*Official* Shiny Things club - Part 2

[makav31i]

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?

So back to the issue at hand, you invest $1k/month using IB and compare it to someone who uses SCB and invest $2k every two months...

One thing is guaranteed, IB you need to pay $120 in fees a year...

You say that if you invest every 2 months with SCB, you will lose the potential gain of $35/year...However, you only pay $60 in fees a year...So you still gain $25 more than you were to use IB...

If I were to decrease the buying frequency to once every quarter, I will pay $40 in fees and lose out on the potential gains of $46.64 which still see the additional gains of $33.36 compared to buying it each month with IB...

 

[FrostWurm]

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?

If you throw all your money into Bitcoin, after 50 years, you could well be the poorest man on earth, or the richest man alive.

The key is to diversify

 

[BBCWatcher]

is there a possibility that the long term investor might not see their investment bear fruit, even in the long term?

Practically everything is possible, including a giant space rock crashing into our planet on your next birthday (Happy Birthday!), but that doesn't mean you don't make reasonable cost estimates.

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

It's just a tax, and you won't be around to experience it. Your estate will.

I thought of another way your estate can avoid the U.S. estate tax: bequeath at least your U.S. estate taxable assets above your US$60,000 exemption to any U.S. IRS 501(c)(3) qualified charity, for example the New York office of Doctors Without Borders, and/or the Connecticut office of Save the Children.

Honestly, truly, taxes aren't all important, especially when you're dead. If the U.S. markets have helped you multiply your money tenfold, or whatever, does it really matter whether your estate owes/pays a percentage to the U.S. Treasury? It's merely a consideration, not a veto.

I suppose US Treasury T bills are not taxable?

Right.

 

[FrostWurm]

So back to the issue at hand, you invest $1k/month using IB and compare it to someone who uses SCB and invest $2k every two months...

One thing is guaranteed, IB you need to pay $120 in fees a year...

You say that if you invest every 2 months with SCB, you will lose the potential gain of $35/year...However, you only pay $60 in fees a year...So you still gain $25 more than you were to use IB...

If I were to decrease the buying frequency to once every quarter, I will pay $40 in fees and lose out on the potential gains of $46.64 which still see the additional gains of $33.36 compared to buying it each month with IB...

Basically, SCB charges USD $10 min per trade, so if you trade a lot of stuff (eg. both IWDA and EIMI and anything else), your pocket would have a very huge hole.

However, if you only do one trade every 2 or 3 months, you will be slightly better off with SCB.

TLDR: If you only buy IWDA once a month, then I guess it doesn't matter which one you buy from. IB for flexibility of buying other assets if you want, SCB for the flexibility of not buying IWDA for that month if you don't want.

 

[BBCWatcher]

One thing is guaranteed, IB you need to pay $120 in fees a year...

Until your total account balance reaches US$100,000. If we're assuming Singapore dollars here, and average 7% annual gains, that'll take under a decade.

You say that if you invest every 2 months with SCB, you will lose the potential gain of $35/year...

Yes, that's a reasonable lost opportunity cost estimate in the scenario I described. Zero is not a reasonable cost estimate, which is what you seem to be arguing.

However, you only pay $60 in fees a year...

No, you pay US$120/year. It's two trades in the example I provided (and you provided for that matter -- I'm just going with your example): IWDA and EIMI.

If you want to stretch that to quarterly purchases of IWDA and EIMI, then that's US$80 in trading commissions at Standard Chartered and, using a 7% yield assumption, you have 8 months when money is out of the market. $1,000 is out of the market for 2 months, 4 times per year. Another $1,000 is out of the market for 1 month, 4 times per year. The monthly lost opportunity cost is ~0.583%, and that works out to ~$70/year as a reasonable lost opportunity cost estimate.

We haven't factored in currency exchange costs yet.

 

[Mecisteus]

So back to the issue at hand, you invest $1k/month using IB and compare it to someone who uses SCB and invest $2k every two months...

One thing is guaranteed, IB you need to pay $120 in fees a year...

You say that if you invest every 2 months with SCB, you will lose the potential gain of $35/year...However, you only pay $60 in fees a year...So you still gain $25 more than you were to use IB...

If I were to decrease the buying frequency to once every quarter, I will pay $40 in fees and lose out on the potential gains of $46.64 which still see the additional gains of $33.36 compared to buying it each month with IB...

You need to factor in 1% loss from FCY conversion using SCB.

If you invest 10k SGD annually, the loss is already $100.

 

[makav31i]

Until your total account balance reaches US$100,000. If we're assuming Singapore dollars here, and average 7% annual gains, that'll take under a decade.


Yes, that's a reasonable lost opportunity cost estimate in the scenario I described. Zero is not a reasonable cost estimate, which is what you seem to be arguing.


No, you pay US$120/year. It's two trades in the example I provided (and you provided for that matter -- I'm just going with your example): IWDA and EIMI.

