Investing Basics - Low Cost Index Fund investing (Passive Investing)

I've heard of this term called passive investing and think that it is suitable for those who are starting out in investing or those with little knowledge on investment. In essence, this method works by you putting a fixed amount into an index fund and let the fund grow over time.

A recommended fund if you're investing in Singapore is the STI ETF. You can buy this ETF from SGX directly. However, currently the minimum investment for this ETF is $3000+. Most young investors who just started working will find it hard to invest $3000+ at a time. They will not have enough money to see the effects of dollar cost averaging which is investing on a regular basis.

The solution is to start a share builders plan from phillip securities. I've attended talks on this share builders plan and have also talked to a licensed broker from philip securities to understand on how this plan works.

Do note that an ETF is a listed as a specified investment product(SIP) and MAS requires all individuals to have certain knowledge before you can invest in SIP. If you do not have finance background, you can take a knowledge assessment by SGX and once you pass the requirements, you can start investing in it.


How the share builders plan works? 
The minimum sum to invest in is $200 every month. You can decide on a variety of counters to invest in. This includes blue chips like Capitaland, Capitamall Trust, DBS, Keppel Corp, OCBC, NOL, SIA, SGX, Singtel, SPH, ST Engineering, UOB etc. And not forgetting the STI ETF too. You can choose to invest in one counter only of you can invest in two or more counters. You can decide to allocate $200 every month to STI ETF and $100 every month to DBS. Total invested amount will be $300 per month in 2 different counters.

Charges
The charges are simple to understand. Fees of $6.42 if you invest less than $1000 per month in <=2 counters. Fees of $10.70 or 0.2%(whichever is higher) if you invest more than $1000 per month in more than 2 counters. So for example if you invest $200 per month in STI ETF, the fee will be fixed at $6.42 every month. A point to note is that if you just invest $200 per month, the fees/charges is already 3.21% which is not recommended. When investing, i always try to keep my fees as low as possible, best to be less than 1%. This is because fees can reduce your investment significantly overtime if kept at a high %. Therefore, the optimal investment amount should be more than $600 per month. This amounts to a fee of 1% which is manageable.


Why invest in STI ETF?
Or the question should be why invest in an index fund? The reason is an index fund offers a good diversification of stocks in that fund itself. For example, the STI, which is the straits times index, comprises of the 30 largest companies listed in the Singapore stock market. If you invest in an index fund, you do not have to pick stocks individually. The best thing is component stocks in an index is changed periodically. Bad companies are removed and replaced with another company. Index all over the world has been rising for the past 50 years. An exceptional case is Japan which has seen its Nikkei index fallen in the past 10 years. Japan has been in a deflationary economy which is a reason for its sluggish economy and stock market. Elsewhere in the world, we're still seeing growth in the past 10 years.

Performance of the STI ETF 
So how has the STI ETF performed over the past 10 years. From its fund factsheet, STI ETF has returned an annualized return of 8.04%. This is the return compounded over 10 years. Which means your money invested at the start has already doubled in the 10 years. STI does give dividends also. Adding the dividends, annualized return is about 11.31%. With performance like this, i'm sure this index funds has beaten most of the other funds out there in the market. You just have to invest monthly and let it compound over 10 years. No stock picking involved and no market timing needed. This is dollar cost averaging working in its power.


Will the Index continue to rise in the future? 
The stock market goes through cycles. There are ups and downs but overall the stock market rises in the long run. This coincides with the economy of the country. Unless we have a situation where a country like Japan goes through a deflationary cycle for a long time, then the stock market will not rise.

Conclusion
Passive investing is suitable for people who want to invest but do not know how to pick stocks. If you know how to pick stocks, your investment returns can be much higher. There are many ways to invest. You can be a value investor where you buy great companies at undervalued prices or you can be a passive investor where you invest regularly in an index fund. Its up to us to decide which one we want to be and to measure our own risk appetite. Start investing today to maximize the value of your money.


Update: POSB and OCBC each came up with their own version similar to the Philip share builders plan which also allows you to invest in index funds. Check out the POSB invest saver and OCBC blue chip investment plan. Make sure when choosing on what to invest, select the correct one. 


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