Warren Buffett has been investing in stocks for more than 7 decades, picking value stocks and waiting for value to be unlocked or realised. Given the reputation, wealth and empire he has built, he has also learnt a lot about cycles, fear, greed and when is a right time to be investing in stocks. Hence, when Warren Buffett gives advise on how to invest, one should pay close attention to it.
One such advice he has always been giving the average investor would be to just invest in Exchange Traded Funds (ETFs). This is because he understands that individual stock picking is not for everyone and for most investors who have full time jobs and families, they would probably not have the time to analyse companies.
Furthermore, as much as we may deny it, humans are emotional — myself included. Therefore, given the human psychological behaviour, he believes that investing in ETFs, especially by Dollar Cost Averaging (DCA), would be a simpler and better strategy.
“A low-cost index fund is the most sensible equity investment for the great majority of investors,” Buffett told Bogle in his book “The Little Book of Common Sense Investing.” “By periodically investing in an index fund, the know-nothing investor can actually out-perform most investment professionals,” Buffett said.
I do agree with Buffett that most investors who do not have the time and emotional capacity to be investing in stocks should just adopt a DCA method and invest in ETFs. However, that said, I do not believe that this is applicable to Singapore’s STI ETF. In today’s article, I will share my reason for this.
What is an ETF?
An Exchange Traded Fund — better known by the acronym “ETF” — is a fund that can be traded on an exchange like a stock (hence the name). ETFs give you a way to buy and sell a basket of assets without having to buy all the components individually. Furthermore, given the diversification of stocks invested within the ETF, an investor would have their risk well spread out as well. Therefore, the STI ETF essentially contains 30 companies that best represents Singapore’s economy.
I have attached a snapshot of the companies within the STI ETF with >2% weightage within the ETF. For the full list, you may check out this site here.
STI ETF vs Singapore Banks
As referenced to the snapshot above, our STI ETF has a huge weightage in our 3 local banks — DBS Group, OCBC and UOB, a total of 37.1%, which equates to more than one third the value of the fund’s holdings.
Hence, this begets the question. Would it make more sense to be investing in the STI ETF or our 3 local banks?
The above table shows the returns excluding dividends reinvested for the STI ETF and our 3 local banks. I did not include dividends reinvested as the calculation would be quite troublesome, but the end result will be similar.
As shown, the returns of our STI ETF is mainly driven by our 3 local banks. This is true no matter what time period I used — 1 year, 3 year, 5 year, 10 year and 15 year. Investing in any of our 3 local banks would yield you better returns than investing in the STI ETF.
I will be sharing more of my thoughts on the 3 local banks with my subscribers this Friday (5 June 2020), those interested in receiving a copy of it do leave your email contact in the link below!
The information provided by InvestingNook serves as an educational piece and is not intended to be personalised investment advice. Readers should always do their own due diligence and consider their financial goals before investing in any stock.
Disclaimer: The Author has vested interest in OCBC & UOB at the time of writing.