The Power of Diversification Illustrated With Australian Equities: Chart

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Diversification and patience are two of the free and simple strategies for success with equity investing. Patience requires  not only holding stocks when the market is soaring but also the ability to withstand during dramatic and painful declines. Diversification on the other hand is easier to follow and implement with one’s portfolio. It is always wise to hold a variety of different assets across regions or countries than to won a concentrated basket of stocks.

The following chart from Vanguard Australia shows the power of  diversification over the 30 years from 1992 to 2021:

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Source: Vanguard Australia

Australian equities were the top performers in just 3 out of those 30 years. The chart clearly shows no asset earned the best return year after year year consistently.

Related ETF:

  • iShares MSCI Australia ETF (EWA)

Disclosure: No Positions

Why Time in the Market is More Important Than Timing the Market

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I have written many times before that time in the market is more important than timing the market, if that is even possible. It is worth repeating this concept especially during volatile market times as more investors tend to think about bailing out of the market. The problem with this idea is while it is easy to get out at any time to cut down further losses it is not easy to say the least of figuring out when to get back in. Since nobody knows when the market would turn for the better it is foolish to hope that one can predict this. For example, for the past few weeks many experts have been trying to identify “the bottom” of this market in a futile exercise.

Staying invested during good and bad times is important because even just missing the best few days will lead to a much lower return as shown in the chart below:

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Source: How to handle market declines, The Capital Group

An excerpt from the above piece:

Even missing out on just a few trading days can take a toll. A hypothetical investment of $1,000 in the S&P 500 made in 2012 would have grown to more than $3,790 by the end of 2021. But if an investor missed just the 10 best trading days during that period, he or she would have ended up with 44% less. (emphasis mine)

Another important fact to remember is that the best days seem to be closer to the worst days and vice versa. This makes it even more difficult to time the market. When the market plunges say 5% one day an investor that sells out will inevitably miss the say 3% surge that may follow in the next few days.

A recent article at Vanguard UK makes this point very clear. From the article:

Another reason for clients to stay invested and not time the market is that, historically, the best and worst trading days have come close together, making it difficult to avoid one without the other. Last week was a perfect example of that, with US share prices surging on the day of the Fed’s rate-hike announcement, followed by a plunge the next day.

Remember also that some of the best trading days have occurred during periods of long market downturns, as shown in the chart below. Missing those key trading days lowers long-term returns.

Again, please note, that the returns data shown below only cover the 500 biggest listed companies in the United States and is in US dollar terms. However, the US market accounts for well over half the world’s shares by value and it’s a similar picture in other currencies.

Past performance is no guarantee of future returns. Sources: Vanguard calculations, based on data from Refinitiv using the Standard & Poor’s 500 Price Index. Data between 1 January 1980 to 31 December 2021.

The bottom line for investors is that sticking to your long-term investment strategy may be the best route to investment success.

Historically, investors with patience and a long-term perspective would have benefitted more from staying the course than trying to time the market when things get choppy.

Source: Keep perspective when markets are volatile, Vanguard UK

So the key takeaway for investors is that it is wise to simply stay put during adverse market conditions and focus on the long-term by ignoring the day to day noise and other distractions.

Related ETFs:

  • iShares MSCI UK Index Fund (EWU)
  • SPDR S&P 500 ETF (SPY)

Disclosure: No Positions

Sources of Tax Revenue in the US vs. OECD Countries

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While researching on capital taxes around the world recently, I came across the below interesting graph that shows the sources of tax revenue in the US compared to the OECD countries. Tax revenues come in various categories such as Individual Taxes, Corporate Taxes, Property Taxes, etc. But they differ significantly in terms of reliance on each of these taxes by the US and other OECD countries.

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Source: Taxes in the United States, Tax Foundation

I wrote an article about this fact many years ago. The US collects more taxes from individuals than from corporations as shown in the chart above. This is policy is highly beneficial to investors of corporations. By paying less taxes, corporations are able to keep more of their profits or pass it on to their owners in the form of dividends and share buybacks. OCED countries on an average raise nearly double the US rate in the form of Corporate Taxes.

