ETF / S&P 500 investments

[LionFlyer]

VB mostly discusses active investment strategies, fund analysis, individual stock picks, across different markets. 

In forums like reddit/singaporefi, the standard advice is IBKR/Moomoo -> DCA, VWRA/CSPX100/SWRD/IWDA/ACWD accumulating and chill. It seems to be very popular among young people starting to invest as well.

Was wondering what are the views of the VB people here? Are they part of your existing portfolio?

[weijian]

Was wondering what are the views of the VB people here? Are they part of your existing portfolio?

hi LionFlyer,

Non-local ETFs/indexes are part of my existing portfolio. They are there mainly for diversification purposes as I do not have a good grasp of, nor have enough experience investing in non-local companies thus far.

In essence, I can't imagine myself been able to tip-toe while others are not in these markets. Therefore, I mainly expose myself through foreign markets (which may be faster growing) through ETFs/indexes than individual companies.

[specuvestor]

Many ETF salesman misquote Buffett that he recommended S&P ETF. The pretext was that he said if you don’t have time to drill down / do homework etc

That is also in the context of academic studies in past 2 decades claiming asset allocation contributes 80% of returns. That also led to once hot exotic ETFs including factor based ETF. So some fund houses actually abandoned stock selection before realising their folly and reversed course.

So ETF makes a lot of sense for markets and sectors that we have little expertise in. But otherwise bottom up stock picking should still be able to do better in long run.

[LionFlyer]

Therefore, I mainly expose myself through foreign markets (which may be faster growing) through ETFs/indexes than individual companies.

Thanks, Weijian for your replies.

I don't have any ETFs yet, but I am planning to do so to diversify my portfolio. What is your ratio/distributio like for equity, fixed income and ETFs and why does it work for you?

But otherwise bottom up stock picking should still be able to do better in long run.

I was wondering if our age was a factor in our investment choices; at the time I started, there didn't seem to have much options and I was directly introduced to SGX. No IBKR, no Moomoo, very limited access to information. Of course, now have more options.

The general point they make is the average investor is unlikely to beat passive market indexes. How true is this statement?

[Corgitator]

Many ETF salesman misquote Buffett that he recommended S&P ETF. The pretext was that he said if you don’t have time to drill down / do homework etc

That is also in the context of academic studies in past 2 decades claiming asset allocation contributes 80% of returns. That also led to once hot exotic ETFs including factor based ETF. So some fund houses actually abandoned stock selection before realising their folly and reversed course.

So ETF makes a lot of sense for markets and sectors that we have little expertise in. But otherwise bottom up stock picking should still be able to do better in long run.

I don't think the pretext was about not having time to do homework.

I quote WB:

"In my view, for most people, the best thing to do is own the S&P 500 index fund," Buffett had once said. "The trick is not to pick the right company. The trick is to essentially buy all the big companies through the S&P 500 and to do it consistently and to do it in a very, very low-cost way," 

"The record shows that the unmanaged index fund is going to do quite well over time and active investment as a group can't beat it,"

So it's more about the average investor not having the aptitude to beat the market (doing homework doesn't necessarily translate to generating alpha).

In fact, in 2008, WB made a bet with Ted Seides (a professional fund allocator / FoF operator) that a simple SP500 fund would beat Ted Seides's hand-picked portfolio of hedge funds. WB handily won the bet. So even when we have a professional picking a portfolio of hedge funds (themselves managed by professionals), a vanilla index fund is still considerably hard to beat. 

Sure, retail investors have some advantages that professionals don't (able to buy less liquid companies, less pressure to perform on a short-term basis etc), but the professionals also have their advantages. Studies done by SPIVA (and many other academics) have shown the deplorable performance of active managers, especially once fees are accounted for. I don't think it's any better for retail investors.

End of the day, if an individual has the talent to beat the market, then he/she should definitely go ahead and do stock-picking. Otherwise, buying into an index fund should prove to be significantly superior in terms of building wealth. 

Of course, if the individual enjoys the process of investing, a case can be made to do stock-picking (basically treating it like a hobby that burns money just like most other hobbies) even when alpha cannot be generated.

[weijian]

Therefore, I mainly expose myself through foreign markets (which may be faster growing) through ETFs/indexes than individual companies.

Thanks, Weijian for your replies.

I don't have any ETFs yet, but I am planning to do so to diversify my portfolio. What is your ratio/distributio like for equity, fixed income and ETFs and why does it work for you?

Hi LionFlyer,

I will keep myself out of the wealth asset allocation portion and just focus on the equity portfolio allocation. Afterall, I am ill-qualified as a FA.

My portfolio has a mixture of equities (individual stocks-max 10 stocks, and ETF/indexes) and cash. ETF/Indexes for each geography is treated as an individual stock with the same max allocation of 10-20% by "cost". The limit is based on "cost base" to handle my tendency to buy (and average down) on cheap stuff, which often have poor results in the absence of an external crisis. The variation of the 10-20% max limit is explained as this: All stocks start with the same max limit=10% but the winners that proved themselves over time, will have their limits progressively increased to the ceiling level of 20%. This is designed to allow me to "average upwards".

As you can see, I have cash in my "equity portfolio" too, and it is part of my IRR tracking in my equity portfolio. It is deliberately designed as a red herring for comparison - Therefore all re-allocations from cash into equities will undergo the "risk free return and optionality" comparison with cash itself. In general, cash has varied between 20-30% of my portfolio at most times.

