My fiancé and I were not content with parking our combined savings in a high yield savings account so we looked for alternative places to grow our savings. However, the available options we found such as fixed deposits and endowment plans did not offer the liquidity and returns that we were seeking. (Will need to withdraw funds in less than five years for wedding and housing!!) As such, we decided to allocate a portion of our savings to an ETF portfolio that fulfilled our conditions.
To DIY or not to DIY
Our first instinct was to pump money into a roboadvisor. It’s fuss-free, low maintenance, and we can withdraw the money anytime if we need the cash.
However, me being the smart alec that I was, I suggested we DIY our own portfolio instead of using roboadvisors so that we can save on platform fees. I mean, how hard can it be right? LOL. All I had to do was model our portfolio after theirs and we don’t have to let anyone else earn our hard earned money!
But these managed portfolios tend to have so many ETFs in them and it was neither practical nor cost-effective for us to copy it wholesale. Buying every ETF would incur us huge transaction fees which is the very thing we were trying to avoid in the first place. So once again I suggested we adopt the Boglehead 3-fund portfolio and with little persuasion, my accommodating fiancé agreed to my proposition and let me have a go at it.
What is the Boglehead 3-fund portfolio?
The Boglehead 3-fund portfolio, as its name suggests, is a portfolio comprising only three core funds, typically low expense ratio index funds, that can capture total market performance. These three funds are a domestic stock index fund, an international stock index fund, and a bond index fund.
Depending on your risk profile, you decide how much you would like to allocate to each of those funds accordingly. It is an effective portfolio that boasts simplicity and ease of maintenance, hence it is also known as a lazy portfolio!
You can choose ETFs instead of mutual funds too if you prefer. I do not think that it really matters so long as all three areas are covered and at the lowest possible cost.
Read more about the Boglehead 3-fund portfolio here and also view other examples of Boglehead-style portfolios they suggested using mutual funds or ETFs from different fund houses.
For Singaporeans, this is how the portfolio can look like:
- SPDR Straits Times Index ETF (SGX:ES3)
- Vanguard Total International Stock ETF (NASDAQ:VXUS)
- Vanguard Total Bond Market ETF (NASDAQ:BND)
Singapore’s economic performance does not impress me though so I decided to adapt my own version of the Boglehead 3-fund portfolio.
What’s in our 3-fund portfolio
This is what our adapted portfolio looks like:
- Vanguard S&P 500 ETF (NYSE:VOO) – 35%
- Vanguard Total China Index ETF (HKEX:3169) – 35%
- Schroder Asian Income A Dis SGD – 30%
Since the Singapore economy is so dismal, we decided to use a US index fund as our “domestic” stock. We selected the ever popular Vanguard S&P500 ETF for its relatively stable track record and positive long-term performance. Hold it long enough and we will probably see some decent growth. However, it is a US-domiciled ETF which does not make it very ideal but Ireland-domiciled ETFs which have a lower withholding tax is not available on the platform we are using for this portfolio (FSMOne). However, the low cost and convenience of using FSMOne outweighs the value of the withholding tax so we just stayed with what we were comfortable with.
Check out this post by Frugal Youth Invests where he investigates whether platform fees negate savings from buying Ireland-domiciled ETFs.
The choice for the international stock fund was initially VTI but we already own that in our Autowealth portfolios and did not want any overlaps. As strong believers in China’s growth, we decided to replace the international stock fund with a total China fund instead to get more exposure to the growing China market. We selected the Vanguard Total China Index ETF which covers all major share classes listed in and around China.
We selected three Vanguard ETFs initially but the Vanguard Total International Bond Index Fund ETF that we chose as our bond index fund initially was not working out and we had it swapped out. The reason for this is the withholding tax that we had to pay for dividends received at 30% was not justified at the small amount we were starting to invest. As such, we substituted it with the Schroder Asian Income Fund which has monthly payouts and no withholding tax charged. All dividends received are automatically reinvested.
Here’s a nifty list from The InvestQuest on what ETFs you can consider for different sectors. Do have a read for some ideas and things to consider in screening ETFs.
Merits and weaknesses of the portfolio
Our DIY portfolio is not perfect and it is actually quite far from the original Boglehead portfolio but the idea of simplicity holds true. A 3-fund portfolio with 3 core funds is easy to manage, offers instant diversification, and can outperform stock picking.
At this point the main weaknesses of our portfolio are the associated withholding tax of the US-domiciled ETF and possible currency risk due to the exposure to three different currencies (USD, HKD, and SGD). The former will eat into our returns while the latter might make our portfolio susceptible to currency fluctuations which would also affect returns. But does that also mean we sort of hedged ourselves against it by having multiple strong currencies too? Anyway we will just let natural hedging take its own course.
Administratively it can be quite a hassle to ensure sufficient converted funds in our accounts and to track currency conversions but that is just an extra thing we do that we technically don’t have to.
We are still on the lookout for better performing, more tax-efficient funds that can replace the current ones we have so as to minimise our costs and maximise returns. If anyone has any fund recommendations do share them in the comments below!
Is it worth it?
Ultimately, it is our personal decision and attempt at constructing a portfolio that can generate higher returns than a traditional savings account. We don’t intend to beat the market, we only seek higher returns than what a traditional savings account can give. And so far, we have been rather successful since portfolio inception in 1H2020.
I hope my sharing shows that it is not that difficult to DIY and encourages you to try it for yourself instead of going straight to robos/FAs (no hate there, I love AW). It just requires a little more homework and diligence on our end but it can be incredibly fruitful and satisfying to see the portfolio take off. Will probably give an update on this portfolio when the amount grows substantially for us to see meaningful returns. Till then!