I’ve had many years of experience trading stocks and I’ve even dabbled into Contract For Differences (CFD) and forex. However, while I had my good times and great returns, I’ve also had my “investments” go belly-up or languish for months. If you’re young, “waiting for your investment to break even” may not seem like a bad idea, but if it’s $100,000 worth, and you have to wait a year for it to just breakeven, you’re not coming out of it flat – you’re also giving up the gains had you invested the money elsewhere during that one year. This is otherwise commonly known as “opportunity loss”. When you consider that you can put that same amount into a savings account that gets you 1% per annum, or a stock index exchange-traded fund (ETF) that might get you 8% per annum, you can start to feel the pinch.
Embarrassingly, it was only until recently that I found the concept of “lazy portfolios”. Essentially buying the whole market, it was the perfect answer to what I was looking for: a mix of diversification, lowered risks, indifference to bull and more importantly bear market cycles, returns that beat market benchmarks, and most importantly, takes no time and effort at all to implement and maintain.
Here are the 3 benefits of a lazy portfolio:
1. Saves Time
How do you know what stock will go up (or down)? You don’t. In fact, noone can. Not consistently, that is. So rather than to guess/gamble/speculate or spend hours of your time doing “research” and “analysis”, why not just buy the whole market? Stock index ETFs allow you to do so. When you consider that it is incredibly difficult to beat the market, why not buy the market, and enjoy the gains that the markets make?
2. No Stress
Worried about your portfolio’s performance? Not sure when the next bear/bull cycle will be? Concerned about when to buy or sell? Forget all of that. Use Dollar-Cost Averaging, or Value Averaging, or a combination of both. If you’re using the Lazy Portfolio strategy, you’d be more excited when there are bear cycles because you’d think of them as a great fire sale, and want to buy more then. Compare this to what people would normally do, which is to sell, and you can see how much more stress-less this strategy is.
3. Solid Returns
You might think that with all these benefits, a strategy like this would probably be low-returns as well, but you couldn’t be further from the truth: a lazy portfolio averages 7% annually. That’s the kind of returns that the stock market will average, and you don’t even have to pay much fees for this (we’re talking about something like 0.05% for a Vanguard ETF). Unlike mutual funds or unit trusts, you don’t pay fees of 1% to 5% a year. On an investment of $50,000, that difference will result in $97,866 after 30 years (with a 0.05% annual fee), versus $84,561 (with a 1.5% annual fee). And that’s assuming your unit trust beats the market (many fail to, even experienced fund managers).
Lazy Portfolio For A Singaporean
Interested? Well, as a Singaporean, we have the problems of a relatively illiquid stock exchange as compared to other markets such as the New York Stock Exchange, London Stock Exchange, or even the Hong Kong Stock Exchange. However, the Singapore Stock Exchange is getting better and more liquid with every year. Until then though, I have chosen to invest my funds elsewhere.
Case A: Investing in the US market
I considered the US markets, especially for their popular Vanguard ETF options. However, there is a 30% withholding tax on dividends of US-domiciled ETFs for international investors from a country without a tax treaty with the United States (Singapore is without a tax treaty). That adds up to a fair sum.
In addition to that, I didn’t want to risk any chance of dying and leaving my family the grand gift of a huge estate tax (this can be up to 55%, so don’t think that it’s a small amount). Since the lazy portfolio is a long-term approach, I didn’t want to park my funds in US-domiciled brokers and ETFs.
Here are some links for international investors:
IRS – Characterization of Income of Nonresident-Aliens
IRS – Some Nonresidents with U.S. Assets Must File Estate-Tax Returns
Unless you are a US citizen or live in a country with a tax treaty with the US, you should probably avoid holding US-domiciled ETFs. Read on for my solution to this.
Case B: Investing in the Canadian market
The next best market seemed to be the Toronto Stock Exchange, which has liquidity, and quite a range of ETFs. However, withholding tax was still 25%. That means for every $1 you get as dividends, you will be taxed $0.25. Ouch.
If you are feeling bullish about the CAD currency, and maybe plan on retiring to Canada, then this portfolio will make sense. The Global Couch Potato model portfolio that is recommended is made up of 3 equity ETFs, in equal parts.
- iShares MSCI EAFE IMI (XEF.TO, CAD): International equities ETF, covers the whole world except North American (Canada and USA)
- Vanguard US Total Market (VUN.TO, CAD): US equities ETF.
- Vanguard FTSE Canada All Cap (VCN.TO, CAD): Canada equities ETF.
The portfolio is no slouch, gaining over 10% every year for a 10-year period.
Case C: Investing in the London and Hong Kong markets
The best markets for Singaporeans seem to be the London and Hong Kong markets. Both London and Hong Kong have no capital gains tax. London-domiciled ETFs will have a 15% tax on dividends (at source – you don’t see this tax on your received dividends), and Hong Kong-domiciled ETFs have a 0% tax on dividends.
- ABF Pan Asia Bond Index (2821.HK, USD): The ABF Pan Asia Bond Index invests in domestic currency-denominated government and quasi-government bonds issued in eight EMEAP markets, namely, China, Hong Kong, Indonesia, Korea, Malaysia, Philippines, Singapore, and Thailand
- Vanguard FTSE All?World UCITS (VWRD.L, USD): International equities ETF, covers the whole world
- SPDR Straits Times Index (ES3.SI, SGD): Singapore-only equities ETF
How To Start a Lazy Portfolio As A Singaporean
I feel that my CPF acts somewhat as a bond component of my portfolio, so I’m reducing my bond component in my portolio.
The broker I use is Saxo Trading, which has a really straightforward account opening process. It has slightly more expensive trading commissions and rates than other brokers such as E*Trade, but has the benefit of not having any of the problems of US estate duties that I highlighted before. Saxo Trading does slap you with a hefty forex conversion fee (additional 0.5% on your conversion), so always try to fund your Saxo account in the currency that you want to trade with.
For me, since I wanted to buy ETFs denominated in SGD and USD, I simply opened a HSBC Multi-Currency Account, and denominated it in SGD and USD. This has a benefit over other local banks in Singapore because I could do a same-day transfer to Saxo Trading’s bank account, which is also a HSBC bank account. From then on, every transfer I make to/from my HSBC account and to/from my Saxo Trading account, could all be executed online and completed within the business day.
What’s Next – Maintaining Your Lazy Portfolio by Rebalancing
The only thing that you need to do is to make sure that your portfolio components maintain their ratios. For my portfolio, I’d just ensure that each equities component is roughly equivalent, and that my bond component doesn’t exceed half of my age (e.g. if I’m 30 years old, it should not exceed 15%). Since I don’t plan on selling, I merely add funds to the component that is lagging.
If, however, you plan on selling some components, then during your portfolio rebalancing (which can even be an annual affair – there’s no “right” time to do this), you would sell some units of your best-performing component, and add those funds to your worst-performing component and try to bring the mix back to their original levels again.
And that’s it. After this, decide on a regular period in which to make more purchases of your ETFs, and leave your portfolio to do its work, and spend more time doing the things that you love!