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Self-directed investing, or DIY investing, can be both lucrative and challenging at the same time. It has the best chance of beating the market index and making very large returns, and it is also more exciting for investors who like researching and learning about the financial markets. However, picking individual stocks is usually riskier.
When you buy stocks on your own, you may be tempted to over-allocate to a single asset class or sub-sector that you are more familiar with or drawn to. At the same time, it can also be a time-consuming and expensive endeavour. Studying each company requires more time and investment capital in order to build a diversified portfolio. Unwittingly, you may also be increasing your portfolio risk.
One way to protect your downside when investing in the long-term themes you believe in is to diversify your portfolio into multiple sub-sectors and asset classes. You can achieve this with exchange-traded funds (ETFs) without taking on the risk that comes with investing in individual stocks.
Create Portfolio Diversification With ETF
Constructing a long-term portfolio typically involves allocating a percentage of your funds across various asset classes, like stocks, bonds, and cash. Additionally, you would also want to diversify your portfolio into multiple subsectors or industries within each major asset class, such as the different stock sectors (i.e., technology, healthcare, and finance) and bond types (i.e., high-yield and government bonds).
An index ETF holds a diversified basket of securities that track a specific benchmark index. For example, the locally-listed STI ETF holds the top 30 companies listed on the Singapore Exchange (SGX), and the U.S.-focused S&P 500 ETF holds the top 500 companies in the U.S.
Aside from stocks, there are ETFs available for other asset classes like bonds, commodities, and even currencies. ETFs make it easy for investors to get diversified exposure to any market in the world for as little as one share.
Like stocks, ETFs are also listed on stock exchanges. They can be bought and sold through brokerages like OCBC Securities, which offer a wide selection of both domestically and globally listed ETFs. This makes ETFs a cost-effective way to gain diversification compared to buying individual stocks or funds.
Build A Long-Term Core-Satellite Portfolio With ETFs
There are many ways that you can incorporate ETFs into your portfolio to suit your investment outlook and bias.
One popular way is the core-satellite investing strategy. The principle behind this approach is to recognise that asset allocation is more important over the long run compared to market timing. Therefore, the core portfolio should represent your investments that track the major indices.
For example, you could consider having some exposure to our local stock index with the SPDR STI ETF (SGX:ES3). You may also want to add more globally diversified equity index ETFs listed in the U.S., like the Vanguard 500 Index Fund ETF (NYSE:VOO) and the iShares MSCI ACWI ETF (NASDAQ:ACWI). If you’d rather have bonds as the main part of your portfolio, you can think about locally-listed ETFs like the ABF SG Bond ETF (SGX:A35) and the U.S.-listed iShares 20+ Year Treasury Bond ETF (NASDAQ:TLT).
When you invest via OCBC Securities, you are not limited to just ETFs in Singapore and the U.S. You have access to over 15 global exchanges, such as the Hong Kong Stock Exchange (HKEX), the Australia Securities Exchange (ASX), Bursa Malaysia, and many others. This gives you a wider range of choices to diversify your core portfolio.
Once you have formed your core portfolio of around 70 to 80%, you can supplement it with satellite portfolios focusing on trending themes. You can again stick to ETFs rather than picking individual stocks. These can be based on your values, such as doing your part for the environment by investing in clean energy, low-carbon industries, and companies that rank well for Environment, Social, and Governance (ESG) factors. Some ETFs within this space are LGI-OSPL SLC ETF (SGX:ESG), which allows you to partake in the decarbonisation journey of Singapore’s real and financial economy; iShares Global Clean Energy ETF (NASDAQ:ICLN), which invests in global equities in the clean energy sector; and Global X Hang Seng ESG ETF (HKSE:3029), which gives exposure to companies that have a greater ESG focus and are listed on the HKEX.
Additionally, you could also get exposure to different market indices, such as the Chinese market through Lion-OCBC Securities China Leaders ETF (SGX:YYY), the Australian market through BetaShares A200 (ASX:A200), the Malaysian market through FTSE Bursa Malaysia KLCI ETF (MYSE:0820EA), and even the Philippine market through First Metro ETF (PSE:FMETF). Besides being able to invest in all of these ETFs via your iOCBC app, you can also rely on its intuitive, predictive instrument search mechanism that allows for easy searching based on the instrument name or code.
