*Official* Shiny Things club - Part 2

[BBCWatcher]

If you don't trade regularly or once every few months, how is IB better if you do not have $100k with them?

I didn't necessarily argue in favor of one or the other, but at a single trade per month, Standard Chartered doesn't appear to be any less expensive....

....And then what's the currency exchange cost from Singapore dollars to U.S. dollars and back? I know that currency conversion costs are extremely low at IB.

 

[FrostWurm]

I am not able to understand what is your real argument. Basically there are instruments (IWDA, EIMI etc) and there are brokers. Each of us have different preferences of asset allocation and investment frequency and different portfolio sizes. So there is no good or bad strategies. Main thing is you must know what each instrument is and what are the fees of each broker and choose whatever works best for you.

Basically, the question is (simplifying many points), if you are a newbie to the workforce/investing, and you want to buy IWDA/EIMI (two of the hottest ETFs here), should you use SCB or IB as your broker?

IB charges a USD $10 each month to maintain the account, while letting you offset the brokerage fees against this USD $10 when you trade. SCB, on the other hand, does not charge to maintain the account, but has a minimum brokerage fee of USD$10 per transaction.

Seems to me, at least, that a newbie who does not have a lot of earning power will be better off starting with SCB, trading only once every few months.

 

[revhappy]

Basically, the question is (simplifying many points), if you are a newbie to the workforce/investing, and you want to buy IWDA/EIMI (two of the hottest ETFs here), should you use SCB or IB as your broker?

IB charges a USD $10 each month to maintain the account, while letting you offset the brokerage fees against this USD $10 when you trade. SCB, on the other hand, does not charge to maintain the account, but has a minimum brokerage fee of USD$10 per transaction.

Seems to me, at least, that a newbie who does not have a lot of earning power will be better off starting with SCB, trading only once every few months.

Agreed, there is a cutoff point after which IB becomes cheaper than SCB. This cut off point depends on investing frequency and the amount you invest in a year. You need to factor in currency conversion, minimum fees/monthly fees. It is easy to calculate.

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[limster]

So I am right that you are just guessing.

Anyway, the figure you posted, there is green color for "0-1" yr bonds, so there should be some small % of bonds between 0-1 year maturity isn't it?

And, you also assumed that "The index LQD tracks is bonds of 3+yrs maturity" "means that the ETF is supposed to sell bonds that are shorter than 3+ maturity".
I never heard things like that before, may be somebody can help to shed lights on whether your claim is true?

However, the fact that the figure shows that there are still 2.25% of the portfolio consisting of 2-3 years bonds means the figure you posted already rebutted your claim?

My original post I said they are holding zero 0-1 years bonds and I reproduced the factsheet

Now you talking about 2-3 year bonds?

Like I said the index LQD tracks is an index of corporate bonds with more than 3 years maturity. So the ETF should not be holding bonds of more than 3 years maturity. As to why it is holding 2.25% 2-3 years bonds, you have to ask the fund managers. But the question is, why is it holding 0 bonds of 0-1yr maturity?

You can look also at the iShares bond ETF CLY that follows an index of 10+ year bonds and see their maturity profile. If they are holding the bonds to maturity, how come so few bonds between 0-10?

 

[artemov]

Agreed, there is a cutoff point after which IB becomes cheaper than SCB. This cut off point depends on investing frequency and the amount you invest in a year. You need to factor in currency conversion, minimum fees/monthly fees. It is easy to calculate.
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So IB is better? Except that it is based way over in US/HK ...

 

[BBCWatcher]

Agreed, there is a cutoff point after which IB becomes cheaper than SCB. This cut off point depends on investing frequency and the amount you invest in a year. You need to factor in currency conversion, minimum fees/monthly fees. It is easy to calculate.

You'd also have to add in some loss of investment performance if you're going to trade less frequently in order to work around Standard Chartered's higher commission rates (their US$10 minimum per trade).

