The Easiest Way To Start Investing [TFC 99]

So this is Episode 30 on this current feed and I’m going to bring it over again today to set the premise so that all of us can learn better and form the basis of a future discussion going forward. Essentially, index investing is very popular. It’s been very popular because there’s a lot of research at this point in time to show that active managers may not perform as well as just buying the whole market.

But is this true? Is this going to be going forward? I’m not sure. Historical returns do not determine the future. So let’s see if that happens. This episode will give you basics to understand index ETF and use these basic to then evaluate all these other theme funds and other interesting things that are coming up.

People are creating all these interesting ETFs and all these interesting structured products. Where do you start? You’ve got to start by understanding the most vanilla of things: index ETF, index funds. Yes, I hope you enjoy today’s episode. And if you love the episode, please continue to share with your friends and also check out some of the other peripheral episodes around it.

Episode 30 something to 40 something was the period where I had a lot of these kinds of learnings as I go along because I ran out of stuff to talk about from my head. So I learnt a lot of interesting things from (Episode) 30 to about 40 plus. So all that content, check it out and join today. Take care, see you next week. I’ll be back. 

Good day guys. I know in your head, there’s this one question that’s boggling you. “Hey, why so many negative news, but the stock markets still keep going up and up and up? Have we passed the bottom? Am I going to lose this chance to acquire good companies?” 

Aha! So all the FOMO (Fear Of Missing Out) is setting in and a lot of my friends have been asking me all sorts of questions. “How do I start? How do I invest?” And in my head it’s like “bro, don’t rush. If you’re in a rush, chances are you will not do very well.” But then my question is… okay, so if I don’t want them to rush, how can I give them some thoughts so that they can get some exposure to make some money without the risk of busting it?

And I thought okay, maybe we should really explore index ETFs. I really want to share with you what I’ve found, some of my thoughts and today we are going to talk about the three pointers to look out for when investing in index ETFs. 

Good morning everyone. I welcome you to another day with The Financial Coconut. In our podcast, we’ll be debunking financial myths, discovering best financial practices, discussing financial strategies that fit our lives. You get it, ultimately empowering us to create a life we love while managing our finances well. So today’s topic: three pointers to look out for when investing in index ETFs. 

Yeah, good day guys. Happy to be chatting with you guys again and sharing with you some of  my thoughts around investing, around personal finance. In general, I think at this point in time, if you are considering investing, you are even in the discussion of investing, then you are in a pretty good space. Honestly, right? That means your income is pretty stable. You have your savings, you have done all the groundwork that you need to do to be able to be at this point in time even think about investing. 

But maybe there’s one thing you’ve not really done yet, which is to really think of how to invest. You’re really going to learn over time, which is very understandable because if you want to make all their money, you’ve got to probably be spending a lot of time doing what you do, brush up on yourself and get to where you are today. 

So you have all this surplus sitting around and you always hear people say “hey, you know ah, the market come down. Must buy you know? Buy anything also make money.” Clearly that’s not the case, and we went through that in the past few episodes so do check out the past few episodes… some of the mass misconceptions that people have about investing in the stock market.

And I want to put it out that before all these lockdown, before all this RMO (Restriction Of Movement Order), Stay Home Notice and this market collapse, I was never very interested in index investing. I was never a big proponent of index funds. All the ETFs that people talk about all over YouTube, everywhere… a lot of these personal finance professionals or personal finance gurus, whatever you call them, they keep talking about index investing. I’m not a big fan of that before. It doesn’t mean I’m a huge fan of it now, I’m just a lot clearer about what it does. So ultimately, you’ve got to realize that there are many tools to do all these different things and investing has a lot of different strategies and a lot of different tools out there.

Over time, I slowly learnt to appreciate different tools. I started out only picking stocks in the US… and then slowly I looked into REITs (Real Estate Investment Trusts) in Singapore, and then I’m looking into index investing. The reason why I’m looking into it, the reason why I actually bothered to study it is because of you guys! 

