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The Bogleheads 3-Fund Portfolio for Singapore Firewalkers

Reading Time: 10 minutes

Hey there! If you’ve started doing some research into FIRE (don’t know what FIRE is? Check out my “What is FIRE?” post before continuing!) you may have run into the concept of the 3-Fund portfolio. Then if you, like me, wanted to setup a similar portfolio here in Singapore, you would have found that most of the resources are focused on people in the U.S. and isn’t very useful for us. That’s why I’ve taken some time to do the research for myself and have compiled the information here in the hopes that it will help you to build a similar portfolio.

So now that’s out of the way, let’s dive into the meat!

Super Short Summary of the 3-Fund Portfolio

The 3-Fund portfolio is one of the core pillars of FIRE. It is a simple and straightforward way to structure your investment portfolio to position yourself for long-term investment success. Explaining the details of why and how the 3-fund portfolio works is outside the scope of this article, you can read up more about it by following this link to the Bogleheads website for more details.

The portfolio, true to its name, consists of 3 parts:

Each of the parts of the portfolio plays a unique role, so let’s dig into how you can set this up for yourself!

Local Stock Market Index Fund

Let’s start with the easy one to get it out of the way.

For those new to the 3-fund portfolio concept, the purpose of the local stock market index fund is to provide you with a portion of your portfolio that is not impacted by foreign currency risk. The local stock market index fund should be denominated by the currency of your monthly expenses (in this case, Singapore Dollars) such that, if SGD drops in value relative to other currencies, you have a pool of investments that you can draw on that has not dropped in value.

Generally when we discuss indexing, we’d want a broad-based index with a large number of companies in them to provide diversification. However in Singapore, the only index is the Straits Times Index (STI) which is made up of only 30 companies, but it is the best we’ve got.

Currently there are only 2 possible choices of ETF that replicates the STI:

Here are some of the important data points for each of these ETFs:

ETFES3G3B
Expense Ratio0.30%0.33%
Dividend FrequencySemi-AnnuallySemi-Annually
Volume436,400
Net Asset Value (NAV) as of 08-08-18SGD $662.02 MSGD $233.17 M

The SPDR has a slightly lower expense ratio and have roughly 3x the NAV so SPDR is much larger as it has been around much longer. However, they are very similar and it would not matter much which one you choose, so won’t worry too much about this and just select whichever ones that is more convenient or if it matches any plans that your brokerage offers.

Personally, I’ve selected the SPDR Straits Times Index ETF for my portfolio, because my brokerage account is with Philips Capital (using their POEMs platform) and their Regular Savings Plan only offers the SPDR for the monthly shares purchase. I’ve set mine to purchase S$1,000 worth each and every month so I will always be dollar cost averaging into the STI.

If you’re wondering about the past returns of the STI ETF, I’ve written a post on the returns you would have gotten if you Dollar Cost Averaged into the STI ETF in the past 10 years here.

Now that we’ve settled the local market fund, let’s take a look at the International Stock Market Index Fund.

International Stock Market Index Fund

On to the fun bits! The International Stock Market Index Fund is meant to provide the investor with exposure to public companies from around the world, ideally excluding the local market since we already have a fund dedicated to that above. The idea would be to get funds that hold as many public companies from as many countries as possible (both developed countries like U.S. and developing countries like China); as the world economy grows, so does our portfolio. Plus, we won’t have to care about which country will come out on top in the future (U.S. or China) because we own both.

Now, as Singapore investors you may keep hearing about Vanguard and their amazing index funds (like VTSAX) if you look at personal finance blogs from the U.S., however we don’t have access to their mutual funds here in Singapore. Thus you may think that the next best thing would be to get into the Vanguard ETFs that are listed on the US Stock Exchanges like the Vanguard Total World Stock (VT) with an expense ratio of only 0.10%, but not so fast!

Unfortunately for us, non-U.S. investors are heavily discouraged from purchasing any stocks through U.S. stock exchanges (U.S. domiciled stocks) due to the hefty 30% dividend withholding tax and up to 40% estate tax for any investments exceeding USD $60,000 in total value. This makes buying any U.S. domiciled stocks or ETF prohibitively expensive and out of the question for us Singapore investors.

So what are our options?

First, instead of looking at the U.S. stock exchange, let’s turn our attention to the London Stock Exchange (LSE.) There are ETFs listed here that attempts to achieve a similar goal of VT but are domiciled in Ireland, which removes the estate tax concerns and reduces the dividend withholding tax rate — which is now effectively a transfer between a U.S. company to an Irish company, with a withholding tax rate — of just 15%.

