Index Investing: Getting Good Stock Market Returns as a Beginner

Index Investing Singapore
I’m sure at some point you’ve heard about someone you know or a friend’s friend making a tidy sum from investing. But is it possible to start investing  in Singapore as a beginner with little to no finance knowledge or time commitment? 
OF COURSE IT IS!

Let’s talk about making consistent stock market returns through Index Investing.

Well, first, what is an Index?

An index is a method used to measure a specific group of assets. In most applications of the word, this is usually referring to a group of stocks that is used as a representation of a certain country’s economy or of an industry. This means that as the stocks in the index move up or down, the value of the index increases or decreases together with it. 

Ever hear terms like the Dow Jones Industrial Average (DJIA) or the S&P 500 on the news at night? Yes, these are indexes! Both the DJIA and the S&P500 are indexes that are commonly used to track the performance of the US economy as a whole. For example, the S&P 500 tracks 500 large companies in the United States. These companies are weighted based on their size, meaning that larger companies such as Apple and Microsoft will impact the index more than smaller companies such as Ford and Domino’s Pizza.

Company Ticker Symbol Weightage
Apple Inc.
AAPL
6.4269%
Microsoft Corporation
MSFT
5.2614%
Amazon.com Inc.
AMZN
4.3412%
Facebook Inc. Class A
FB
2.1948%
Alphabet Inc. Class A
GOOGL
1.7546%
*S&P 500 top 5 holdings as of 12/12/2020

In Singapore, we have our very own Straits Times Index (STI) which holds the top 30 listed companies in Singapore. This index contains companies that we are all too familiar with, including DBS, Singapore Airlines, Singtel, Keppel Corporation among others. This is often recommended as a starting point for new investors in Singapore as it is something familiar to them and easy to understand.

Company Ticker Symbol Weightage
DBS Group Holdings Ltd.
D05
16.60%
Oversea-Chinese Banking Corp
O39
10.80%
United Overseas Bank Ltd
U11
9.70%
Singtel
Z74
6.50%
Jardine Matheson Holdings Ltd.
J36
5.60%

What is Index Investing then?

Index Investing, sometimes referred to as passive investing, is a practice where investors invest into funds that try to copy a specific index, to recreate its performance in their portfolio. This is usually done with broad market indexes like the S&P 500 where the investor buys and holds over a long period of time. This means that as the index goes up, the funds that we invest into, as index investors, will rise together with it as well. This method is particularly recommended to beginners in investing by famous investors such as Warren Buffett and John C. Bogle (who actually created the first index fund in 1975).

For your reference, I have also included some popular index funds that are available to Singaporean investors to invest in. (Do note that most of them are traded on foreign exchanges).

Fund Name Index Exchange Ticker Symbol
Vanguard 500 Index Fund ETF
S&P 500
New York Stock Exchange
VOO
iShares Core S&P 500 UCITS ETF USD (Acc)
S&P 500
London Stock Exchange
CSPX
Invesco QQQ Trust Series 1
Nasdaq 100
Nasdaq
QQQ
Vanguard Total Stock Market Index Fund ETF
CRSP Total Market Index
New York Stock Exchange
VTI
iShares Core MSCI World UCITS ETF USD (Acc)
MSCI World Index
London Stock Exchange
IWDA
SPDR Straits Times Index ETF
Straits Times Index
Singapore Exchange
ES3

Passive Investing Beats Active Investing

You might be thinking, “Ah so I guess I’m settling for average returns and those investors with more skills will make greater returns than me.”

Well, it might surprise you but that is pretty far from reality. In fact, the average investor underperforms the S&P 500 by a whopping 4.6% annually over a 20-year period from 1998 – 2017. It is key to note that during this period, we also saw the Dot-Com Bubble and the Global Financial Crisis among other smaller crises and global events.

Average Investor Returns Compared With Various Asset Classes

Not only does the average investor underperform in the market, even fund managers, struggle to beat the index. 

Warren Buffett himself was so certain of this that he made a $1 million bet with a hedge fund in which he challenged them to beat the S&P 500 over a period of 10 years starting in 2008. Of course, we know now that the hedge fund ended with a return of 36% over the 10 years, while the S&P 500 returned over 125%. Heck, even Warren Buffett himself, with his company Berkshire Hathaway has underperformed the index significantly in recent years.

Looking at historical returns, the S&P 500 has yielded approximately 9.8% in annualised returns (including dividends) since its inception in 1926. That might not seem like much but hear this, $10,000 placed in the S&P 500 in 1980 would be worth just more than $890,000 today! Crazy isn’t it?  

Diversification

Index funds are also well diversified. Famous economist and  Nobel Prize winner Harry Markowitz once remarked:
“Diversification is the only free lunch in finance”.

Diversification protects your investments against volatility such as from specific industry factors or individual company failure. Index Investing does just that, by spreading your money across hundreds of companies, hence reducing the impact of bankruptcy or failure of a single company. For example if we went back to the table showing the top 5 holdings of the S&P 500, a complete bankruptcy of Apple will only set your portfolio back 6.43% (assuming Apple shares go to $0). This is opposed to if Apple made up your whole portfolio, which would send it straight to zero of course!

Yup, this also means that with a single share of an index fund, you own a piece of every single company in that index. Very nice,  isn’t it?

This also makes it perfect for beginners, who may not have the expertise or the time to pore through pages of financial reports of the companies that they wish to invest in, but are still able to attain consistent returns in the market.

Rebalancing

Indexes also regularly rebalance themselves. This means that new additions will be included into the index while weaker companies will be removed. As such, the quality of companies in the index is maintained. This also means that the index managers are doing the additions and removals  for us which means less work for us, hooray!