Just as a roughly calculated example, let's suppose that you're investing $1,000 per month, $12,000 per year, split across two securities: IWDA and EIMI. Let's suppose a 7% average market yield (~0.583% per month). And let's suppose with Interactive Brokers you invest every month (the IWDA and EIMI trades fit into your US$10 monthly minimum, let's suppose), but with Standard Chartered you invest every other month (so you get to the same US$10/month)....

....What ends up happening is that you lose an average of $5.83 for every month your $1,000 is sitting idle, out of the market. That happens 6 times per year if you're investing bimonthly versus monthly, so that's about $35/year in this example. And the loss ends up being compounded over time.

Anyway, you've got to toss that ~$35/year (compounded) figure into your calculus, too. $2,000 bimonthly yields a bit less than $1,000 monthly, and you should adjust for that, if that's what you're doing.

 

[makav31i]

You'd also have to add in some loss of investment performance if you're going to trade less frequently in order to work around Standard Chartered's higher commission rates (their US$10 minimum per trade).

Just as a roughly calculated example, let's suppose that you're investing $1,000 per month, $12,000 per year, split across two securities: IWDA and EIMI. Let's suppose a 7% average market yield (~0.583% per month). And let's suppose with Interactive Brokers you invest every month (the IWDA and EIMI trades fit into your US$10 monthly minimum, let's suppose), but with Standard Chartered you invest every other month (so you get to the same US$10/month)....

....What ends up happening is that you lose an average of $5.83 for every month your $1,000 is sitting idle, out of the market. That happens 6 times per year if you're investing bimonthly versus monthly, so that's about $35/year in this example. And the loss ends up being compounded over time.

Anyway, you've got to toss that ~$35/year (compounded) figure into your calculus, too. $2,000 bimonthly yields a bit less than $1,000 monthly, and you should adjust for that, if that's what you're doing.

You cannot count like that...Stock price do not go straight up...It fluctuate and can go up and down...How can you even count loss of potential gains of 0.583% is really beyond me...

 

[BBCWatcher]

So IB is better? Except that it is based way over in US/HK ...

Well, that means you get SIPC insurance coverage. It's an interesting question how to value SIPC insurance, but it's clearly better than what Singapore-based brokers offer (not much).

Another difference is that cash (in any currencies) held at IB is counted toward the US$60,000 estate tax exemption if you're a non-U.S. person. Cash held at Standard Chartered and at other Singapore-based brokers is not counted toward that US$60,000 exemption. (Other assets still might be, but the U.S. estate taxability of other types of assets wouldn't vary across brokers.)

Yet another difference is that Standard Chartered seems to take custody of your assets in a segregated pool rather than record your positions separately, in depositories, at least in certain markets. The depository-based approach is safer, assuming of course the broker is actually following that approach consistently. (That's something that a regulator, and sometimes individual accountholders, can check.)

Standard Chartered and other Singapore-based brokers (and some non-Singapore-based ones) have "brick and mortar" offices in Singapore. IB and some other brokers don't. Some people like having a B&M location in Singapore, and some don't care.

Anyway, you should do a comparison based on your own calculations and views. We're just describing the differences.

 

[BBCWatcher]

You cannot count like that...

Yes, you really can. You take an average long-term yield, and you use that in this part of the calculation. It's perfectly legitimate and realistic.

That ~$35/year figure will bounce around with market volatility, but that figure will also be the average annual loss (before compounding) in the example I described (7% average annual yield).

 

[revhappy]

The weak USD trend seems to have died for now. It's funny how something that looks like a sure thing a few months back is not so sure now. EURUSD is sub 1.2 and SGDUSD is above 1.33.

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[artemov]

Another difference is that cash (in any currencies) held at IB is counted toward the US$60,000 estate tax exemption if you're a non-U.S. person. Cash held at Standard Chartered and at other Singapore-based brokers is not counted toward that US$60,000 exemption. (Other assets still might be, but the U.S. estate taxability of other types of assets wouldn't vary across brokers.)