Let’s take a look at the ETFs that we have access to in LSE which could be our International Fund:

ETFVWRDIWDAEIMI
Expense Ratio0.25%0.20%0.18%
Replication MethodPhysicalPhysicalPhysical
Dividend DistributionDistributingAccumulatingAccumulating
Dividend FrequencyQuarterlyN/AN/A

VWRD: the Simplest Option

VWRD is similar to VT in the U.S. but it is missing the small-cap companies that VT provides. It also pays dividends once every quarter in USD and is a good option if you are planning to live off of dividends eventually and not sell your stocks to fund your lifestyle. However, this also means that in order to reinvest your dividends during your investing years, you must manually use the dividend to buy more stock, which – if your dividend isn’t high enough in the beginning to be used to buy more shares – could leave your dividend sitting idle in your portfolio as cash waiting to be put to work again.

Despite that, VWRD is the simplest option with a good expense ratio that allows you to simply add both developed and emerging market companies to your portfolio in just 1 ticker. Simply add VWRD to your portfolio in the right allocation and your International Stock portion is done. Simple!

For more info on VWRD, you can check out the Turtle Investor’s short FAQ on VWRD.

IWDA & EIMI: The Developed & Emerging Market One-Two Punch

Disclaimer: My current portfolio consist of both IWDA and EIMI (together forms about 80% of my portfolio.) I am not sponsored by iShare – but hey if they’d like to reach out, I’m all ears!

Although VWRD is the simplest option, it is not what I’ve selected for my own portfolio. What I did instead was to purchase IWDA and EIMI in combination in order to form this part of my portfolio.

Here are 3 reasons why I did not elect to use VWRD:

  • The expense ratio of VWRD is 0.05% more than IWDA and 0.07% more than EIMI and every little bit counts when this is going to be the largest part of my portfolio.
  • The volume is much lower than that of IWDA which will impact the liquidity of the fund during times of high market volatility (it’s easier to buy and sell a stock if it has high volume since that means more people are buying and selling that stock.)
  • It distributes dividends – which means I need to manually reinvest the dividends myself. In the beginning, when my holding is small, the dividend distribution will not be enough to form a large enough lump sum to make another purchase of IWDA. This means it will often sit around in my account waiting for more money to be added to my brokerage account before I can use it as part of my funds to purchase more shares. In contrast, IWDA and EIMI are both accumulating, which means they will automatically reinvest the dividend for you and is already priced into the share value, thus your dividend is working for you at all times. It’s much more fuss free and less things for me to think about.
  • IWDA and EIMI split allows me to have flexibility in how much I’d like to be exposed to developing markets vs. emerging market separately (I can choose 50/50 split or 80/20 split between IWDA/EIMI based on my risk appetite.

IWDA provides me with the developed markets exposure and EIMI provides the emerging market portion. Together, I will only be missing the developed markets small-cap companies from this group, which is probably fine as in contrast, VWRD is missing the small-cap companies from both developed and emerging markets.

The lower expense ratio is a nice bonus, but one of the nice things about IWDA and EIMI is that they are both “Accumulating” ETF, which means they do no distribute dividends and instead they automatically reinvest the dividends for you back into itself. This means I don’t have to wait to receive the dividend and manually reinvest, it is done automatically for me. Since I’ll be reinvesting dividends anyway during the wealth-accumulating phase of my journey, having this handled automatically for me is great. This means my dividend will never be sitting idle.

Having the developed and emerging markets in 2 separate ETF also allows me the flexibility to increase or decrease my portfolio exposure to either markets independently. That’s a flexibility that you can view as both a positive or a negative, but it’s good to note. At the moment, I try to keep the emerging market exposure to roughly 10% of my portfolio.

Having said that, both routes are great choices and you can choose either option to make up your International Funds and you’ll be fine. The easiest way to choose would be to ask if you’d like to receive your dividend as cash or would you rather it be automatically reinvested for you.

  • Dividend as cash (VWRD)
  • Dividend auto-invested (IWDA & EIMI)

Phew! Hopefully that was clear. Now, let’s take a look at bonds!

Bond Index Fund

Finally, last but not least is the Bond Index Fund. The role of the bond fund in the 3-Funds Portfolio is to provide stability and “smooth out the ride” as JL Colins of www.jlcollinsnh.com like to put it. (Check out his famous Stocks Series, it’s great!)

Bond prices are largely dependent upon the interest rate environment which changes much less often, in a slow and more predictable manner. This will mean that bond prices are much more stable and less volatile than that of stocks. Additionally bond prices tended to historically be inversely correlated with stock prices – meaning when stock prices go up, bond prices tend to fall and vice versa.