P.S. Just a quick comment on your question to specuvestor - There is no doubt that our starting position is a huge factor. But it is surely not a determinant to where we go or end up with. I expect my above asset allocation to keep evolving over time too. I will be very disappointed with myself if what I described to you above, still remains exactly unchanged, in a few years time.

[ghchua]

Hi LionFlyer,

Personally, I don't have any overseas listed ETF in my portfolio. What I have are SGX listed ETFs and index funds. And for ETFs, I avoid synthetic ones. Just pure duplication ETFs.

There are issues with holding overseas listed ETFs. Like tax issues, estate issues etc. It is best that you look at these issues and decide whether it is still worth holding them.

There are reasons why CPF Board only allows SGX listed ETFs to be included in CPF Investment Scheme. In fact, only 6 of them currently. If CPF Board is not comfortable with members investing their retirement monies into these products, what makes you think that you can take the risk? Food for thought.

[LionFlyer]

My portfolio has a mixture of equities (individual stocks-max 10 stocks, and ETF/indexes) and cash. ETF/Indexes for each geography is treated as an individual stock with the same max allocation of 10-20% by "cost". The limit is based on "cost base" to handle my tendency to buy (and average down) on cheap stuff, which often have poor results in the absence of an external crisis. The variation of the 10-20% max limit is explained as this: All stocks start with the same max limit=10% but the winners that proved themselves over time, will have their limits progressively increased to the ceiling level of 20%. This is designed to allow me to "average upwards".

Thanks. I have a cash portion as well, currently invested in T-bills. It is the part that I am considering to partially allocate to an ETF that tracks S&P 500.

There are reasons why CPF Board only allows SGX listed ETFs to be included in CPF Investment Scheme. In fact, only 6 of them currently. If CPF Board is not comfortable with members investing their retirement monies into these products, what makes you think that you can take the risk? Food for thought.

It is not a persuasive reason, IMO as we do not know how CPF decides which instrument is eligble and it is very Singapore centered view.

A quick glance suggest that the 6 approved ETF's are domiciled in Singapore. Is this factor relevant to "safe"? Perhaps in CPF's definition as their mandate to help citizens grow their retirement savings, their definition of "safe" means Singapore only (as the authorized brokers are also Singapore only).

But to use that as a reason to imply that other large global ETFs (e.g CSPX, VWRD) isn't "safe" seems like a major stretch.

[ghchua]

But to use that as a reason to imply that other large global ETFs (e.g CSPX, VWRD) isn't "safe" seems like a major stretch.

Hi LionFlyer,

Your definition of safety is different from CPF Board and mine. I am talking about the structure and legal recourse. You are looking at size.

Being big doesn't mean that it is absolutely safe, if you do not have the legal recourse if anything bad happens. There are ways to invest into these ETFs, in a form of a Singapore based company offering index funds on these products. Anything happens, it is based in Singapore and you have legal recourse on them. MAS can also step in if necessary.

[specuvestor]

Many ETF salesman misquote Buffett that he recommended S&P ETF. The pretext was that he said if you don’t have time to drill down / do homework etc

That is also in the context of academic studies in past 2 decades claiming asset allocation contributes 80% of returns. That also led to once hot exotic ETFs including factor based ETF. So some fund houses actually abandoned stock selection before realising their folly and reversed course.

So ETF makes a lot of sense for markets and sectors that we have little expertise in. But otherwise bottom up stock picking should still be able to do better in long run.

I don't think the pretext was about not having time to do homework.

I quote WB:

"In my view, for most people, the best thing to do is own the S&P 500 index fund," Buffett had once said. "The trick is not to pick the right company. The trick is to essentially buy all the big companies through the S&P 500 and to do it consistently and to do it in a very, very low-cost way," 

"The record shows that the unmanaged index fund is going to do quite well over time and active investment as a group can't beat it,"

So it's more about the average investor not having the aptitude to beat the market (doing homework doesn't necessarily translate to generating alpha).

In fact, in 2008, WB made a bet with Ted Seides (a professional fund allocator / FoF operator) that a simple SP500 fund would beat Ted Seides's hand-picked portfolio of hedge funds. WB handily won the bet. So even when we have a professional picking a portfolio of hedge funds (themselves managed by professionals), a vanilla index fund is still considerably hard to beat. 

Sure, retail investors have some advantages that professionals don't (able to buy less liquid companies, less pressure to perform on a short-term basis etc), but the professionals also have their advantages. Studies done by SPIVA (and many other academics) have shown the deplorable performance of active managers, especially once fees are accounted for. I don't think it's any better for retail investors.

End of the day, if an individual has the talent to beat the market, then he/she should definitely go ahead and do stock-picking. Otherwise, buying into an index fund should prove to be significantly superior in terms of building wealth. 

Of course, if the individual enjoys the process of investing, a case can be made to do stock-picking (basically treating it like a hobby that burns money just like most other hobbies) even when alpha cannot be generated.

Hi Corgitator

Actually the main denominator which he has emphasized many times is that an active investor has to overcome transaction cost which ETF is low cost and hence  his bet against Ted Seide is that fund of funds with embedded fees is not going to beat passives.

So if one is an amatuer investor (not full time) it might be better for one to just buy ETF. Inversely if you spend more time and effort then stock picking is possible, which is what he has been advocating Graham's style of value investing. Otherwise there's nothing to advocate

https://www.youtube.com/watch?app=desktop&v=kqfMvHufOMk
https://www.youtube.com/watch?v=wSIXEXIFWgY