Property Taxes are nearly double in the country relative to the OECD average. Property Taxes vary widely even within a state or a city. These taxes are used as a form of catch-all revenue sources by local governments. Any need for funds such as adding a new library to building a stadium to establishing a park and everything in between is easily achieved by adding them to property taxes owed by a owner of a property within the jurisdiction. Of course such levies are first put through a ballot for approval from voters. In addition, since annual property taxes are in the thousands of dollars just adding a dollar here and dollar there for some requirement can easily generate millions in additional revenue.

The American economy is a consumption-driven economy. Hence taxes on consumption are kept low when compared to OECD countries. High taxes on consumption such as consumer goods for example can slash demand. So lower consumption taxes indirectly encourages consumers to consume more of goods and services.

Which US Stocks Performed Better During the 1970s ?

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In the 1970s, the US economy was suffering from Stagflation. This was period of high inflation and unemployment. Many experts are predicting the current economic condition could lead to a similar scenario. If the US economy enters into a period of stagflation, which stocks will perform better?

According to a report by Marko Gränitz, “During the 1970s, when inflation rates were very high, the 20 percent of stocks with the lowest valuation – as measured by price-to-earnings ratios – performed significantly better than the highest-valued stocks.”

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Source: “Stagflation, then and now“, by Marko Gränitz, guest author at LGT, May 18, 2022 via Investment Office

Here is an excerpt on Stagflation from an article at AP:

Saudi Arabia and other oil-producing countries imposed an oil embargo on the United States and other countries that supported Israel in the 1973 Yom Kippur War. Oil prices jumped and stayed high. The cost of living grew more unaffordable for many. The economy reeled.

Enter stagflation. Each year from 1974 through 1982, inflation and unemployment in the United States both topped 5%. The combination of the two figures, which came to be called the “misery index,” peaked at a most miserable 20.6 in 1980.

Stagflation, and especially chronically high inflation, became a defining feature of the 1970s. Political figures struggled in vain to attack the problem. President Richard Nixon resorted, futilely, to wage and price controls. The Ford administration issued “Whip Inflation Now” buttons. The reaction was mainly scorn.

Source: Worry about stagflation, a flashback to ’70s, begins to grow, AP

Related ETF:

  • SPDR S&P 500 ETF (SPY)

Disclosure: No Positions

An Important Note on Singapore Stock Dividends

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The Dividend Withholding Tax Rate for Singapore is 0% (excluding REITs) for US investors. The tax rate on REITs is 10% for 2022. Singapore has always had no withholding taxes on dividends paid out domestic firms to US investors. This makes the Singapore market attractive. However one important point to remember is that the dividends are NOT considered as “Qualified” dividends by the IRS for tax purposes. So instead of the reduced rate of qualified dividends American investors will pay their individual marginal tax rate on those dividends since they will be considered as “Ordinary” dividends. This rate will most likely be higher than the qualified rate.

Unlike many other countries, Singapore dividends are treated as ordinary dividends because the US does not have a tax treaty with Singapore. Tax treaties between countries allow for reduced rates or to avoid double taxation. Though Singapore is a developed country and is a global financial hub, it is said that the US has no tax treaty with Singapore.

Another point is many Singapore stocks are known are their high dividend yields. For example, the dividend yield of the benchmark Straits Times Index (STI) was 3.6% as of November, 2021 (in Singapore Dollars). This is much higher than the 2.35% on the S&P 500 (in SGD). In US dollar terms, the S&P 500’s dividend yield rarely crosses 2%.

Currently just two Singapore companies trade on the US exchanges. However about 44 firms trade on the OTC markets. The country’s banks traditionally tend to have high dividend yields. For example, the DBS Group Holdings Ltd (DBSDY) currently pays $4.04 in dividends per year for a yield of 4.40%. But this rate will be effectively reduced since they are ordinary dividends and not qualified dividends which can be as low as 10% or 15%.

So investors need to be aware of this important rule and make their investment decisions accordingly.

Related:

Related ETFs:

  1. iShares MSCI Singapore Index Fund (EWS)
  2. iShares MSCI Singapore Small-Cap Fund(EWSS)

Disclosure: No positions

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