What is the Boglehead Singapore 3-fund portfolio

The Singapore 3-fund portfolio explained

The Boglehead Singapore 3-fund portfolio is an adaptation of the Boglehead 3-fund portfolio, which was suited for American investors. The Boglehead 3 fund portfolio basically uses 3 funds, in order to achieve global diversification, and thus receive the market rate of return.

It was named after the main advocate of index investing and the founder of the Vanguard Group, John C Bogle. John Bogle strongly recommends low costs for investments, because costs reduce the long-run return of any portfolio.


3 main components of the portfolio

There are three funds in the Boglehead 3-fund portfolio:
- Domestic stock index fund
- International or world stock index fund
- Domestic bond index fund

Rationale for the 3-fund portfolio

The 3-fund portfolio encompasses a mix of domestic and global equities, as well as a mix between equities and bonds.

Equities and bonds

In the past history, equities have outperformed bonds. This led to many investors being overweight on equities in order to chase returns. However, they were impacted when the financial crises hit in 1999 and 2008.

This is the reason why there is a need for bonds in the portfolio. Although bonds have historically given a lower return than equities, they are also less volatile. In times of crisis and uncertainty, they become a safe haven for investors.

Trade off between risk and return for bonds and equities

Although stocks have outperformed bonds in the past, there is no guarantee it will continue to do so. Thus, it is helpful to include a portion of bonds in the portfolio.

Also, with another asset class other than equities, we are able to do portfolio rebalancing. Portfolio rebalancing adds 0.5% to 1% to the annual returns on a portfolio. A study conducted showed that a portfolio comprising of 80% equities and 20% bonds with annual rebalancing outperformed a 100% full equity portfolio, even though the returns of stocks outperformed that of bonds in the same period of study.

Domestic and foreign

In the portfolio, we also have a mix of foreign and domestic holdings. Ideally, the portfolio should be completely diversified. In other words, we should have 100% holdings in international equities or bonds. However, this is not practical.

Because we live in our home country, we are more affected by developments in our home country, and the economy of our home country. For example, when our economy is doing well but the international economy is not, our portfolio should do well. This is because we are living in the economy that is performing well.


Singapore's market capitalisation is less than 0.5% of world market capitalisation

As a result, there has to be domestic exposure in our portfolio. On the other hand, we also need to have foreign exposure. This is to reduce risk by diversification.

The target asset allocation

Now that we have decided that we need foreign and domestic exposure, and a mixture of stocks and bonds, we will set out to design our portfolio. The 3-fund portfolio will consist of these funds.


The Straits Times Index is the domestic stock fund, the ABF Singapore Bond Index is the domestic bond fund, and the Vanguard All-World UCITS is the international stock fund

Now, you will have to determine how much you should put into each fund. To do so, head over to here to complete a risk-profile questionnaire.

With your results, it will tell you how much of your portfolio should be in equities and how much will be in bonds. Split the equities percentage equally among the Straits Times Index ETF and the Vanguard All-World UCITS ETF.

For instance, I get a result of 80% equities and 20% bonds. I would then allocate 40% of my money into the Straits Times Index ETF, 40% into the Vanguard All-World UCITS ETF, and 20% into the ABF Singapore Bond Index ETF.

My target portfolio allocation

If I disagree with the results of the questionnaire, and feel that I am more risk averse, I can decrease my exposure to equities and increase my exposure to bonds. For instance, I might now be 40% in equities and 60% in bonds. It is okay to be more risk averse than what the questionnaire stated, but it is not advisable to adjust your portfolio to become more risk-chasing.

Conclusion

The 3-fund portfolio provides a simple, fuss-free way for us to invest for the long run. We do not have to worry about day-to-day fluctuations in price, but simply dollar cost average, and rebalance our portfolio annually. By sticking to a proven way of investing, you can outperform many others who pick stocks and lose money.
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Ellaa William
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28 September 2016 at 16:04 delete

Hello, can I ask how do you go about buying the Vanguard ETF? I used to collect bit by bit via SC, but new min fee made it not feasible anymore.

Ellaa

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28 September 2016 at 22:36 delete

Hello Ellaa,

Thanks for dropping by. I used to do dollar cost averaging into the VWRD but like you, the minimum commission made it not possible.

Now, I just wait for around 3 months then make a purchase. As long as the cost of your purchase is more than $4,000, it is okay.

I have wrote a post about this minimum commission before, but the best alternative would still be to accumulate at least $4,000, then buy into the VWRD.

This is the blog post: http://lazysingaporean.blogspot.sg/2016/06/an-alternative-to-standard-chartered.html.

Hope it helps!

Lazy Singaporean

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