best index fund portfolio us foreign foreigner gift estate tax rates
Investing

The Best Index Fund Portfolio For Non-US Investors (2020)

Opinions and analysis of the best index fund portfolio are typically geared towards US investors. For Non-US investors, fret not! There are plenty of viable choices that I’ll cover below. If you understand diversification and passive investing, then index funds will be something that you’ll really like. Index funds form the core of what I think is the best investment strategy for Singaporeans.

I hear a lot of references to Warren Buffett whenever I look at investment methodologies and techniques, e.g. “Follow how Buffett Invests” or “This is what Buffett would have done”, but it’s never what Buffett has specifically said so himself. Except for this:

“There are a few investment managers, of course, who are very good – though in the short run, it’s difficult to determine whether a great record is due to luck or talent. Most advisors, however, are far better at generating high fees than they are at generating high returns. In truth, their core competence is salesmanship. Rather than listen to their siren songs, investors – large and small – should instead read Jack Bogle’s The Little Book of Common Sense Investing.”

– Warren Buffett, Chairman of Berkshire Hathaway, 2014 Annual Shareholder Letter, page 19.

For those interested, the book can be found on Amazon: The Little Book of Common Sense Investing: The Only Way to Guarantee Your Fair Share of Stock Market Returns.

Best Index Fund Portfolio: Buying the Whole Market

The premise is simple: instead of picking individual stocks, just buy the entire stock market. There’s nothing more efficient and optimised than a low-cost Exchange-Traded Fund (ETF). For US investors, the US has plenty of US-domiciled ETFs that are great. For non-US investors, buying ETFs domiciled in the US has several disadvantages that make it a pretty lousy deal:

  1. Dividends are taxed. For Singaporeans, it’s going to be 30%.
  2. If you own a total of more than USD60,000 of US assets (stocks, ETFs, properties, etc), you’ll face an estate tax. For Singaporeans, it’ll be a fixed sum PLUS around 18% to 35% of your assets. Just as a fun piece of trivia: if you are a US national, your limit is not USD60,000, but around USD5,000,000.

Here’s a snapshot of 2012’s gift and estate tax rates for foreign nationals in the US:

Best Index Fund Portfolio: us foreign foreigner gift estate tax rates

From: US Taxation of Foreign Nationals

How To Start With The Best Index Fund Portfolio

You’re going to be wanting a portfolio of index funds, or otherwise known as a lazy portfolio. Make no mistake though, it’s not a bad thing to be lazy in this case. What you’re going to get is something that is easy, cheap, quick to implement, and more profitable than most other things that you can invest in.

There is an entire encyclopedia of information about the various portfolios that you can use that you’ll be able to find on Google, but I like things simple – so I’m keeping it to as little funds as necessary.

For non-US investors, ETFs on the London Stock Exchange (LSE) are typically domiciled in Luxembourg or Ireland, and are attractive because:

  1. No capital gains tax
  2. No dividend withholding tax for you (however, dividends will still be taxed at source, and is between the UK and wherever the fund’s component lie.)
  3. High estate/inheritance tax limit (currently £325,000)
  4. No stamp duty

What is the Best Index Fund Portfolio?

I was previously buying VWRD, until I started questioning the efficiency of collecting dividends. I didn’t like the fact that VWRD issued dividends, because I would have to figure out what to do with the dividends. Typically, I’d need to hold on to them for a while until I was next ready to buy more of VWRD. If you think about it, that meant I’d have to incur a commission when I used the dividends to buy more of VWRD, and very possibly had to incur a dividends tax at the source too.

If you like receiving dividends (VWRD has around 2+% dividend yield a year), VWRD is great. However, I have discovered that iShares has an ETF, the iShares Core MSCI World UCITS ETF (IWDA), that is benchmarked on the MSCI World Index, and more importantly, accumulates instead of distributing its dividends. This means that if IWDA were to be giving a 1 cent dividend, it would automatically be accumulated into the ETF, raising its price by 1 cent instead. As a long-term investor, I found this to be very appealing.

The only drawback is that IWDA does not contain any emerging markets, which VWRD has. To complete IWDA, you’ll need another ETF, the iShares Core MSCI Emerging Markets IMI USD (EIMI). Both IWDA and EIMI trade on the LSE, and in USD.

VWRD has ~9.3% exposure to emerging markets, so to mimic that, one can potentially buy IWDA and EIMI in that ratio.

Start With The Best Index Fund Portfolio Today

This is going to be assuming that you’re a Non-USA person. In which case, one should go for ETFs on the LSE because of the tax savings. VWRD is preferred by people who’d like to receive dividend payouts, or IWDA + EIMI for dividends automatically reinvested.

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best investment strategy for singapore
Investing

The Best Investment Strategy for Singapore in 2020

I’ve been thinking about the best investment strategy for Singapore, being a Singaporean myself. Besides having income streams which come from your job, starting your own business, dividends, or any other side hustle, you need to be investing your money well too.

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 – clearly not what you want from an investment strategy!

Best Investment Strategy for Singapore

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.

Benefits of a Lazy Portfolio

Here are the 3 benefits of a lazy portfolio when building the best investment strategy for Singapore:

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. Removes 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).

Best Investment Strategy for Singapore: Lazy Portfolio Singapore

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, best investment strategy for Singapore might include and depend on other countries products, so 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.

  1. iShares MSCI EAFE IMI (XEF.TO, CAD): International equities ETF, covers the whole world except North American (Canada and USA)
  2. Vanguard US Total Market (VUN.TO, CAD): US equities ETF.
  3. 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.

  1. 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
  2. Vanguard FTSE All-World UCITS (VWRD.L, USD): International equities ETF, covers the whole world
  3. SPDR Straits Times Index (ES3.SI, SGD): Singapore-only equities ETF

How To Start a Lazy Portfolio (Singapore)

The best investment strategy for Singapore will arguably have to include a fixed income component. However, I feel that my CPF acts somewhat like a bond component of my portfolio, so I’m reducing my bond component in my investment portfolio.

The next thing is to buy index funds. To do this, you’ll need to find out more about the best index fund portfolio for Non-USA investors, since the USA has a lot of taxes that will create drag for your portfolio if you buy the wrong funds.

What’s Next – Maintaining Your Lazy Portfolio (Singapore) by Rebalancing

This is probably the simplest and the best investment strategy for Singapore. 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.

Enjoy The Best Investment Strategy for Singapore!

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!

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