Because a lot of you guys, after listening to the podcast… or some of my friends, they just came and asked “hey, how do I start? How do I start investing? What kind of stocks do I pick?” And in my head, it’s like “bro, you’re just in a rush.” It’s virtually impossible to do it in such a short period of time. But then I want to give them another alternative. Realistically, you know you cannot do it right? You cannot… you are not able to pick stocks in a short period of time, at least not with some level of finesse and understanding. 

So then if you want to be vested, given such a short period of time, definitely. I feel index investing is one of those strategies that… it works! So what is index investing? What is an index ETF? Essentially, index investing is trying to buy an index. An index is essentially a measurement, like the Dow Jones Industrial Index. That is a very common and popular index. That is the 30 biggest manufacturing companies in the US. The S&P 500 (Standard and Poor’s) 500 Index is the measurement of 500 of the best companies in the US supposedly. They all have their own measurement. That’s up to them to decide. And then there’s the Hang Seng Index, which is the top 50 companies in Hong Kong across four different sectors. And then famously, we have the Straits Times Index back at home which measures 30 companies in the Singapore Stock Exchange. 

All of them are trying to do one thing: they’re all trying to indicate the performance of the stock exchange. While we will not go deep into breaking down all the weightages and why these indexes track these companies… all those things you can go and geek it out yourself. It’s not difficult to find. But by recognizing that all these indexes are trying to track the broad market movement, you realize that what is it trying to say is that if the market is doing well, the index will go up. If the market is not doing well, the index will come down. 

That is the beauty of index investing. You don’t actually need to break your head and choose companies and try to find the value and all those things… all those are great. They have their own way of doing things. It’s just that it’s within a short period of time, realistically, I think it’s quite challenging for anybody to chime in on that… and sometimes you just don’t want to do it. I have some friends who just want to focus on what they do. They don’t want to spend all day trying to study the charts, trying to study the market, trying to study the fundamentals. So yeah, index has this position and it’s pretty interesting. 

But the truth is you cannot actually buy an index. The index is just a measurement run by a company, whether is it Standard and Poor’s, whether is it Straits Times… different companies, they have their own indicators to help people understand what’s going on in a market because it tracks market movement essentially.

But over time, there’s a bunch of people that came with this thing called index ETF, also known as exchange traded funds. These index ETFs aim to copy the movement of the indexes. So you cannot buy the index because that is a measurement tool, but you can buy these index ETFs that are trying to copy the index movement such that you can get exposure to the market. Meaning when the market grow, your portfolio can grow along together with the market. 

The first point I have for you when looking out to invest in an index ETF is that you definitely want to be a cheapo and go for low fees. The idea is that in the broad market of ETFs, there are two kinds of… generally, there are two kinds of ETFs. One is what we are going to talk about: index ETFs, and the other one is what we call a sector ETF. It can be a particular sector or it can be a particular country, particular region. That requires a bit more work, depending on what the fund is trying to do. It essentially depends on the managers, right? Are they are trying to do equal weighted? Are they going to try to do cap back weighted… and all those things we can talk about in another podcast. 

But why I shared with you this is that you need to realize that in an index ETF, there’s not much work to do. The reality is if the index doesn’t change, the ETF will not change because the goal of the index ETF is to mimic the index. So unless there’s a change in the S&P 500… that means amongst these 500 companies, S&P decided okay, some companies are going to go out this index because it doesn’t reflect the stock market, doesn’t reflect the economy and other companies are going to come in. Or in the STI (Straits Times Index), they’re going to change out some of the companies, then these index ETFs will need to do their switches. 

But more often than not, these things don’t really change. They do from time to time when whoever that’s behind the index decide to reevaluate the index. It’s not like every day they are changing or every week they are changing. It doesn’t work that way. If the index doesn’t change, the index ETF doesn’t need to do much work. So I will personally not pay someone to… not do much. 

