive investors, and I reckon that accounts for more than 90% of the population.

    But a swanky advertisement will make many ignore conventional wisdom.

    Hard-earned money down the drain.

  • KB
    Posted at 11:21h, 21 July Reply

    Hello Alvin,

    Here is an article that simulated several guru’s investment ideas and overlaid fee to examine its impact.
    A simple 1-2% fee can wipe out the returns quickly.

    After Standard Chartered started their global trading account, I gained access to ETFs in UK, US and HK. Except for a few unit trust investments, I have move most of them into ETFs. Some markets could benefit from active investing and some indices are not replicated. I also avoid synthetic ETFs.

  • Tacomob
    Posted at 16:22h, 21 July Reply

    Hello Alvin,

    That post should be mandatory reading for all people who do not know where to put their money (yet).
    Always ask yourself what is the main objective of the person who recommends something to you. Is he/she really interested in you or only in your money?

    When analyzing past performances of unit trusts we must not forget the survivorship bias. In brief this is the logical error of concentrating on things that “survived” some process and ignoring those that did not because they are no longer visible.

    The so called fund ‘managers’ (what do they manage again?) do like to quietly close non-performing funds or merge them with successful ones giving all kinds of superficial reasons.

    One real reason is that by doing this those underperformers are no longer displayed for any long-term analysis.

    Clever people studied the unit trust historic perfomances for the U.S. market including those funds that did not survive and the result is that shockingly 96% of actively managed funds underperformed the market index after those fees you describe above and taxes.

    Good luck in finding those outperforming 4%. Not in hindsight (that would be easy), but right now and goign forward for the next years.

  • Lin
    Posted at 19:49h, 21 July Reply

    I agree with you STI ETF is a cheaper option. But to gain exposure to other markets such as China, you will have to do it via UT as ETF is not an option. Investing should also not be narrow minded looking just at STI. It should be across asset classes.

    • Alvin Chow
      Posted at 22:30h, 21 July Reply

      There are affordable ETFs that track the Shanghai Index if you are interested to invest in China, not necessarily need to use UT.

      There are bonds and commodities ETFs which give exposure to other asset classes too.

  • Shaun
    Posted at 22:59h, 21 July Reply

    Can you advise which are the cash based ETFs for China?

    • Alvin Chow
      Posted at 18:46h, 22 July Reply

      The bigger ETFs tracking the Chinese indices are listed in U.S. and two of them are

      iShares MSCI China ETF – 0.62% expense ratio
      SPDR S&P China ETF – 0.59% expense ratio

      Important to note they track different indices so understanding the composition, size and number of stocks in the index should be part of the considerations.

  • YJ
    Posted at 23:06h, 21 July Reply

    Hi Alvin, do you have any recommendations on a good ratio between STI ETF and Singapore Bond Index ETF?

    • Alvin Chow
      Posted at 17:35h, 22 July Reply

      The rule of thumb is to have an allocation in stocks is equivalent to 100 minus your age. And the remaining percentage in bonds.

      For example, John is 40 years old, he will have 60% in stocks and 40% in bonds.

      • Joel
        Posted at 12:50h, 25 July Reply

        Hi Alvin, would like to have your opinion: with interest rates still being at lows, would the long term investor still be concerned by this factor and reduce the allocations to bonds accordingly?

        • Alvin Chow
          Posted at 07:59h, 27 July Reply

          Even though the interest rate is low and more likely to rise, it does not mean it is going to. The market likes to surprise us.

          Instead of guessing, one should build a portfolio against all possible scenarios. And a permanent portfolio is a good start.

  • Jason
    Posted at 00:31h, 22 July Reply

    @lin; you seem to be ill informed that there are no ETFs that doesn’t track the China market or any regional markets when there are.

  • peter
    Posted at 19:35h, 22 July Reply

    I invest in a global bal fund. It give me even better return than STI ETF. And even better risk diversifiscation.

    I vest with 30K, to date it is worth some 59K. I think some 12%. I don’t mind the charges, so long it perform.


  • Lik
    Posted at 00:43h, 27 July Reply

    Here are some well-known heavyweights that swore not to touch unit trust…
    1. Donald Trump, a billionaire.
    2. Jim Rogers, another billionaire who stays in Singapore.
    3. Rich Dad Poor Dad author Robert Tanaka Kiyosaki.
    4. The very famous Warren Buffet.
    5. The Millionaire Mindset author T Harv Eker.

    The list goes on but you get the idea. These people either told me they avoid unit trusts (T Harv Eker & Robert Kiyosaki) or i read it from their book(s).

    • florence
      Posted at 13:52h, 05 August Reply

      can show me the articles from the above mentioned above how they told not to invest in UT?

  • florence
    Posted at 13:53h, 05 August Reply

    FYI, for as little of $20k, one can simply sell US options far away and get 5-10% per mth. That’s far more worthwhile than what ST suggested.

  • florence
    Posted at 13:54h, 05 August Reply

    to add on, if want “super safe” aim for 1-3% per mth, which is very very very possible in options selling.

  • hyom
    Posted at 11:30h, 07 August Reply

    This is a good post. Financial education at its best. Educating the masses on what to avoid, particularly when unit trusts are even recommended by mainstream media. The numbers speak for itself. It is a no-brainer to invest in a ETF that tracks the STI compared to unit trust given the guaranteed higher cost and probable out-performance of the ETF.

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  • jeff
    Posted at 17:44h, 28 October Reply

    Do i buy ETF from the posb invest saver or I can buy the ETF myself?

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      The ETF is listed on the SGX, so you can use any services that allow you to buy Singapore shares.

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