Quora Answer: What is the Best Way to Select Index Funds for Investing?

The following is my answer to a Quora question: “What is the best way to select index funds for investing?” 

When you pick an index fund, there are a few things you need to consider.  They pertain to your investment strategy and horizon, and the technicalities of the fund.  Any investment must have a strategy, and that strategy should have some form of investment horizon.  You choose the fund that suits this best. 

Once you have identified the funds, consider their expense ratios.  These are the fees that cover the operating expenses of the fund.  There is a cost to managing the fund.  Some funds charge more than others, and while going for the cheapest fund is not always the best, funds with lower expense ratios tend to be larger, and they tend to be more efficiently run.  Funds are not very transparent with expense ratios since there is rarely a breakdown.  What you get is a percentage deduction of fund assets.  If you are invested over a long investment timeline, the difference in fees can be in the hundreds of thousands of dollars or more.  That eats into your gain. 

While past returns are not an indication of future performance, they are an indication of the qualities of the investment committee and managers.  Good people are consistently good.  There should be an upward trend over an extended period, barring periods of economic challenges or shocks to the market.  Pay attention to who manages your investments. 

When you build your portfolio, diversify across industries, regions, and markets.  This builds a resilient portfolio.  Have a good mix between debt instruments and equity.  Generally, a 60% weightage towards equity s a good start.  Consider beginning at the lowest common denominator.  What I mean is that people go looking for gold, when the guaranteed money is in those who sell gold prospectors the shovels.  Look for those shovels, the basics that are always required whether the economy goes up or down, and build your portfolio from there.

Quora Answer: Is Life Insurance Part of an Estate Regardless of the Estate’s Debt?

The following is my answer to a Quora question: “Is life insurance considered part of an estate, subject to paying off debt, or is it solely for the beneficiary, regardless of the estate’s debt?” 

If a life insurance policy is not nominated to a beneficiary, then it is part of the estate of the deceased, and subject to the probate process.  This means the payout is consolidated with the rest of the estate, less debts and obligations, and the remainder disbursed to the heirs according to the will, or of there is no will, as per the direction of the public trustee in as equitable a manner as stipulated by law. 

If the life insurance policy is nominated to a beneficiary or beneficiaries, then is not part of the probate process, and is distributed according to the policy nomination to the beneficiary or beneficiaries.  The possible exception to the rule is if the deceased is a bankrupt, in which case the public trustee determines how much of it goes to creditors.

Quora Answer: Which is More Effective: Punishment or Rehabilitation?

The following is my answer to a Quora question: “Which method is more effective, punishment or rehabilitation?” 

When considering the consequences for breaking the law, punishment must go along with rehabilitation.  Punishment by itself does not serve society since long incarceration is a cost upon society.  As such, it makes sense that Singapore, for example, adopts a preventive philosophy for law as opposed to a punitive one.  There is capital punishment, and the penalties for major crimes are very strict.  The intent is to discourage law breaking as opposed to punishing it after the fact.  The death penalty for crimes such as drug trafficking, murder, kidnapping and intentional firearms discharge with intent to hurt is either a massive deterrent, or it removes the perpetrators from the gene pool. 

As for everyone else, the intent is that they can be returned to society and contribute to it after their time served.  This is where rehabilitation is part of the process.  It involves counselling, the provision of life skills, and a support network after they leave to limit recidivism to the minimum.  Otherwise, we are simply returning criminals to society, with no incentive to contribute to it.  Prison should not be a revolving door.

Quora Answer: Why Should You Have a Concentrated Portfolio Versus a Diversified One?

The following is my answer to a Quora question: “Why should you have a concentrated portfolio versus a diversified one?” 

A concentrated portfolio consists of a few specific equities and derivatives for the sole purpose of surpassing the benchmark.  It maximises potential gain at the expense of very high risk.  It works when you make the right call on the underlying assets and companies.  But when you miss, and you will eventually miss, the losses are great.  A concentrated portfolio generally takes advantage of a bubble, requires significant management, and for a short investment horizon. 

The opposite of it is a diversified, where the assets and investments are diversified across asset classes, industries, geographic regions and more.  The idea is to spread the risk since the chances of the entire market crashing is miniscule.  Such a portfolio generally minimises leveraging as well.  A good diversified portfolio is normally passively managed, has an extended investment horizon, and tends to outperform a concentrated portfolio over that extended investment horizon due to compounding. 

In summary, for most people, I would advocate a diversified portfolio.  Concentrated portfolios are for accredited investors with access to the latest market information and the best market analysis.

Quora Answer: Will Batam Become the Next Singapore?

The following is my answer to a Quora question: “Will Batam become the next Singapore?” 

What do you mean by the next Singapore?  In terms of being a sovereign city state, that is not going to happen.  The population of Batam is just over 1 million, which is small.  The population of the entire Riau islands is just over 2 million. 

