I have never heard of John C. Bogle until recently, when I read that Warren Buffett, in his 2013 Berkshire Hathaway annual letter, said this:
“My advice….could not be more simple: Put 10% of the cash in short-term government bonds and 90% in a very low-cost S&P 500 index fund (I suggest Vanguard’s). I believe the trust’s long-term results from this policy will be superior to those attained by most investors — whether pension funds, institutions or individuals — who employ high-fee managers.”
John C. Bogle is the founder of the Vanguard Mutual Fund and creator of the first index fund. If the legendary investment guru Warren Buffett recommends Vanguard, it is definitely worthwhile to study Bogle’s methods for his own retirement.
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In his seventh book, Enough., John C. Bogle wrote about 3 steps that he takes to retire well. To my pleasant surprise, I realized that I am already applying Bogle’s methods in my own investment journey. In this blog post, I will share on how I adapt Bogle’s 3 steps for retirement to the Singaporean way.
1. “I was born and raised to save rather than spend”.
Like Bogle, I hardly go for extravagance and will always consider carefully before spending on things that I think are not necessary. I have a tight monthly budget that tracks my expenses carefully, making sure I understand where my money goes. Recently, I have started to save my entire monthly salary. I am able to do that as my passive income can already cover my expenses.
It has been about a decade since I started building up passive income, but I still have to live frugally to control my expenses. I am still saving up as much as I can, so that I can buy more assets to generate more passive income. It is always easier to spend than to save, especially when credit is so easily available nowadays. It takes discipline to be prudent when there are so many external temptations to seduce me to spend money.
It is now easier for me to control my spending urges, as I have gotten used to living below my means. But it was not so easy when I started out. I used to have a personal car, but to trim my expenses, I sold the car and take the public transport now. I also eat at hawker centers or cook my own meals often, instead of spending too much at expensive restaurants.
Many people in Singapore lament that they can’t put aside anything for savings. While it may be true for some families, often it is a choice of their lifestyle. A meal at the restaurant for 2 people can cost more than $50 easily, which can feed the same couple at a hawker center for a week. Taking the public transport is relatively cheap compared with owning a car in Singapore, yet I see many people still working hard to pay the banks for their cars.
Savings are the basic foundation stones for retirement; the seeds that grow the tree. To be able to invest so that I can generate more passive income, I simply need to save more. I always see my cash savings as “soldiers”. The more soldiers I can muster, the bigger an army I have when I go fight the “battles”. These battles occur regularly as financial markets are volatile and move in cycles. I only need to be patient.
And the real truth is that we simply do not need that much to live. There are needs and there are wants, and when I spend unnecessarily on stuff I do not need, I am “killing my soldiers”. Just like a real army, I need to feed the troops, and the cost of providing for my army is inflation. I lose spending power gradually due to increasing costs of living, so I am always conscious of the balance I must have between holding cash and investing for higher yield.
2. “I have been blessed with a fabulous defined retirement plan”
Like all working Singaporeans, I contribute to CPF (Central Provident Fund), our mandatory national social security plan. CPF is made up of 3 separate accounts: Ordinary (OA), Special (SA) and Medisave (MA). Each month when I am working, I make the maximum possible contribution to CPF and eventually when I retire, CPF will pay me back a monthly annuity income. My OA had been used to pay for my housing mortgage, but SA remains untouched, and my MA pays for medical insurances.
Each year, I also contribute the maximum $12750 into my SRS (Supplementary Retirement Scheme) account. This voluntary contribution must be done with cash and provides a tax relief that reduces my tax bill. SRS is a form of forced savings as early withdrawal from the account attracts penalties.
Unlike the CPF that pays a risk free 2.5% to 5%, the SRS pay a very low interest, so I invest my SRS funds for higher yields. I sink my SRS money, using a RSP (regular savings plan), into the STI ETF (Straits Time Index exchange traded fund). What happens is that by the end of each year, I will contribute the maximum $12750 into my SRS account, and in the following year after my contribution, $1000 will be deducted every month automatically and bought into the low cost index fund, the STI ETF. In this way, the process is automated and I avoid timing the market too.
I treat my CPF as a form of bond, as it pays a decent risk free rate. The OA pays 2.5%, while the SA and MA pays 4%. There is an additional 1% paid to the first 60000 dollars. In the long run, with the magic of compounding interest, the amount in my retirement account can be significant. Contributing to my SRS gives me a tax saving and I do not actively manage my investment of the SRS money, as I feed them into the Singapore stock market automatically and regularly with a RSP. Together, my CPF and SRS plans will ensure that I will have 2 strong pillars for my retirement planning.
3. “I have invested wisely, eschewing speculation and focusing on….low cost mutual funds”
I have learned that it is difficult to time the market and even full time investment experts get their predictions wrong. Warren Buffett advised that to invest successfully, we must watch the fees we pay to the managers we invest with. My CPF has almost no cost, while the SRS is invested in a low cost index fund. The investments are automated and continue every month regardless of market conditions. I monitor their performance at the end of each year and to update my records.
I may be investing my SRS money into the STI ETF due to home bias, because I live here and am familiar with the local equity market. But I also feel that China will become increasingly more important in the financial markets. As such, I invest $1000 each month into a CPF approved mutual fund that tracks the China market. The CPF board only approves investments in funds with low fees. This RSP investment is done through the Fundsupermart platform.
Together, it means that each month, I invest $2000 using RSP into Singapore and China equities. The process is automatic and I only need to ensure there are sufficient funds for investment. The 2 funds I invest in are low in cost and CPF approved. Automating the buying using a RSP means that I do not time the market and this removes the emotions away from my investing process.
But I also have a speculative element to my investing. I have diligently set aside money, hoping that I can purchase financial assets at sale prices. Markets do move in cycles and I feel that the current bull market in stock markets seemed overstretched. I will be patient and continue with my passive stock buying, but when the markets do present an opportunity, I am also ready to buy more.
So just like John C. Bogle, I feel fortunate that I seemed to be doing fine for my retirement. It was difficult in the earlier years when I was building up my passive income and had a lot lesser to start with. Lady Luck played a significant part, but being resilient and disciplined helped very much. It is even tougher now to stay on course, as there are so many temptations for me to stray.
There are many curved balls in life, but I will try to control what I may control, and leave the rest to providence. In fact, the most difficult part to control may be my own emotions, as I can be influenced by the environment. That is why I automate part of my investment process. But I will always keep in mind Buffett’s advice to be fearful when others are greedy, and to wait patiently for the opportunity to be greedy when others are fearful.