Thanks BBCW. Regarding the 60k estate tax thingy, so if I open an IB account, I can't have more than 60k cash in the account at any time (including certain taxable assets like AAPL shares)? At any time means 1 second, 1 day ...?

 

[morpork]

I know we're pretty big fans of passive investing here, but for fixed income it seems like the argument isn't always very clear.

pimco[.]com[.]sg/en-sg/insights/viewpoints/quantitative-research-and-analytics/bonds-are-different-active-versus-passive-management-in-12-points

any thoughts about the article? it seems to suggests that active management for bond funds may be able to beat the index returns due to certain distinctive characteristics of bond markets.

Also since we're in a rising interest rate environment, does anyone know when we'll see bond etf (our dear a35) rise in yield as well?

 

[makav31i]

Yes, you really can. You take an average long-term yield, and you use that in this part of the calculation. It's perfectly legitimate and realistic.

That ~$35/year figure will bounce around with market volatility, but that figure will also be the average annual loss (before compounding) in the example I described (7% average annual yield).

How is that realistic?

January price average $1 you buy at $1

February price average $1.20 you did not buy

March price drop to $1.10 you buy $2.20 worth

How is buying each month suddenly guaranteed to perform better?

Nothing is guaranteed in investing..

 

[BBCWatcher]

Regarding the 60k estate tax thingy, so if I open an IB account, I can't have more than 60k cash in the account at any time (including certain taxable assets like AAPL shares)? At any time means 1 second, 1 day ...?

You certainly can! You can have $1 million of cash in your IB account if you wish, and if you're able.

If you're a non-U.S. person then, at the moment you die, your cash (in any currencies) held at IB counts toward your estate's US$60,000 estate tax exemption. So would your shares of Apple (AAPL), whether those shares are held at IB or via any other broker. The only tax difference is that, at a U.S. broker, your cash (in any currencies) counts toward the exemption. If the cash is at a non-U.S. broker, or even at a U.S. bank, it doesn't count -- it's not U.S. estate taxable.

If you're concerned about that, then there are two basic techniques at IB (or at another U.S. broker) to reduce the exposure:

1. Don't keep much cash in the account for very long. One way to deploy idle cash is into short-term U.S. T-Bills, which are available for purchase via IB.

2. Buy some more life insurance to compensate for the estate tax.

There's also a third technique that some can use:

3. If your heir is your legal spouse (same or opposite sex), and if your spouse is either a U.S. citizen or quickly becomes a U.S. citizen within 9 months of your death, then (I believe) the U.S. estate tax exemption rises to infinity -- the unlimited spousal exemption applies. This only works if the (sole) heir is a U.S. citizen. It doesn't work quite as well in the other direction, although a U.S. citizen who dies has a much higher estate tax exemption (US$11.2 million for deaths in 2018). And I think this is a citizen-specific privilege, but maybe it also applies to U.S. persons more generally.

Yes, there really are some non-U.S. citizen widows (usually widows) who are married to extremely wealthy American men (usually men), and they quickly naturalize as U.S. citizens within 9 months of the death (if they're able) in order to reduce the tax rate on the estate they stand to inherit to zero. This really happens, on occasion, and it's perfectly legal.

 

[artemov]

1. Don't keep much cash in the account for very long. One way to deploy idle cash is into short-term U.S. T-Bills, which are available for purchase via IB.

Thanks BBCW. I think I have read about this T-bills method deep inside another thread ... if I can still find it lol ... how does one find T bills on IB?

Oh, and why are AAPL shares so special? Any other such special shares we need to take note of?

Thanks again.

 

[BBCWatcher]

Nothing is guaranteed in investing..

Nothing is guaranteed in short-term investing in a single trade. But that's not what's happening here. There are lots of purchases, and this is long-term investing. You wouldn't be investing without the prospect of long-term positive results....

....And you are mathematically guaranteed to lose long-term market gains if your money is out of the market. There is a cost to delaying purchases, and you can calculate that average cost based on your assessment of average long-term yields and your purchase patterns.