We need to understand that fees do play a big part in the way we invest, which is why I’m super big on finding a good, decent brokerage without much fees. I’m not fancy of paying a lot of people a lot of fees if they are not doing a lot of work or they’re not value adding to that service for me. In the case of… specifically in the case of index ETFs, because they’re not doing a lot, the market benchmark, the market rate is about 0.2 to 0.4%. Anything more, you really got a question why the ETF is charging you so much. The average is about 0.2 to 0.4. Let’s take that as the benchmark. 

When you are choosing an index ETF, whether is it the SPY, whether is it the IWO or IVO, or is it the ES3… all these are tickers so I’m sure you come across some of these tickers where you just simply go and google “index ETF” and wah, whole list come out.

So all these tickers, they come out and I will not go into them individually. But you definitely want to make sure that it’s within 0.2 to 0.4, because that’s the market rate. Most of the big index ETFs are around this rate, so don’t need to be too worried… which brings me to point number two. 

So point number two, it’s really about the tracking difference between the index and the index ETF. Because the reality is you’re trying to buy the market, you’re trying to get exposure to the market. You’re trying to buy the index, but you cannot buy all these. So you buy the index ETF. The index ETFs’ role is to track the market.

That means if the market goes up by 10%… let’s say Straits Times goes up by 10%, which is very rare. We can talk about why the Singapore Stock Market doesn’t grow another time… taking that as an example. Let’s say Straits Times goes up by 10% and your index ETF goes up by 9%. That will mean that there’ll be a 1% tracking difference and that is huge because 10 to 9, that’s actually a 10% variance. To me, it’s not acceptable. We got to realize that there will always be a difference or as expected to have a difference. But the question is: what is the optimal difference? 

The optimal difference is essentially the fee price. When they say they charge you a fee, they’re not going to actively send you a bill and tell you “okay, you need to pay how much, how much, how much.” No, it’s just a reflection of the difference which means if they are charging you 0.3% for a fee and this year’s growth rate is 10% on the index, then you’re expecting your index ETF to go up by 9.7%, factoring the 0.3%. 

That is the optimal case, which is why I say the tracking difference between the index and the ETF is optimal is when it meets the cost, the low cost that we are looking at. Sometimes, very good indexes or very good funds… they do have times where the index ETF ends up paying more than the index. This is because sometimes these index ETF guys, the fund managers behind these ETFs, they do take the shares that is owned by the ETF and lend it to someone else so that they can short the market and they can do whatever they want to do. All those are technicals. 

What I’m trying to tell you is that you must adjust your expectation. It’s like you go makan (eat) somewhere and then the person give you extra dessert. Please don’t expect that the dessert is included in the set meal, okay? The understanding is as long as the tracking difference is small, which means optimal at the fee price, which is a low fee, that is good enough. It’s very easy to calculate. Some platforms even have already calculated that for you, like etfdb.com, you can check them out. In Singapore’s context, I think a lot of people use fundsupermart.com. You can check them out also. But Fundsupermart doesn’t count for you, you might need to do a little bit of counting for yourself.

Very simple: you just go and… if let’s say you want to track STI Straits Times Index, you just go and put STI… under Google Straits Times Index and see the one-year mark. What is the one year difference? And then you click on the fund, which I think ES3 is one of the more common fund that is tracking the STI index and just see the differences.

You are just going to calculate yearly basis. Don’t try to calculate day-to-day… so that will be where it is. It’s not that difficult, very easy to find. Do a little bit of calculation, okay? Take out the calculator app in your iPhone that you never use ever. Let’s do a little bit of calculation. It shouldn’t be that difficult… which brings me to point number three. 

The third point as to what you should look out for when investing in an index ETF is you want to go for the big funds. You want to go for the big index. Honestly, I don’t think there are a lot of small index ETFs also, but it’s a good thing to understand why you want to go for the big index ETF. Investopedia actually has a benchmark saying that 10 million and above fund size is considered good enough. So if you’re going for the super big ones, of course they are… they will be in the billions. No big issue on that, but why we want to go for the big funds is because we want to go for liquidity.