Low Cost

Index investing is also low-cost! All ETFs will have a certain fee to them, known as the expense ratio, which is paid to the manager of the fund. Index funds will have low expense ratios because the work of the management is relatively simple as they are simply “copying” the index in their fund. This is as compared to funds which actively trade to generate returns where the fees charged to the investors will be generally higher. Note that there may still be slight differences in expense ratios in funds even if they are tracking the same index.

Fund Name Ticker Symbol Type of Fund Expense Ratio
Vanguard 500 Index Fund ETF
VOO
Index ETF
0.03%
iShares Core S&P 500 UCITS ETF USD (Acc)
CSPX
Index ETF
0.07%
Invesco QQQ Trust Series 1
QQQ
Index ETF
0.20%
Ark Innovation Fund
ARKK
Actively Managed Fund
0.75%

Returns are Capped

While the returns are definitely great, at the end of the day, a key limitation to index investing is that your returns are capped at the market’s returns. Of course, this return is nothing to scoff at, having net over 13% annualised returns  over the last 10 years alone. But that means that through index investing alone, you will never attain market-beating returns.

My Personal Recommendations

Personally, Index Investing makes up a key portion of my portfolio, and I like to think of it as the foundation for my portfolio. I first started in index investing in university after discovering the concept of FIRE, with the SPDR STI ETF (ES3.SI), that tracks the Straits Times Index in Singapore. I slowly gained my confidence in the markets and eventually shifted over to Invesco QQQ Trust Series 1 (QQQ) which tracks the NASDAQ 100. Index ETFs make up about 25% of my portfolio at the point of writing this post.

For a beginner looking to start investing in Singapore, I would recommend starting with either:

  • IWDA: iShares Core MSCI World UCITS ETF USD (Acc)
  • CSPX: iShares Core S&P 500 UCITS ETF USD (Acc)

These are two broad-based index funds that are generally very stable, and easy to get into for new investors. CSPX does have a more US focus while IWDA has shares from other regions such as Japan, United Kingdom, France and many more. Note that if your broker does not have access to the London Stock Exchange*, you may choose:

  • VXUS: Vanguard Total International Stock Index Fund ETF
  • IVV: iShares Core S&P 500 ETF

*In case you were wondering, the difference between the US-domiciled ETFs (VEU/IVV) and the Irish-domiciled ones (IWDA/CSPX) are difference in withholding tax on dividends (30% in the US compared to 15% in Ireland).

To sum up, I think Index Investing is a good starting point for investing beginners and should still form a significant portion of your portfolios even as you progress into a seasoned investor in the stock market. Here’s to years of consistent stock market returns! 🥂

Photo by AlphaTradeZone from Pexels

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4 thoughts on “Index Investing: Getting Good Stock Market Returns as a Beginner”

  1. What is the best (safe, reliable, and cheap) online broker to invest in overseas indexes while working in Singapore? I am looking at a long investment horizon of 10+ years and only buying overseas indexes. Is HKEX as good as LSE, NYSE and NASDAQ?

    I currently have the DBS Vickers with cash upfront option in mind. Is this a good option for buying in overseas markets. Is it cheaper than other platforms?

    1. Hi there, thanks for dropping by!

      Firstly, for overseas indexes, if you’re looking for global/US indexes, I would recommend UK (first choice) or US exchanges. HKEX would be better for HK indexes instead such as the Hang Seng Index.

      Regarding DBS Vickers, DBS Vickers is quite pricey when it comes to overseas transactions as they charge a custodian fee on non-SGX counters. For US counters, this charge is SGD 2 per month per counter (capped at SGD 150). As such, I would steer away from DBS Vickers for overseas counters.

      Since LSE is more cost efficient, a good choice of broker would be either Interactive Brokers or Standard Chartered. Neither charge custodian fees and both are very well-established and are reliable. However, Interactive Brokers is much cheaper in terms of commissions and FX rates (USD 1 per trade vs USD 10 per trade for SC). But, the downside for Interactive Brokers is the Inactivity Charge of USD 10/month, which is waived only if you incur USD 10 of commissions per month or your account value > USD 100k. Do note that the inactivity fee is offset by your own commissions, meaning if you incur USD 4 in commissions, your inactivity charge will only be USD 6 (derived from 10 – 4).

      Personally, I am an Interactive Brokers user so you can check with me more on Interactive Brokers if you have further questions!

      1. Thanks. I have a couple of questions
        1. Can I buy a fraction of a share through IB? This is not possible using SC broker.
        2. I do not intend to do more than 2 trades every quarter. That would cost me $80 for SC and $120 for IB. Keeping this in mind, will IB be better in any way (taking currency conversion and other fees into account)? e.g., for trading SG$1500 per trade.
        3. Indexes in HKEX (such as S&P 500) cost far less than LSE. Does it not make more sense to buy from HKEX? Especially if I cannot buy fractional shares.

        1. Hi, apologies for the late reply!
          1. Yup, fractional shares are allowed on IBKR.
          2. Ah, the FX spread for IBKR is at spot FX whereas the rates for SC are known to be worse. That being said, for your trade volume, I think it’s ok to be use SC for the time being until your portfolio grows bigger, because the cost difference will not be too big between the two.
          3. Hmm, the expense ratios for HKEX is a bit higher, but if there are no other choices, it is feasible to do so!

          Another alternative would be to use FSMone’s RSP to buy into the S&P 500 via VOO/IVV. While these are less tax efficient than LSE ETFs, the reduction in commissions are well worth it since under FSMone’s RSP, the minimum commission per purchase is reduced to USD 1 (which is a good improvement from SC’s rates).

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