By adding bonds to your portfolio, when stock prices fluctuate and maybe falls sharply in recessions, the bond fund component is there to reduce the impact by moving in the opposite direction as the stocks. Of course bonds also has a much smaller potential return compared to stocks (1-2% for bonds compared to 7-8% for stocks in inflation-adjusted returns.) Due to this, most investment advice always recommend adding more bonds to your portfolio as you age to reduce risk at the cost of also reducing returns.

OK that makes a lot of sense, so what’s available for us?

For the bond fund, since we want to make sure it is low risk, we want to approach it in a similar way to either the local stock market fund (made up of SGD denominated bonds to mitigate currency risk.) With that criteria, we really only have 2 options here:

A35MBH
Total Expense Ratio0.25%0.30%
Fund SizeSGD $754.52MSGD $290.51M
Yield-to-Maturity2.34% p.a.3.22% p.a.

In terms of liquidity, neither of the Singapore bond ETFs has fantastic average daily volumes and thus suffers from a larger bid/ask spread (the gap between the price the sellers want to sell and the buyer wants to buy.)

After assessing my situation and looking at the options above, I’ve decided not to have a bond portion to my portfolio.

Wait what? Why don’t you have a bond allocation and what are you doing instead?

There are a number of reasons why I do not personally have a bond allocation in my current portfolio:

  • Long investment horizon: Since I am relatively young, being only 33 years old, I have a longer investment horizon which reduces the risks from stock market volatility. Having the majority (even up to 100%) of my liquid investable cash in stocks allows me to capture higher average returns of equities and let compound interest more time to work its magic. Putting a portion of my investments into bonds now – while it lowers risk – also lowers the returns of the portfolio.
  • We already have CPF: As Singapore residents, we are all required to fund our CPF accounts each month. The contribution can be as much as 20% of our paycheck – dropping lower as our income rises above the $6,000 cap – with another up to 17% contributed by our employer. These amounts are already being placed into the Special Account (at least 4% in risk-free return) and Ordinary Account (at least 2.5% in risk-free return). Given the amount we are already contributing to the CPF monthly AND the relatively high risk-free return we receive, we can view this portion of our networth as our “Bond” component and put the rest of our liquid cash into stocks instead. (Should you invest your CPF money?)
  • Low volume, large spread & returns of the bond ETF: Lastly, the quality of the Bond ETFs are frankly not that great. The returns aren’t much higher than the CPF return (and is not risk-free), the liquidity isn’t good so the spread is large (means you end up paying a bigger premium every time you buy or sell.)

Based on the above, I decided to forego having a bond portion. However, if you feel that despite all the above points, you’d still like to build your bond portion, I’d probably go for the ABF Singapore Bond ETF due to lower expense ratio, higher volume, and larger fund size even though you get slightly lower returns since the bond allocation is meant for stability and not for gains.

One big benefit of having a bond allocation that is not your CPF is that it is liquid. This means that you can make use of it for rebalancing your portfolio when a recession hits. If stocks start dropping in value significantly, it is beneficial to have a bond component that has not gone down significantly that you can sell to buy stocks when stocks are cheap. Without the bond component, you may not have liquid cash ready to take advantage of the drop in stock price as all of your money is already invested in stocks.

Of course, if you are still employed and earning consistent income, you should be able to continue to buy into the stock market as prices drop – this does require to continue having a job when the markets are tanking (something that’s not a guarantee during times of market trouble.)

Conclusion

And there you have it! My thoughts and notes on how to construct a 3-Fund Portfolio in Singapore to set yourself up for long-term investment success! This is a pretty long post, which I think is good for going into adequate depth on a topic like this, but do let me know if you prefer content in long-form like this or more broken up in smaller posts instead so it’s not overwhelming.

Thank you for reading this far and I hope that this post was helpful. If you have your own take on the 3-fund portfolio that is different from what I’ve shown here, I’d love to hear it!

Of course, if you have any questions, suggestions or feedback please let me know in the comment section down below! You can also follow me on twitter if you want to have a conversation by tweeting @firepathlion! Thank you for reading!

Until next time!

FPL

23 thoughts on “The Bogleheads 3-Fund Portfolio for Singapore Firewalkers”

  1. Regarding the use of CPF as bond replacement, one can still use the amount in CPF to buy STI ETC while the stock start dropping value.

    • Yes that is true. The CPF has the benefit of having a relatively high and safe return while also can be used during bad markets like the financial crisis of 2008 to buy up stocks for cheap. Sort of a best of both worlds.

  2. I am SO excited to come across this blog and read about Fire from a Singapore perspective! I’ve been looking for information like this for a long long time! Thank you for starting this blog!