If you want to stretch that to quarterly purchases of IWDA and EIMI, then that's US$80 in trading commissions at Standard Chartered and, using a 7% yield assumption, you have 8 months when money is out of the market. $1,000 is out of the market for 2 months, 4 times per year. Another $1,000 is out of the market for 1 month, 4 times per year. The monthly lost opportunity cost is ~0.583%, and that works out to ~$70/year as a reasonable lost opportunity cost estimate.

We haven't factored in currency exchange costs yet.

This bring back the first point if you have to purchase IWDA + EIMI, you are better off with buying just one counter which is VWRD which will cover both IWDA + EIMI...Which is definitely the most newbie friendly...

 

[FrostWurm]

You need to factor in 1% loss from FCY conversion using SCB.

If you invest 10k SGD annually, the loss is already $100.

How much is IB's SGD/USD FX spread? couldn't seem to find it online..

 

[BBCWatcher]

However, if you only do one trade every 2 or 3 months, you will be slightly better off with SCB.

It's not clear yet. There's a lost opportunity cost to delaying purchases, as I've illustrated, and then what does the currency conversion cost comparison look like?

 

[Mecisteus]

How much is IB's SGD/USD FX spread? couldn't seem to find it online..

You can safely assume it's spot rate. So there is no loss.

 

[BBCWatcher]

This bring back the first point if you have to purchase IWDA + EIMI, you are better off with buying just one counter which is VWRD which will cover both IWDA + EIMI...Which is definitely the most newbie friendly...

OK, you could do that, but that has a cost, too. VWRD has a slightly higher management fee than IWDA (equal to EIMI), and that'd be $5.40/year more expensive (before compounding) if 90% of the $12,000/year in this example would be streaming into IWDA. (VWRD is about 10% in emerging markets, hence the 90-10 split here.) Also, VWRD pays out dividends instead of automatically reinvesting them, thus you have to "manually" reinvest those dividends. That's a delay, with those funds sitting out of the market, and that delay has a cost.

 

[BBCWatcher]

You can safely assume it's spot rate. So there is no loss.

There is a small commission on a currency trade at IB, but it tends to be absorbed within the US$10/month minimum commission, at least in the low trading frequency scenarios under current consideration.

So what's the math at Standard Chartered for currency conversions?

 

[FrostWurm]

You can safely assume it's spot rate. So there is no loss.

Lol can you at least say something like 1 pip rather than 'spot rate'...

 

[BBCWatcher]

You need to factor in 1% loss from FCY conversion using SCB.

Ouch. That's each direction? 1% loss in, then 1% loss out?

 

[Maeda_Toshiie]

0.5-0.6% in one direction for USD. May be larger for other currencies.

 

[BBCWatcher]

0.5-0.6% in one direction for USD. May be larger for other currencies.

OK, so using the lower figure (0.5%), assuming U.S. dollars (e.g. IWDA, VWRD), and at a $1,000/month pace ($12,000/year), that's $60 in currency conversion cost going in (before compounding), then another $60 on the way out.

Right, OK, that's not great. IB's currency conversions cost less than that, but how much less depends on whether the currency conversion commission fits within the US$10 minimum monthly commission or not.

 

[Shiny Things]

Hi ST, I would like to clarify what you mean by buy one fund a month. In the book you wrote, it is recommended to do monthly DCA, as such I am starting on monthly DCA worth $800, split 3 ways (40% IWDA, 40% G3B, 20% A35), but are you recommending to buy $800 worth into one of the each month till the ideal 40-40-20 percentages are reached, or would you recommend $320 (40%) into IWDA, $320 (40%) into G3B, and $160 (20%) into A35?

Hi, I've reached a point where I'm able to put as much as $700 into POSB invest saver for G3B every month, should I stick to POSB or should I switch to SCB? I already have a SCB account for IWDA.

OK, so using the lower figure (0.5%), assuming U.S. dollars (e.g. IWDA, VWRD), and at a $1,000/month pace ($12,000/year), that's $60 in currency conversion cost going in (before compounding), then another $60 on the way out.

Right, OK, that's not great. IB's currency conversions cost less than that, but how much less depends on whether the currency conversion commission fits within the US$10 minimum monthly commission or not.

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.

I’m going to wrap all of these up into one answer.

From FalconDiaz’s question: yeah, the first option is the smart way to do it: buy $x worth of one stock each month until you get to your target percentages, rather than trying to split it three ways every month.

How this interacts with buying IWDA or EIMI or whatever overseas-listed stock:

• When you buy a stock through Stanchart, you pay $10 (ish) in brokerage fees, and 0.5% (-ish, though it’s hidden) in spread on the FX conversion. So, for a $1,000 purchase of stock, that’s about $15 SGD.
• When you buy a stock through Interactive Brokers, you pay $2-ish in brokerage fees, $2-ish in fees on the currency conversion, and basically zero in spread on the FX conversion (it’s about 0.01% on SGD-to-USD). However, the $4 in fees gets offset against your monthly account maintenance fees ($10 a month).