This really is nothing controversial, at all. I have to believe that anybody who understands basic investing at a relatively basic level understands this concept.

If you're still struggling to understand, how about this scenario. Let's assume a 0% average long-term stock market yield, but let's assume a 4% average long-term dividend yield (1%/quarter). Every business day some fraction of the stocks in IWDA and EIMI are "ex-dividend," meaning that you have to be a shareholder at the close of market on that day in order to qualify for that 1% quarterly dividend. Is it obvious now that there's a cost to delaying half your investments by one month? You miss the ex-dividend dates for some of those stocks, and that has a real cost. You should properly account for that lost cost in your brokerage comparison.

In practice, IWDA and EIMI offer some forecasted mix of average long-term capital appreciation and average long-term dividends (which are reinvested, and thus are expressed as capital appreciation). You cannot forecast an average long-term yield of zero and ignore this factor -- that's not realistic. You have to account for it in any proper, realistic comparison. Your average long-term yield forecast might not be 7% -- that's just an example -- but 0% is clearly incorrect. Otherwise, why on earth would you be investing in IWDA and EIMI, if you expect an average long-term 0% yield?

 

[BBCWatcher]

how does one find T bills on IB?

Start here for more information.

Oh, and why are AAPL shares so special? Any other such special shares we need to take note of?

They're not special. Like all U.S. listed/traded stocks, they are counted toward the U.S. estate tax exemption. They are U.S. estate taxable. And that tax treatment doesn't vary across brokers. It doesn't matter where your (deceased) person holds (held) your shares of Apple, General Electric (GE), AT&T (T), etc., etc.

If you don't like that U.S. estate tax liability (your dead body wouldn't appreciate it, so to speak), then don't buy/hold U.S. listed/traded stocks, at least not directly or individually. The popular way to invest indirectly in U.S. stocks in a U.S. tax friendlier way is to buy exchange-traded funds (ETFs) listed on the London Stock Exchange and domiciled in Ireland. Those ETFs are not subject to the U.S. estate tax (and Ireland doesn't have an estate tax if you live outside Ireland, at least), and those ETFs also enjoy the 15% Irish treaty rate on U.S. dividend tax withholding (instead of the normal non-treaty 30% withholding rate). Please note they are not appropriate for U.S. persons. (They can be held by U.S. persons, but their tax treatment for U.S. persons isn't great.) Also, you cannot buy individual U.S. stocks that way, and those ETFs have higher management fees and trading costs than their U.S. listed/traded counterparts....

....Or become a U.S. person, and then U.S. tax liabilities change in some interesting ways that may or may not be better. (I happen to be one.)

 

[artemov]

You wouldn't be investing without the prospect of long-term positive results....

There's an article on TOC today ...
https://www.theonlinecitizen.com/2018/05/01/when-is-the-next-market-crash/

There's a quote:
"They are people who saved money, bought a house, got out of debt, and invested for the long term in the stock market. Those are the people who may be wiped out.
– Robert Kiyosaki, Why The Rich Are Getting Richer"

Not sure if I am out of context here ... is there a possibility that the long term investor might not see their investment bear fruit, even in the long term?

 

[artemov]

Like all U.S. listed/traded stocks, they are counted toward the U.S. estate tax exemption.

So if I want to buy US stocks, I just hope that I dun die with more that 60k US cash plus assets? ...

I suppose US Treasury T bills are not taxable? Cheers.

 

[revhappy]

There's an article on TOC today ...
https://www.theonlinecitizen.com/2018/05/01/when-is-the-next-market-crash/

There's a quote:
"They are people who saved money, bought a house, got out of debt, and invested for the long term in the stock market. Those are the people who may be wiped out.
– Robert Kiyosaki, Why The Rich Are Getting Richer"

Not sure if I am out of context here ... is there a possibility that the long term investor might not see their investment bear fruit, even in the long term?

Seems like they got inspired by zerohedge

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