We need to understand that when we’re investing, it is a lot about buy and sell. It’s a lot about liquidity because it’s very easy to buy, but then when you want to sell it? How? Who is going to take over? So in a big fund, it is much easier for money to come up because they have more money sitting around and people are very willing to take over from you, which is why ETFs are so amazing at what they do. 

A little bit different from… let’s say like property, right? You want to sell property and you got to wait for a buyer and you got to search for the buyer. You pay all the people in between to help you source for the buyers. The beauty about stocks, let’s say stocks per se, super liquid, because there’s an exchange and a lot of people that are looking to buy and sell. So the moment you go in, you want to sell something, people are willing to buy at a certain price. 

For ETFs, you want to definitely look at those big ETFs, which has the liquid assets to allow you to sell if you really need. But I’m definitely sure that if you’re looking at index investing, you are looking for the long term. Long-term investing, we are not buying and selling a lot, but we just want to make sure that if we are going to any index… in any index ETF, we want to make sure that the ETF has the capacity to allow us to liquidate if we need. 

So I’m going to sum up these three points to look out for when investing in an index ETF. Number one is definitely you want to go for the low fees. Honestly, they’re not doing much, so you don’t want to be paying them a lot because it eats into your revenue, eats into your profits.

Number two, you want to go for the tracking difference, very optimal tracking difference between the index and the index ETF which should match your fees. And number three, you want to go for the big funds. Don’t be a hipster, don’t try to go cafe hopping on the stock market or in the index market. Stick to the big guys and I think you should be doing pretty well this period. No more FOMO for you, consider some index ETFs. I hope you learnt something useful today. See ya!

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Okay, thanks for tuning in and continuously tuning in, especially for a lot of you guys that have been listening to all our other content. You may be re-listening to this on the main feed again. So, great stuff! If you have not heard all these other content, maybe because we have all these other feeds there and we’re trying to keep the feed lean so that it does not become too messy.

If you’re particularly interested in property, particularly interested in entrepreneurship, particularly interested in any of the topic, head to the specific feed. You can go to thefinancialcoconut.com for more information. 

I’m going to take this time to give you some updates. So what is going to happen going forward with TFC? So TFC at this moment in time, we’re doing a few things. Number one, we’re prepping new seasonal content. So Coconut Avenue is getting a season two, Entrepreneurshit is very likely getting a season two. We are confirming some of these things. So stay tuned with us. 

On TFC’s main feed, what is going to happen is Andrew Zhan, professional DJ, will be taking over Chills with TFC. I did an episode with him to hand over this whole thing for Thursday segments. So you’re going to be hearing him very soon. We did a fun episode to transit over to him. Thank you for supporting the podcast so far, but in order to continue to grow the network and make it a serious, big content player, we’ll need to pass the mic. So Andrew is going to take over and I’ll be freeing my capacity to do other things in our content network. So yes, all that jazz, pretty good. 

He is a professional. He has been doing this for years, doing DJ hosting. It’s going to be fun with him. He has the same vibe, similar vibe as me: also siao siao (crazy), a bit of dad jokes here and there, so great. You will continue to be hosted while with him on Chills with TFC and all these new content that we’re doing. 

We’re also contemplating on doing YouTube in terms of adding a video element to some of these things because we do believe that some episodes recorded on YouTube can be pretty interesting too. So if you like it and if you think that we should do YouTube, please go to our YouTube channel now: The Financial Coconut to give us a follow and let us know that “hey, I actually want you guys to do YouTube on certain content” and we’re explore that for all of you also.

So going forward, we’re doing all these interesting new content, but everything still anchors around living life… at least living the life you love while managing your finances well. Wah so long never record, I forget the tagline. So yes, living the life you love while managing your finances well, and all these different aspects of our personal finance and extension into careers, investing, entrepreneurship and all that jazz.

So if there’s any particular thing that you’re looking for, please drop us: hello@thefinancialcoconut.com. Sign up to be a member to be on our members backend. And also you know, just hang around, join our Telegram group and continue to help us grow. Yeah, stay awesome. Let us know. I want to see you soon, all right? So see you after my break. Now I’m going to take a break. Meanwhile, take care.