Saturday 15 February 2014

The Passive Portfolio

This is the final part of the trilogy of blog posts on how I set up a passive portfolio. This trilogy was inspired by the desire to set up a portfolio that needs minimal attention. It is also to give an example to some of my friends who are new to investing on how they could invest their money.

Just to recap, in the first post, we discussed that a common rule of thumb for the allocation into the bond component of the portfolio is your age in percentage. For example, if your age is 30, you allocate 30% of your portfolio to bonds and 70% to stocks. We also discussed that the larger the margin allowed for volatility swings in the portfolio allocation before rebalancing takes place, the higher is the portfolio value. In the second post, we discussed that the greater the volatility of the stock and bond components, the higher is the portfolio value. Hence, based on the above research, my planning parameters for the portfolio are as follow:

Stock Allocation 70%
Bond Allocation 30%
Rebalancing Margin 8%

The bond allocation is actually lower than my actual age. That is because I am an aggressive investor. For less aggregate investors, they can stick to the rule of thumb mentioned above. For conservative investors, they can increase the allocation to bonds by 10% more than the rule of thumb suggests.

Next, on the selection of stocks that make up the stock component, I selected an index fund as literature overwhelmingly shows that the vast majority of investors actually cannot beat the market. There are 2-3 index funds available on unit trust platforms such as FundSuperMart (FSM) and DollarDex, namely, Infinity Global Stock Index, Infinity European Stock Index and Infinity US Stock Index. As the European and US funds are regional-specific, they have higher risk and volatility compared to the Global fund. Although the research above shows that higher volatility will lead to better portfolio value, my preference is for less country-specific risk to adverse events such as the European debt crises. Hence, my selection for the index fund is the Infinity Global Stock Index.

On the selection of bonds that make up the bond component, the research shows that bonds with long maturities and low coupon rates are most volatile and will lead to higher portfolio value. On this basis, the ideal bond would be the 30-year Singapore Government Securities (SGS) bond. Again, I deviated from my research for the following reasons (more excuses really):

  • The SGS bond and the index fund are traded on different platforms. E.g. the SGS bond is traded on Singapore Exchange (SGX) or with the banks while the index fund is traded on unit trust platforms. When rebalancing takes place, you will need to transfer money across the platforms. The only platform that deals with both is FSM, but I don't like paying platform fees just for holding the bond/ funds.
  • Because they are on different platforms, you will have to compute the current allocation to stocks/ bonds yourself. 
  • The SGS bond can be traded on either SGX or with the banks. Bank staff seldom deals with SGS trading and you have to educate them every time you trade.
  • The SGS bond reduces in maturity over time. Hence, every few years, the bond would have to be sold in exchange for new 30-year bond to maintain the long maturity.
  • There is country-specific risk in SGS bonds.

Hence, I turned to FSM (but trade on DollarDex) for a selection of bond funds. A snapshot of the available list of bond funds is shown below.

Bond Funds Available at FSM

As mentioned in an earlier post on Why Unit Trust Expense Ratio Matters, expense ratios matter significantly in the overall return of the funds. At an expense ratio of 1% and possible returns from bonds of 5%, that is paying 20% of the expected returns for management of the funds every year. 

There are only a handful of bond funds that has expense ratio of around 1% or less. Among these bond funds, I selected the one with the higher risks, taking into consideration the fund size as well. My selection for the bond component is the Schroder ISF Global Corporate Bond SGD Hedged fund. According to the fund description on FSM, it is invested in bonds of governments, government agencies, supra-national and corporate issuers worldwide, with a maximum of 20% held in government bonds. Corporate bonds have higher risks than government bonds, which suits the objective of having a high-volatility bond, while reducing the country-specific risks with worldwide diversification.

Hence, my eventual portfolio is:
  • 70% in Infinity Global Stock Index
  • 30% in Schroder ISF Global Corporate Bond SGD Hedged fund
  • Portfolio is rebalanced whenever the allocation exceeds the above allocation by 8%.

In the final analysis, research can tell you one thing, but the portfolio that you construct must be consistent with what you believe in, your risk appetite and your judgment of how financial markets will perform in future. You must be comfortable with the portfolio so that you can go through thick and thin with it. Only then can you reap the rewards of investing with the portfolio.

See related blog posts:


  1. Hi Chin Wai, thanks for sharing.Would a target maturity date bond ETF meet your profile? Have you consider the Vanguard All World ETF in UK for the stocks portion?

    1. Hi Kyith,

      Thanks for sharing. A rolling long maturity bond fund/ ETF will suit my objectives better as the volatility is maintained over time. I didn't consider the Vanguard All World ETF as I try to have both the stock and bond components on the same platform to reduce the efforts for rebalancing.

  2. Hi, do you have the link to the research that use 8% as benchmark for rebalance? I always read about rebalance at fixed interval says yearly, half year or quarterly.

    1. Hi Lewis,

      It's available at I back-tested the optimal rebalancing margin for portfolios with different stock / bond allocation. The optimal margin is around 9% for most of the portfolios, but I opted to set it slightly lower for my passive portfolio.

  3. Hi, may I know what's the performance of the passive portfolio thus far? I am considering starting a regular savings plan using the similar portfolio too, with a 7-10 year timeframe. Will it be suitable?

    1. Hi, I wrote about the performance of this portfolio in Mar; you can read about it at Possibly The Worst Time to Invest – A Year On. From Mar till now, the performance is down slightly by 1%.

      Generally, if you are able to stick to a commitment to invest for the long term using Dollar Cost Averaging (DCA), you should be able to do fine :) I have another blog post that discusses a portfolio invested using DCA after 7 years. You can refer to it at Review of My SRS Investments. It should provide you with some reference for a long-term investment.

    2. I'm just wondering how would a bond fund perform in a rising interest rate environment? The duration of the Schroders ISF Global Corp fund is about 6 years, and Fullerton Asian Bond Fund is about 4 years. I believe prices of these bond funds would be very negatively impacted once rates start to rise. Would it be better to select a Short-Duration bond fund instead?

      You mention that you take into consideration the fund size when selecting a fund, any reason why?

      How's your spicy passive portfolio coming along? I'm thinking of going with the LionGlobal US 500 fund, just haven't decide on which bond fund to select. And I agree with you that the US market is really resilient.

      How's your experience investing through DollarDex thus far? Any points to take note? FSM platform is more user-friendly, but I believe their annual platform fee will impact returns more than a initial sales charge.

      Your blog is really informative, really appreciate your effort! :)

    3. You're right to say that bond funds will be affected when interest rates rise. The underperformance of the passive & spicy portfolios is due to the bond funds. A short duration bond fund will be able to weather the interest rate rises better. Nevertheless, my analysis at Volatility is Your Friend shows that volatility is advantageous to a portfolio that will be rebalanced, so I'm not too concerned.

      I have another bond fund, Nikko AM Shenton Short Term Bond Fund, in my SRS investments. That has held up quite well compared to the 2 bond funds above.

      The main issue about fund size is mainly the expense fees. If a fund is too small, the expense fees can be higher.

      I'm still funding the spicy portfolio on a monthly basis, which will only be completed by end of the year. Todate, it is up slightly by about 1%.

      I started off with FSM, but the platform fee was too much to bear for a relatively inactive portfolio, so I switched over the DollarDex. It has a lot of legal fine print that I got tired of reading, but other than that, it is OK as an investment platform. For carrying out research on which unit trusts to buy, I find it more convenient to do so at FSM.

      Thks. Hope you will visit often :)