Three Fund Portfolio - For Lazy Singaporeans

I am a huge proponent of passive investing. This strategy involves buying and holding ETFs that track a broad index. The philosophy behind this strategy is encapsulated in this quote from John Bogle, the founding father of modern day index funds: "don't look for the needle in the haystack, just buy the haystack!". In today's complex and uncertain world, keeping our investment strategy simple is perhaps one of the wisest things we can do.

Proponents of this method of investing, known as "bogle heads", have popularised a three fund portfolio that is inspired by John Bogle's simple and low cost investing strategy. Typically, a three fund portfolio consists of the following:

1. U.S Stocks
2. International Stocks
3. Bonds

However, given that this portfolio was created with the U.S. context in mind, I have adapted the three fund portfolio to suit my personal goals and preferences and Singapore's unique context (many blue-chip stocks and REITs, no withholding taxes on dividends and the CPF system).

Here is an outline of the three fund portfolio adapted for Singaporeans.

1. An ETF that tracks a broad index

When it comes to passive investing, there is a plethora of ETFs to choose from. For starters, choose which index you would like to track. For instance, there is the S&P 500 index, the total U.S. stock market, the Russell 1000 index, world indices, etc.

If you would like to invest exclusively in the United States, your choice will be between the S&P500 index, the total U.S. stock market and the Russell 1000 index. From here, it will depend on whether you would like some exposure to small and mid cap stocks. If you do, pick the total U.S. stock market fund. Else, the S&P500 and Russell 1000 index are fine as well.

If you believe that the other markets could provide greater returns than the United States in the years to come, I would suggest opting for an ETF that tracks a world index. These indices typically have about 60% allocation to the United States and a 40% exposure to the rest of the world, providing adequate diversification away from the United States.

The ETFs I picked for my own portfolio are CSPX, which tracks the S&P500 Index and VWRA, which tracks the FTSE All-World Index. Both of these ETFs are Irish-domiciled ETFs, which are more tax efficient for Singaporeans compared to their US-domiciled counterparts. Additionally, they are of the accumulating type as I would like to maximise the compounding effect while minimising costs. For more information on Irish-domiciled ETFs and how to choose one that suits your preferences and goals, check out my article here.

For investors who only wish to pick one ETF, I would go with VWRA because it provides greater diversification and exposure to emerging markets such as China as well.

2. Singapore Dividend Stocks

One of the advantages of investing in Singapore is that there are many high dividend yielding stocks (blue-chip stocks and REITs) and no taxes on dividends. This is why so many Singaporeans are obsessed with dividends (myself included). While dividend stocks may not produce spectacular capital gains compared to high growth companies in the United States, I would argue that there is still a place in our portfolio for them. In investing, we need not seek to maximise our returns but instead seek to build a resilient portfolio that generates adequate returns. These dividend stocks are typically more stable and continue to pay dividends during times of economic downturn (albeit less). A steady stream of dividend income is extremely desirable as it can help tide us over a crisis or challenging period. The Covid-19 Pandemic is the perhaps the perfect example to substantiate my point.

In terms of dividend ETFs in Singapore, there are two main ETFs to consider.

1. SPDR STI ETF (Ticker: ES3)
2. Lion Phillip S-REIT ETF (CLR)

As I am not a fan of the Straits Times Index (STI), I invest directly into the banks (OCBC, DBS and UOB) instead (mainly because they have higher yields than the STI and tend to perform better). If you would like to stick with the most passive form of investing, dollar cost averaging into the STI is fine as well.

Additionally, the S-REIT ETF is an excellent ETF to include in your portfolio. It boasts a higher dividend yield than the STI and Singapore's vibrant REIT market is definitely something that we should take advantage of. Read my article on REITs to find out why I think they remain a worthy investment today.

At this point, some of you might say that my portfolio has more than three funds and deviates from the most passive form of investing (buy and hold ETFs). However, I would argue that the additional work required to invest in the banks and the S-REIT ETF is minimal and well worth it. Furthermore, there is no harm in having greater diversification! That being said, there is nothing wrong if you wish to stick with only three holdings, just pick either ETF (STI or S-REIT) and stick with it.

3. CPF

Lastly, I have opted to replace bonds with the retirement system that Singaporeans have a love-hate relationship with. Despite the limitations of CPF, namely not being able to receive any pay outs until much later in life, CPF has "bond-like" characteristics that makes it a suitable replacement. Let me explain my thesis.

Firstly, I have an extremely long term horizon as I am investing for retirement. Thus, the fact that I am not able to touch my CPF money does not bother me as I have the intention of leaving the money in there for as long as I can. Of course, there is a chance that I will need cash urgently (due to a recession or emergencies). This makes the case of first having an adequate emergency fund.

Next, CPF provides a 4% rate of return that is essentially risk free (as it is guaranteed by the Singapore government which is rated triple A, the highest possible credit rating). This is much in excess of any triple A rated bond in the world. Essentially, the CPF system makes it a bond on steroids that can give us steady, guaranteed pay outs well into our retirement as long as the Singapore government does not default. Given our government's history of prudence and huge reserve, this is extremely unlikely.

Even if you are intending to pursue FIRE, CPF can be your safety net, allowing you to still achieve an adequate retirement in the event that your FIRE plan falls through. Either way, we are forced to make monthly CPF contributions from our salary, which should be form quite a substantial part of our portfolio. However, if you want to allocate a larger portion of your portfolio to CPF, you can make voluntary contributions which can lower your taxable income as well.

That being said, I would like to add a caveat that I am mainly investing for retirement. The CPF system should only be seen as a replacement to bonds if you have an extremely long term horizon. If you are intending to take money out to make a big ticket purchase, consider having greater allocation to stocks and actual bonds.

Thus, a Singapore three fund portfolio will look something like this:

1. VWRA
2. STI ETF or S-REITs ETF
3. CPF

I hope that this opinion piece has been helpful in explaining how to invest the lazy way. If you'd like to learn more about investing, check out my website at www.thedollarsapling.com or click here to join my telegram channel!