3 Reasons Why Singapore’s STI (‘Super Terrible Index’) is a Bad Passive Investment Strategy

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Why Singapore’s STI is a Bad Passive Investment Strategy | SingSaver

When it comes to a passive investment strategy, this writer believes that Singapore’s ‘Super Terrible Index’ is one of the least favourable options for long-term investment.

Opinions expressed reflect the view of the writer (this is his story)

Since 2001, after a string of poor stock picks ended disastrously for me, I have leaned strongly towards a passive investment strategy. It started when my financial mentor introduced a book to me, The Little Book of Common Sense Investing by the late John Bogle. Bogle is widely acknowledged as the “Father” of the passive investment strategy.

The passive investment strategy is pretty simple: buy a broad-based stock market index fund or exchange traded fund (ETF), hold it for decades, and the fund will compound at 8-10% a year.  

In the backdrop of a stock market and property market crash from 1997 to 2001 that burnt me badly, I decided to adopt this passive investment strategy. I allocated my equity investment into two buckets: a majority of my funds went to the Straits Times Index (out of familiarity), and a minority to the S&P500. After more than a decade, the results are startlingly different…

The STI has significantly underperformed the S&P500! From the tables below, you can see that the STI crashed from a high of 3800 points in 2008 and has not recovered since. On the other hand, the US-based S&P500, though badly hit by the global financial crisis of 2008, has not only recovered but also more than doubled in value since 2007.

Straits Times Index (ES3.SI): 2008 – 2019

Why Singapore’s STI is a Bad Passive Investment Strategy | SingSaver

Source: Yahoo! Finance

S&P500 (GSPC): 2008 – 2019

Why Singapore’s STI is a Bad Passive Investment Strategy | SingSaver

Source: Yahoo! Finance

It was then I did much research and eventually realised why the STI is a terrible stock market index to invest in, relative to the S&P500. There are the 3 reasons I have found:

Reason #1: S&P500 comprises of powerful Global Brands that the STI cannot rival

I have done up two brand maps of the composite stocks of the STI and the S&P500  to illustrate the differences.

The 30 stocks of the STI

Why Singapore’s STI is a Bad Passive Investment Strategy | SingSaver

Source: https://sginvestors.io/analysts/sti-straits-times-index-constituents-target-price

(Size of words represent weightage of their stock price in the STI)

The STI is a market cap weighted index of a selected 30 leading companies listed in the Singapore Stock Exchange (SGX). This implies that the prices of the top 5 companies (namely DBS, UOB, OCBC, Singtel, CapitaLand) would make up 50% of STI.

So when you invest in the STI, you are largely investing in these 5 companies whose industries (Finance & Telco) have reached maturity or even in a state of decline.

Another point worth noticing is that there are no Growth Companies (e.g high-tech or internet companies) among these 5 companies.

Top 49 companies of the S&P500

Why Singapore’s STI is a Bad Passive Investment Strategy | SingSaver

Source: https://www.slickcharts.com/sp500

(Accounting for 50% of the S&P500 Index)

On the other hand, the S&P500 is made up of largely very powerful global brands. It comprises high-tech growth companies like Microsoft, Apple, Facebook, Amazon, as well as companies that have withstood the test of time, such as Berkshire Hathaway, Johnson & Johnson, ExxonMobil, and VISA.

I have assembled the top 49 companies of the S&P500 in the word cloud above for you to judge their profiles. The stock prices of these top 49 companies account for 50% of the S&P500 index. So when you buy the S&P500, you are buying into arguably 500 of the world’s best global companies.

The companies in the STI would pale in comparison with many of these global brands in the S&P500.

Reason #2: STI is poorly diversified compared to the S&P500

As a market cap weighted index, the STI performance is heavily linked to the top 5 companies of the SGX which make up 50% of the index. Thus, it is a relatively high-risk index to invest in – a lacklustre performance of one or two of the counters would result in a significantly adverse hit on the STI.

For example, the crash of the telecom industry recently led to the price of Singtel shares falling from S$4.46 (Apr, 2015) to $3.15 (Apr, 2019) and has weighed the STI down heavily. In the event of a banking crisis, the STI would almost certainly plummet down severely, given the heavy weight of DBS, OCBC, and UOB. 

A Singapore-centric economic recession would spell a mega-disaster for the STI, given that almost all 30 of the STI composite companies have businesses concentrated in Singapore. The total Singapore equities market capitalisation is only about 1% of global market capitalisation. I should not have invested so much in such a small speck of global economic activity.

On the other hand, the S&P500 is made up of 500 well-diversified global companies. Many of the S&P500 composite stocks like Microsoft, Facebook, ExxonMobil, and Johnson & Johnson are global brands that are well-diversified across the world. The impact of one industry or country’s downturn is cushioned by the economic upswing in other sectors or countries.  

Reason #3: Unlike the STI, the S&P500 has stood the test of time across a century

Why Singapore’s STI is a Bad Passive Investment Strategy | SingSaver

If you track the S&P500 since its inception since 1923, with the exception of the Great Depression of 1929, there is probably no 30-year investment interval that the index has not risen by over 6% annually. In fact, for the majority of the time, it has achieved an 8-10% annualised return.

The STI, however, was set up only in 1966. During its first 30 years, the STI grew rapidly, mirroring the economic growth miracle of Singapore from a third world to a first world country. As Singapore transitions into a mature economy, I am highly skeptical if the STI can continue to grow as exponentially as it did from 1970 to 2008

Conclusion

After paying a heavy tuition fee in terms of opportunity cost, I have concluded that not all indices are suitable for passive investment. If you take into account the 4-5% risk-free return rates of the Special Account (SA), the STI’s performance pales in comparison even to my frequently publicised 1M65 CPF investment strategy

In fact, if you had put money into the STI in Oct 2007, you would have lost money after more than a decade of holding, whereas if you had topped up your CPF-SA, you would have made 50% more in compounded interest. Taking this further, if you would have put money into the S&P500, your investment would have doubled in capital gains.

STI is indeed a Super Terrible Index to invest in.

Read these next:

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Singapore Finance Bloggers Reveal Their Investment Secrets
Pros and Cons of Keeping Your Savings in Your CPF Special Account
Is the CPF Supplementary Retirement Scheme (SRS) Worth Using?
CPF Has No Equal as Investment Vehicle: Singapore’s Mr. CPF


By Loo Cheng Chuan
Loo Cheng Chuan is the founder of the 1M65 Movement that aims to help many Singaporeans retire as millionaires. He is a regular public speaker and writer in the area of Personal Finance. In 2018, Loo was one of the few non-civil servants to be awarded the Public Sector Transformation award for his 1M65 efforts.