    As an aside, have you heard of ChooseFI? I think you would make a good candidate for launching the ChooseFI Singapore local group! (There are hundreds of them around the world.)

    • I’m so glad you are enjoying reading this blog! Since it’s still early on, I wasn’t sure if this type of in-depth long-form content would resonate, so I’m very happy to hear that you’re finding value in my posts.

      I’ve certainly heard about ChooseFI! I listen to them twice a week, including many other FIRE-related podcasts – I recommend Mad Fientist’s as well if you haven’t started listening to him yet! Great to find another FIRE enthusiast here in Singapore 🙂 A ChooseFI local group does sound like a lot of fun but I’ll have to explore how to do this without exposing myself to my employer! Even if I may not be able to start one, I would definitely love to attend a local meetup of some sort (under the guise of anonymity, hahaha.)

  3. I am SO excited to come across this blog and read about Fire from a Singapore perspective! I’ve been looking for information like this for a long long time! Thank you for starting this blog!

    As an aside, have you heard of ChooseFI? I think you would make a good candidate for launching and moderating the ChooseFI Singapore group!

    • Oh I had another question, looking at the performance of VTSAX vs ES3, the trend up in ES3 does not seem as obvious. One of the ideas behind buying the market is that as long as the economy is robust, the market will always trend up, but I’m not sure I can see that in ES3?

      ES3 also seems a lot more more volatile (understandably, given that it’s only 30 companies), but this volatility will eat into returns as a consequence of sequence of returns. What are your thoughts on it?

  4. Hi there
    Thank you for producing this very useful blog. There is limited info on index investing for Singapore so your views have come in very handy!

    My questions:
    1. What is your allocation between the Singapore and international equities and bonds?
    2. For those who want to set up a monthly savings plan to include both Singapore and international exposure, how would you suggest going about setting this up? For example to start, which platform would you recommend? I’m conscious that a monthly plan which incorporates 4/5 (Singapore and international) funds may be quite expensive in terms of fees.

    Thanks for your advice!

    • Hi Roundcloud! I’m glad you liked my post! Here are my answers to your questions:

      1. Currently I’m trying to shoot for 20% local and 80% international. I don’t plan to hold bonds at this time and may get up to about 10%-15% bond when I retire so I have some amounts I can use for rebalancing. This is because equities has a much higher growth rate which is needed to sustain a long retirement (more than 40-50 years) so I don’t plan to have much bond allocation 🙂 I hope that makes sense!
      2. Unfortunately I don’t see any service that offers an automated way to invest into international stocks on a monthly basis. All the regular savings plans offered here only allow you to automate the purchase of local shares listed on the SGX, no international. For the best options for investing in local stocks, you can check Seedly’s post comparing all the available plans offered by multiple brokerages here: Which Regular Savings Plan Is The Cheapest? POSB vs OCBC vs POEMS vs Maybank Kim Eng

      I hope that helps and feel free to ask any further questions! Thank you very much for reading!

  5. Thank you so much! To follow up then, what would be a cost effective way/ platform to invest on a regular basis in international funds? Would be interested to know how you have done so!
    Roundcloud

    • Sure! Though at the moment I can’t say if the current platform I’m using is necessarily the most cost effective as I haven’t really done enough research into the other platforms!

      What I can say is this: I am currently using the POEMs platform by Phillip Capital and I only really purchase from LSE and U.S. exchanges.

      The commission for each trade are:

      • LSE: Minimum GBP 25 or 0.4%, whichever is higher.
      • U.S.: Minimum USD 20 or 0.3% whichever is higher.

      So with that, I make sure that I always save up until the fees get as close to the minimum as possible. In the above cases:

      • LSE: Minimum trade = GBP 25 / 0.004 = GBP 6,250 or roughly SGD 11,000.
      • U.S.: Minimum trade = USD 20 / 0.003 = USD 6,667 or roughly SGD 9,000.

      This way to are trading in big enough sizes such that you minimise your fees. You should do this with any brokerage firm you use so that the absolute amount you’re paying in fees are a smaller percentage of your total trade. I hope that makes sense.

      This may mean you’ll have to save up for a few months before making 1 trade, but that’s the way to reduce your costs. Making 1 trade every quarter or even every 6 months is fine as well, so no need to rush. Lower cost and consistency is more important long term.