In terms of geopolitical potential, however, Batam is strategic.  It can be built up as a refining, ship repair, and industrial park to leverage on its proximity to Singapore, just across the Straits of Singapore.  It sits at the natural junction between the Malacca Straits and the Sunda Straits.  It has the potential to be a rival air hub for the region.  It is surrounded by waters teeming with fishery and mineral resources.  It has fresh water resources.  Batam is not so much the next Singapore, as a complement to it.  Done properly, its population would explode and it would cease to be a backwater.  It may even be feasible, with all that development and increased population to have a viable land transport link between Batam and Singapore. 

Batam, like much of Indonesia, is potential.  Due to the state of Indonesia, it is wasted potential.  It would take a fundamental shift in thinking and values for Batam to actually live up to what it could be.

Quora Answer: What is the Global Tax Reform?

The following is my answer to a Quora question: “The G20 finance ministers agreed to go ahead with global tax reform.  What is it about?” 

The global tax reform is not solely an agreement among the G20.  140 nations were involved in the discussion, and 136 of those signed it after extensive negotiations.  This began as an American initiative to address an American issue, and they made it a global issue.  The intent was to set taxes for the foreign earnings of American corporations, which has used this as a means to avoid paying corporate taxes in the US.  It was simpler to make it a global problem instead of reforming the American system, which is rotten.  As it is, the tax treaty requires 67 votes in the Senate to be ratified, and in this climate of hyper-partisanship, that would be challenging. 

There are two parts of the reform.  The first past is focused on changing where large companies pay taxes, while the second part is the actual global minimum corporate tax.  The second part would have no teeth without the first since not every single tax jurisdiction in the world is subject to this. 

The first part, called Amount A, would apply to companies with more than €20 billion in revenue. and a profit margin above 10%.  A portion of their profits would be taxed in jurisdictions where they generate sales revenue, 25% of the profits above that 10% margin may be taxed.  After a review period of seven years, this €20 billion threshold may fall to €10 billion.  However, companies which generate revenue from extraction of minerals, such as the oil and gas industry, and mining companies, as well as financial services companies such as banks and insurers, are excluded from this, because their revenue is restricted to specific jurisdictions by law, and may only be taxed there.  Amount A is an attempt to partially redistribute tax revenue from countries that currently tax large multinationals based on the location of their headquarters and operations to countries where their sales revenue is generated.  American corporations would be the single largest group affected by this.  There is also an Amount B, which is a simpler method for companies to calculate the taxes they owe on foreign operations such as marketing and distribution.  The outline, however, provides no new details. 

The second part is the aforementioned the global minimum tax.  It contains two main rules, and then a third rule pertaining to tax treaties.  They are meant to apply to companies with more than €750 million in revenue.  The first is income inclusion, which determines when foreign income of a company should be included in the taxable income of the parent entity.  The minimum effective tax rate is 15%, otherwise additional taxes would be owed in that company’s home jurisdiction. 

The income inclusion applies to foreign profits after a deduction for 8% of the value of tangible assets, and 10% of payroll cost.  These deductions are to be reduced annually over a 10-year transition period.  At the end of transition, the deduction for both tangible assets and payroll would be fixed at 5%.  This will increase the tax costs of cross-border investment and impact business decisions such as hiring and investments. 

The under-taxed payments rule allows a company to deny a deduction for or place a withholding tax on cross-border payments.  If a company in one country is making payments back to its parent entity, which is in a low-tax jurisdiction, then the under-taxed payments rule applies.  Companies that have been in the scope of this for less than five years, have a maximum of €50 million in foreign tangible assets, and operate in no more than five other jurisdictions, are excluded. 

Together, the income inclusion and the under-taxed payments rules create a minimum tax both on companies investing abroad and on foreign companies that investing domestically.  They are both tied to the minimum effective rate of at least 15%, and they apply for each jurisdiction where a company operates.  Additionally, there is the subject to tax rule, used in a tax treaty framework to give countries the ability to tax payments that would otherwise only face a low rate of tax.  The tax rate is set at 9%. 

The changes are meant to be put in place by 2023.  Countries need to write new laws, adopt new tax treaty language, and repeal some policies that conflict with the new rules.  This is the most significant change in international tax laws in the modern era.  Digital services taxes and similar policies are removed as part of implementing this.

Quora Answer: What are Three Finance Tips You Believe are Important?

The following is my answer to a Quora question: “What are three finance tips that you believe are very important?” 

There are many tips on finance, but ultimately, it comes down to the basics.  Here are three that form the foundation of good financial management. 

First, have a goal.  Saving for the sake of it is unsustainable to most, and those that do tend towards miserliness.  Have a retirement goal.  Have a savings goal.  Have things you want to work for.  That is motivation. 

Second, have a plan to reach those goals.  This takes into consideration your investment or savings horizon, and other factors that affect earnings or revenue, such as inflation and job loss.  Part of this plan includes loss mitigation, which is why you need insurance.  You need coverage for death, disability, illness, loss of income, accidents and more.  This also includes spreading your risk. 

Finally, avail yourself to excellent financial advice.  Most people are not experts in finance, and even if they do work in finance, they are not experts in every aspect of it.  Financial consultants and bankers should avoid managing their own investments and portfolio.  There is no distance, and emotions tend to get involved.