Following a strong rally which saw Singapore’s Straits Times Index (STI) rise more than 20% and the US’ S&P 500 index climbing more than 45% from its March 23 lows, markets experienced a slight pullback in recent days.
The dip in prices has opened up bargain hunting opportunities as investors look to capitalise on the eventual market upside. The key question here is whether investors should stick to Singapore stocks, or look beyond our shores to the global equities market.
The comfort of home may come with limited opportunities
As Singaporeans, many of the stocks listed on the Singapore Exchange (SGX) are familiar brand names such as SingTel, CapitaLand, BreadTalk, ComfortDelgro and more. You may already be using their products or services, which makes it easier to understand their core businesses and recent performance.
For newer investors, investing in local stocks can thus be a good way to get familiar with the investing process. But for investors looking for exciting growth opportunities, the Singapore stock market is shrinking. For the past few years, delistings have outnumbered listings. Familiar favourites such as Osim have left the exchange; there were 723 listed companies in 2019, down from a peak of 783 in 2010.
While the SGX is home to an established real estate investment trust (REIT) market and anchored by large, steady, and reputable companies (DBS, OCBC, and United Overseas Bank account for more than 40% of the benchmark STI), the market is not as vibrant as it once was. Many companies on the SGX are mature companies past the growth stage; some of our newer, homegrown brands such as Razer and Sea Group have chosen to list elsewhere as well.
Home bias: the risk of not diversifying globally
Home bias is a phenomenon whereby investors tilt the bulk of their portfolio to investments in their home country. A little home bias is good – Singapore’s economy is competitive and resilient, so it makes sense that Singapore stocks will likely continue to do well in the years ahead. But being too overweight on Singapore stocks can expose your portfolio to risks.
Many of us work for Singapore-based companies, our savings are held in Singapore banks, and our homes are valued in Singapore dollars. If a recession were to hit us, an all-Singapore portfolio may not be as well equipped to withstand the downturn compared to a globally diversified portfolio.
Look to global equities for growth
If you want improved diversification and better returns, investing beyond Singapore’s borders opens up a world of opportunities. Almost half of the global equity market lies in the US. In recent years, the US stock market has performed phenomenally. The S&P 500 index has returned 11.37% on an annualized basis over the past 10 years, led by the growth in technology stocks such as Facebook, Netflix and Microsoft. Apart from up and coming companies like Zoom, many of the world’s most successful companies are listed on the New York Stock Exchange (NYSE) and NASDAQ Stock Market (NASDAQ) as well.
Investing in the US market is simpler than it’s ever been. For broad exposure to the 500 largest companies listed on US stock exchanges, pick an exchange traded fund (ETF) that tracks the S&P 500 index, such as the SPDR S&P 500 ETF (SPY). Prefer targeted exposure to tech companies? The Invesco QQQ is a widely traded ETF that tracks the Nasdaq 100 Index and is weighted towards large-cap tech stocks.
While it may seem that these ETFs are US-focused, their underlying companies are often industry leaders with global footprints and by extension, global revenue streams. As such, these ETFs provide international exposure as well.
How to assemble a globally diversified stock portfolio
With ETFs, building a portfolio that capitalizes on global growth is easy and affordable. A few ETFs is enough to give you broad exposure to different markets. For instance, you can choose the SPY to invest in US companies and the iShares MSCI EAFE ETF for access to a broad range of companies in Europe, Australia, and Asia.
And when it comes to fees, ETFs are often more cost-efficient. When you buy or sell an ETF, you pay brokerage fees for just one transaction. If you were to buy all the stocks held within the ETF, you will need to pay brokerage fees for dozens or even hundreds of transactions.
Not sure which ETFs to pick? Go with ready-made ETF portfolios that robo-advisors like Syfe offers. In fact, Syfe can be an ideal platform if you are looking to invest regularly in ETFs.
You get a portfolio of around 11 ETFs that are diversified across geographies and sectors. Unlike buying through a broker, each investment made in your portfolio comes with $0 brokerage and transaction fees. Coupled with low fees starting from 0.4% per year, you end up paying even less in investment costs so you can make the most of your money.
Update: Syfe has launched a 100% equity portfolio. It invests in over 1,500 stocks from the world’s top companies such as Microsoft, Amazon, Apple and more. With a smart beta strategy that tilts the portfolio towards large-cap, growth and low-volatility factors, Equity100 provides higher risk-adjusted returns over the long-term.
Ultimately, we now live in a globalized world. A globally diversified portfolio will not only help avoid the risk of home bias, but also take advantage of global growth over the long term.
This article first appeared as a guest post on TheKiamSiapLife.com.