So, if you’re going to do about $1000 or more worth of IWDA/EIMI/whatever, and you’re doing it every couple of months or more frequently, it’s going to work out cheaper to do it through IBKR (paying the $10/month account maintenance fee) than through Stanchart (paying $15 every 1-2 months in transaction costs). Once you hit $100k in your IBKR account, they waive the monthly account maintenance fees altogether, and IBKR becomes massively cheaper.

Any questions?

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?

Thing one: Kiyosaki’s a bit of a charlatan. I wouldn’t pay too much attention to him.

And look, nothing in life is guaranteed except death and taxes, but the most likely outcome is that over a period of decades, stocks and bonds will grow in value and outpace inflation. There will be periods of negative returns during that time; and it’s not out of the question that stocks would flatline over decades (though it’s vanishingly unlikely); but the most likely outcome, and the one you should invest for, is that stocks and bonds will be the best place to invest.

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.

Pimco’s obviously talking their book here, because they’re the world’s largest active bond fund manager, but there is a bit of validity to the argument that active bond fund managers have a better chance of beating the index than active equity fund managers (because bond markets are so much more fragmented, and there’s value to be found in weird esoteric corners of the market).

I think there’s still a manager selection problem here, though. How do you know that the bond fund manager you pick is going to be the next Bill Gross or Jeff Gundlach? You can’t know that in advance, and the cost of getting it wrong is pretty sizable.

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?

Presumably when bond yields go up, which is happening right now.

Is ES3 very high right now? I look at the 5 years graph it is at the highest.
I understand the agurment that you wouldn't know what will happen in the future so just invest now but the market seem to be overvalue.

“High” doesn’t mean “overvalued”, though. All-time highs tend to be followed by new all-time highs.

The Dow reached a new all-time high in 2013, and there was a lot of “oh it’s topped out here twice before, it’s overvalued, it’s going to fall again”. Since then, after the Dow hit its first new all-time high in a decade, it’s gained another 10,000 points; after dividends, the US stock market has nearly doubled in the five years since that new high.

None of the bonds? Don't think you can see those bonds that has small % in the bond ETFs isn't it?
So how you can conclude "none of the bonds it holds have maturity of less than 1 year"? You just guess I suppose?

Ervino, mate, you’re beclowning yourself a bit, and it might do you well to think before you type.

Like almost every other ETF, LQD publishes its entire portfolio every day. Go to LQD’s website right here (https://www.ishares.com/us/products/239566/ishares-iboxx-investment-grade-corporate-bond-etf), and under the “Holdings” heading there’s a “Detailed holdings and analytics” link that shows every single bond in their portfolio, all 1,905 of them, right down to the smallest bond in their portfolio (an Enterprise Products bond that they own $10,025 of).

And the shortest maturity bond in LQD’s portfolio is a Coca-Cola 3.15% of November 2020. That's longer than a year.

Don’t be so fighty; you just end up making yourself look bad.

 

[revhappy]

OK, you could do that, but that has a cost, too. VWRD has a slightly higher management fee than IWDA (equal to EIMI), and that'd be $5.40/year more expensive (before compounding) if 90% of the $12,000/year in this example would be streaming into IWDA. (VWRD is about 10% in emerging markets, hence the 90-10 split here.) Also, VWRD pays out dividends instead of automatically reinvesting them, thus you have to "manually" reinvest those dividends. That's a delay, with those funds sitting out of the market, and that delay has a cost.

VWRD is also a lot less liquid compared to IWDA and EIMI and also has worse bid ask spreads. During heightened volatility, the trade price can be significantly different from what it should be. I have posted here in the past, I was able to get previous day ending price on a sell trade at open on VWRD, when market had actually tanked and gapped down.

Sent from Xiaomi REDMI NOTE 4 using GAGT

 

[Wishdom]

OK, you could do that, but that has a cost, too. VWRD has a slightly higher management fee than IWDA (equal to EIMI), and that'd be $5.40/year more expensive (before compounding) if 90% of the $12,000/year in this example would be streaming into IWDA. (VWRD is about 10% in emerging markets, hence the 90-10 split here.) Also, VWRD pays out dividends instead of automatically reinvesting them, thus you have to "manually" reinvest those dividends. That's a delay, with those funds sitting out of the market, and that delay has a cost.

VWRD is also a lot less liquid compared to IWDA and EIMI and also has worse bid ask spreads. During heightened volatility, the trade price can be significantly different from what it should be. I have posted here in the past, I was able to get previous day ending price on a sell trade at open on VWRD, when market had actually tanked and gapped down.

Sent from Xiaomi REDMI NOTE 4 using GAGT

Does that mean that it is objectively better to buy $900 iwda and $100 eimi every month as compared to $1000 vwrd every month?

Sent from Ilovennp using GAGT

 

[blackiller]

Anyone can let me know how to understand the price movements of iwda yesterday? I know it’s made up of 1600+ companies but it’s a pain to track it that way. Usually I look at the indices of the main markets they are in. Yesterday most of the market is in green but iwda went down so much.