The app also categorises the different types of investment instruments, making it simple to view all the available instruments to trade. For instance, you can view all the ETFs available with just one click.
iOCBC – Predictive Instrument Search
There’s also no requirement that your satellite portfolio be focused on the long term. You could easily use it to gain some exposure in the short term to boost your portfolio returns. The satellite portfolio can then be rotated based on your investment outlook or used to ride other new trends that emerge.
You could also use technical analysis to time your entries and exits for your satellite portfolio. To perform an in-depth market analysis, you can use a comprehensive collection of trading tools available on iOCBC, including StockReports+, Market Statistics, and ChartSense, which uses technical analysis to find bullish and bearish trends for you to evaluate and derive trading ideas.
On the iOCBC platform, you can even compare the relative performances of the different ETFs side-by-side on the charting platform, which can help you identify the strong and weak counters. You can also perform the charting on the go with over 50 smart drawing tools via the OCBC Securities app, which is powered by TradingView and allows you to view corporate actions such as dividend yields and earnings releases.
iOCBC –Charting Platform Powered by TradingView
What Are The Considerations In Choosing The Right ETF?
Investments in equities are typically riskier and require a longer investment horizon to ride out the short-term volatility. Your ETF portfolio composition also depends on your risk appetite. The rule of thumb is that you should take less risk when you’re closer to retirement age than when you’re in your 20s. This may result in different allocations to bond ETFs and equity ETFs based on your age and your risk appetite.
Another consideration to keep in mind when selecting your ETFs is to have broader exposure to different regional markets. For example, if you were to invest in the U.S.-listed Vanguard 500 Index Fund ETF for its superior long-term return, you would have lost around 20% of your portfolio year-to-date, or if you invested solely in the Chinese market through the Tracker Fund of Hong Kong ETF, you would have lost around 30% year-to-date. On the other hand, if you were to allocate equally between the SPDR STI ETF, the Tracker Fund of Hong Kong ETF, and the Vanguard 500 ETF, your losses would have been minimised as the STI ETF generated a positive return year-to-date. Having different regional exposures can buffer against large drawdowns as different economies may perform differently from each other.
|Index Funds||Year To Date Performance (1 Jan To 1 Nov 2022)||10-Year Annualised Return|
|SPDR STI ETF (SGX:ES3)||3.80%||3.57%|
|Vanguard 500 Index Fund ETF (NYSE:VOO)||-20.12%||12.40%|
|Tracker Fund of Hong Kong ETF (HKEX:2800)||-29.57%||-0.04%|
*Returns are based on the respective countries’ currencies.
Based on the returns depicted above, you can also see that not only are the year-to-date returns very different, but the 10-year annualised return can also vary significantly. Hence, a diversified global exposure can act as the bedrock of our investment portfolio.
One challenge when investing in multiple markets is keeping track of your overall portfolio’s performance. They are valued differently and in different currencies, and they are held separately from our local stocks, which may be kept in our CDP accounts. However, with OCBC Securities, you do not have that worry.
Your foreign holdings will be displayed in the custodised portfolio and your local shares will be displayed in the non-custodised portfolio, making it easy to monitor your portfolios. Furthermore, your custodised portfolio will be updated in real-time and auto-adjusted with over 20 corporate action types. This includes viewing transaction details like the quantity of your holdings, the average cost price, the unrealised Profit/Loss and the market value of your portfolio.
On the OCBC Securities app, you would be able to see the pre-market U.S. custody movements on the ex-date; track the share transfers; view the associated costs of shares; check on IPO subscriptions and the price bought at; and view the cost of holdings obtained via the employee share scheme.
iOCBC – Custodised Portfolio
Buy and sell orders are easily distinguished on the OCBC Securities app by a blue and red colour code, respectively. You would also be able to see the exact price and time each order was filled from the app’s Orders Log tab, as well as search up to 1 month of your previous transactions.
iOCBC – Easy To Understand Order Log Records
The OCBC Securities app also has an intuitive order form to reduce any chances of “fat finger” incidents with its pre-built order validity checks and reduce the time to place an order by displaying possible errors upfront. This is a good safety measure, especially when you have to make trades on the move.
iOCBC – Intuitive Order Form
Open an OCBC Securities account today to start building your globally diversified ETF portfolio to grow your wealth over the long run.
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