  6. Thanks again for sharing your thoughts. A final question: if you convert SGD to purchase your funds in the local currency (GBP or USD), how do you mitigate the risk of currency movements in the long run? For eg, you invest S$1000 now and it buys you £550 worth of shares in VWRL. In 10 years VWRL is worth £1100. But when you convert GBP back to SGD you only get $1000 because the rates have moved against you.
    Again, would be most interested and grateful to hear your thoughts!
    Roundcloud

    • Yes currency risk is definitely a concern and I will be doing a long-term investment analysis on IWDA as well while also incorporate the effect of currency movements. I think the preliminary results still shows very good returns in the past 7-8 years even when accounting for times when SGD rose against USD. Hopefully I have that article up once I finish the STI series and I’ll let you know! However, on the topic of risk mitigation, that is precisely the reason why we must have SGD denominated portion of our portfolio, if USD somehow drops against the SGD and wipes out all returns in IWDA or VWRL, then we have the STI ETF to draw on while the USD recovers. This doesn’t eliminate the risk, but it does allow us to wait it out.

      Also, IWDA and VWRL are only denominated in USD, but the underlying assets still has its own value. Even if USD drops in value, the value of the underlying asset (the companies) has its own intrinsic value which are not tied to the value of the currency. For example let’s say 1 USD = 2 SGD and Apple is worth USD $5 today (SGD 10), however somehow USD drops against the SGD to 1 USD = 1 SGD, but Apple itself never drops in value, you’d expect it’s share price to adjust and become USD 10 (and thus also still worth SGD 10) as the business fundamentals did not change. Although this is of course a simple scenario, but evidence suggests that equities is a good hedge against inflation and drops in currency value.

  7. I will look out for that, I don’t think anyone has done any research on the effects of currency movements on long term investments in Singapore. Would be super helpful to see this especially with the MAS’s long term policy of gradual appreciation of the SGD, which of course means that any investments you buy in say USD or GBP will suffer FX losses in time which will eat into profits earned from the underlying fund.
    Thanks again for all your hard work.

  8. Hi FPL,
    Great post! If your local bond ETF is not attractive, why not consider a global bond ETF (like IGLO) considering that your portifolio has a global stock ETF (like VWRD or IWDA+EIMI)?

    • Hi SAndrew! That’s a good question. The reason I do not replace the local bond ETF with an international bond ETF is because the Bond portion of the portfolio is meant to provide stability to the overall portfolio. With an international bond ETF, it is usually denominated in USD and the dividend is also in USD, which exposes that to exchange risk. I haven’t done a deeper analysis of the effects of exchange rates on past performance (maybe I will do that in the future and find that I’m worrying for nothing) but I think it would negate the purpose of the bond fund by having it be affected by the volatility of the currency exchange.

  9. Great blog post! It was informative and well written, please keep this up – there is hardly any FIRE financial blogs for Singaporeans so I was pretty excited to see this and shared it with my circle of friends.

    One question though, why are you shooting for 20% local and 80% international? Is it because Sg market is too small so you don’t overweight it?

    • Hi Ochazuke! Thank you for reading and sharing my post! I hope to keep making good contribution to the FIRE community here.

      The reason I am shooting for 20% local and 80% is:
      1. The local is meant as a hedge against exchange rate risk in case the USD value drop negatively impact my international investments.
      2. Historically Singapore index returns are lower on average than international, and I expect it to continue to do so. This is because –
      3. International is more diversified and includes many more global companies compared to the STI (which only includes 30 companies.) So if we believe in holding public companies as an engine of growth, holding more companies and internationally is better than holding a smaller set.
      4. An added point to diversification. International fund provides global market exposure which is much safer than betting just on Singapore.

      Those are my main reasons why I would like to only hold 20% STI instead of higher. Hope that answers your question! 😁

  10. Hi, for US-listed ETFs, you said there is “up to 40% estate tax for any investments exceeding USD $60,000 in total value.” I recall Financial Horse said there is only the 30% dividend withholding tax. Please advise where we can see the details about this 40% estate tax. Many thanks!

  11. Hi FPL, thanks for the info! I found an issue for Irish-listed shares from one of Financial Horse’s readers who wrote “(page 78 Vanguard prospectus): “If a Shareholder does not dispose of Shares within eight years of acquiring them, the Shareholder will be deemed for Irish tax purposes to have disposed of the Shares on the eighth anniversary of their acquisition (and any subsequent eighth anniversary). On such deemed disposal, the Company will account for Irish tax on the increase in value (if any) of those Shares over that eight year period. The Company will pay this tax to the Irish Revenue Commissioners. To fund the Irish tax liability, the Company may appropriate or cancel Shares held by the Shareholder. This may result in further Irish tax becoming due which the Company may satisfy by appropriating or cancelling additional Shares of the Shareholder. No tax is payable by the Company in respect of Exempt Investors and Shareholders who are not resident or ordinarily resident in Ireland and the required Declarations are in place.” ” How does this affect Singaporean investors, and what can we do? Thanks!

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