After putting aside a certain amount of money into your emergency fund ( depending on your job circumstances, your debt obligation, and your health status), you are ready to rock and roll. You need a plan to invest wisely and patiently!
If you want to be 100% sure that your investment worth more than what you have put in in the long run, you can choose Plan A or Plan B,
Plan A– You have the ability to choose the correct individual stock or bond and you diversify by buying up maybe 10-20 different stocks and bonds each. Of course, you need to follow the news, corporate actions, quarterly earning reports and maybe insiders’ trading of the stock OR
Plan B– You can buy 2-3 ETFs or index funds ( mutual funds) and totally forget about everything and keep on buying them indefinitely until you are happy to retire,
I would rather stick to Plan B to save the headache and sleepless nights!
Then, you need to design a portfolio that you are happy with. It must suit your risk appetite and time horizon.
Step 1: You need to choose a mixture of equity and bond.
How many percent of equity and bond you want to hold depends greatly on your age. Are you in the stage of wealth accumulation or wealth preservation? Are you still working and having cash flow? What is your risk appetite?
I would suggest if you are young ( less than 55 and still working), you should be putting 70-90% of your money in equity and the rest to bond.
A higher percentage of bonds in your portfolio would make it less volatile but you lose the power of compounding growth. Like versa, if you hold a higher percentage of equity in your portfolio, you would be having sleepless nights during a market sell down. But you ride higher and faster with the market during the euphoric time.
Step 2: Choose the Indexes to Track
For Americans, it is rather simple, you can either choose the S&P 500 index or total stock index and if you are a little bit more adventurous, add 10-20% of the total World index.
For Asians, especially Malaysians and Singaporeans, the headache comes, “Shall I be following the great Americans or using a different approach by adding in local indexes? “
There is no right and wrong answer. As for me, the Malaysian and Singapore markets are relatively very small compared to the US. And by looking at the performance of both indexes, I would advise you to follow the American’s way of investing!
Divide up your equity portion and put 80 percent in the US S&P 500 or Total Stock Index and the remaining 20 percent in Total World Index ( both Malaysian and Singapore indexes are covered in this index).
Step 3 : ETFs or Mutual/Index Fund
More headache to come for non-Americans! If you are a American, I would say you just need to invest in Vanguard index funds- VTSAX ( tracks total stock) or VFIAX ( tracks S&P500) for your equity and VBTLX ( Total bond index) and you are done!
Or if you prefer to see how the prices move every second/min during trading hours, choose the equivalent ETFs- VTI, VOO and BND.
For Malaysians and Singaporeans, you only have the option of buying VTI, VOO and BND and not the better versions of what your American friends are getting- VTSAX, VFIAX, and VBTLX.
But I must warn you that another headache is awaiting you if you buy these ETFs because you would be slapped with 30% withholding tax for dividend payments!
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Hi Dr Goh. Firstly, I would like to thank you for your insightful sharing on how to transfer MYR into IBKR via Transferwise. It’s now a breeze transferring compared to having to make physical trips to the banks previously and incurring exorbitant fees and long waiting time at the bank.
I have a question on US withholding tax on dividends. My spouse and I have a joint IBKR account. In addition to individual stocks, we are also invested in ETFs (UWM and URTY). Recently, IBKR sent me the 1042s form which showed that there was withholding tax on dividends in my sole name, but not in the joint account holder’s name. Btw, I am Singaporean and my spouse is Malaysian (both residing in Malaysia). Previously, we had completed the W8 form. My question is:
1) Does W8 form exempt non-US persons from incurring withholding tax? Is there any way to avoid paying tax on this?
2) According to IBKR staff I had contacted via online chat, there is only one 1042s generated and it applies to both joint account holders, although it is shown as only one name. Are you aware of this?
Dear Li,
Thanks for your feedback. I have no experience in UMW and URTY ETFs but I think they are leveraged ETFs with high risk and volatility. I am not a tax consultant, but I think you still need to pay 30% withholding tax if you are invested in US stocks. W8 form doesn’t exempt you from paying Uncle Sam’s tax. There is no way for you to avoid the tax, therefore I prefer to buy ETFs domiciled in Ireland and listed in London, the tax implication is 15% instead of 30%. I am not sure about 1042s form because all my USD-denominated portfolios ( namely VUSD,VWRD and IGLO) are listed in London.