You will be able to decide between holding one all-world fund and combining regional funds.
Every few months someone in an investing chat group posts their portfolio and asks for comments. It usually has seven or eight funds: a world fund, a US fund, a technology fund, an emerging market fund, an STI fund, a small company fund, and something that went up a lot last quarter. The replies split into two camps. One says it is beautifully diversified. The other says it is one world fund wearing a disguise.
Both camps have a point, and the choice between them is one you will make once and then live with for years. This lesson sets out what each approach gives you and costs you, so you can make that choice on purpose.
A single fund on an all-world index holds developed and emerging markets in proportion to their market value, as lesson 2.2, World, US, emerging or Singapore: what each index gives you, described. When the US grows as a share of world markets, the fund holds more US. When emerging markets grow, it holds more of those. The regional mix adjusts itself, and you never have to decide whether Japan deserves 5% or 7%.
For the share part of your allocation, that means one line in your portfolio. Each month your new money goes into that fund. Once a year you check it against your bond fund and rebalance between the two. It is about as simple as investing gets, and simplicity has a real benefit: fewer decisions means fewer chances to make a bad one.
The costs are modest. You accept the market's regional weights whether you like them or not. You get emerging markets at their market weight, which some people find too little and others too much. And the all-world funds available to you may have a slightly higher expense ratio than the cheapest regional funds, which module 3 shows you how to measure.
The alternative is to combine two or more regional funds: a developed world fund plus an emerging market fund, or a US fund, a Europe fund, a Japan fund and so on. You decide the weight of each.
This gives you control. You can hold emerging markets at a weight different from the market's, add a small Singapore slice on purpose, or use a cheaper fund for one region. Some investors also use building blocks because the all-world fund they want is not available on their platform or in their account type.
The price is more decisions. Each extra fund is another line to monitor, another weight to set, another target to rebalance towards. If you have three regional funds and a bond fund, your yearly review checks four weights instead of two. Each extra fund also adds trading, and with a fixed commission per trade, splitting a S$1,000 monthly investment across four funds can cost four commissions instead of one.
The cost that matters most is not on any fee page. Each fund you hold is a separate number you can watch, compare and act on. When the US has had a great year and emerging markets a poor one, a building-block portfolio puts that gap in front of you every time you open the app, and the urge to move money towards the winner is strong.
That is how chat group portfolios end up with eight funds. Each fund was added for a reason that felt good at the time, usually a recent return. None of those reasons were written down, and nobody knows what the target weights are any more.
You may still want to hold a region at a different weight from the market. That is a reasonable choice, as long as the reason is one you would still believe after that region has had three bad years. "My job and home are in Singapore, so I want less Singapore, not more" is a reason that survives a bad year. "The US has done well, so I want more of it" is a forecast built from past returns, and it tends to fall apart as soon as the pattern changes.
A useful test is to write the reason down before you buy and set the target weight at the same time. If you cannot write a sentence that does not mention recent performance, the tilt is a bet on last year's winner.
Farhan weighs both sides. He invests S$1,000 a month, his broker charges a fixed commission per trade, and he knows from his own history that he likes to check prices. He chooses one all-world fund for his shares and one bond fund. Grace, from lesson 2.2, decides to keep building blocks, but drops her US fund and writes target weights for the remaining two.
Your own answer depends on how much control you want and how much you trust yourself with it. Write it down in the activity below while the costs of each side are fresh.
Write the case for and against a one-fund approach for your own portfolio and choose one, in under 150 words.
Junxiong-WFG Organisation is an authorised representative of AIA Financial Advisers Private Limited (Reg. No. 201715016G).