*Official* Shiny Things club - Part 2

[BBCWatcher]

Planning to get his book but saw that it's published in 2017. Is it still relevant today?

The current edition was published in 2019 (this year).

 

[mmaro85]

Hi Shiny Things, just read your book. It's a really good read and I have learned so much from it.

Just something that is bothering me slightly, nothing specific to your book or your recommendation. In fact, I believe this is applicable to folks with exposure to non local (SGD) currencies (USD, EUR, etc.).

So being a Singaporean and intending to retire in Singapore, my USD investments (IWDA LSE, SDIA LN, etc.) will eventually need to be converted to SGD. And this unavoidably involves forex risks.

Please pardon me if this sounds like a dumb question. I understand that forex risk cannot be avoided completely, so my question is how can I reduce this risk?

Below are 3 ideas crossed my mind,

1) Currency hedge - As I buy IWDA, take a short position on the equivalent amount of USD. Considering the swap rate and commissions, this might not be a good idea especially for long term.

2) Commodities hedge - As I buy IWDA, take a long position on a commodity that is inversely correlated to USD.

3) DCA withdrawal - Instead of taking a bet on a single exchange rate, spread my withdrawals across a period of time withdrawing a fixed amount each time . Similar to how DCA averages over several price points, over multiple withdrawals the exchange rates are averaged out.


What are your thoughts and the others (BBCWatcher)? Is it even worth the hassle, note that the larger the portfolio the greater the impact of forex risk?

 

[BBCWatcher]

IWDA is not a currency or equivalent. It's a stock fund. It happens to be quoted in two currencies: U.S. dollars and British pounds (via its sister listing SWDA which holds the identical stocks in the identical ratios). But you could quote it yourself in Peruvian sol if you want.

On the other hand, SDIA is a currency equivalent. It's a fund that holds U.S. dollar denominated short-term corporate bonds. Generally speaking it's a rather odd thing to invest in if you're planning to retire in Singapore, but OK, whatever. Yes, there you do have explicit currency risk relative to your retirement destination. But that risk really only ramps up as you get closer to retirement.

You're probably not in the right bond fund, but let's assume you are for sake of argument. What you'd typically do starting 7 years before drawdown age -- or up to 10 years before drawdown age if you're particularly conservative -- is to start gradually, progressively adjusting your investment portfolio from an accumulation posture to a drawdown posture. The "rule of thumb" is that you'd make these adjustments over that time:

1. Shift from an 80%-20% stocks-bonds split to a 30%-70% split.

2. If necessary, shift the bond portion to bonds that are denominated in the retirement country's currency. Or, if the retirement country currency is a lousy currency (nonconvertible, prone to mismanagement, or whatever), shift to a bond fund with a reasonable global diversification in currencies. (CORP would be such an example.) Fortunately, unless circumstances change dramatically, the Singapore dollar is a quality currency and offers very reasonable bond fund choices.

So that's the good answer. You "program" a glide path from your accumulation portfolio to your drawdown portfolio, and then you execute the plan starting 7 years before drawdown (or up to 10 before drawdown if you're particularly conservative).

Let's suppose you currently have 80% of you wealth invested in IWDA and 20% in SDIA. (Probably not, but let's just go with this simple example.) You'd want your drawdown portfolio to be something like 15% IWDA, 15% ES3 (or G3B), and 70% MBH, let's suppose. And let's suppose you're going to make these adjustments over 10 years before drawdown because you're quite conservative -- and because the math is a little simpler. OK then, here we go....

1. To move from 80% IWDA to 15% IWDA, you reduce IWDA by 6.5% per year. That's roughly half a percentage point per month.

2. To move from 20% SDIA to 0% SDIA you reduce SDIA by 2 percentage points per year.

3. To move from 0% ES3 to 15% ES3, you increase ES3 by 1.5 percentage points per year.

4. To move from 0% MBH to 70% MBH, you increase MBH by 7 percentage points per year.

You're still saving and investing, so in practice it'll be a lot of "new" money buying ES3 and MBH with some IWDA and SDIA sale money also going into those funds, mostly MBH. Since ES3 and MBH can be held inside a Supplementary Retirement Scheme account, you could use that "wrapper" for some tax savings.

 

[eD1s0n]

IWDA is not a currency or equivalent. It's a stock fund. It happens to be quoted in two currencies: U.S. dollars and British pounds (via its sister listing SWDA which holds the identical stocks in the identical ratios). But you could quote it yourself in Peruvian sol if you want.

On the other hand, SDIA is a currency equivalent. It's a fund that holds U.S. dollar denominated short-term corporate bonds. Generally speaking it's a rather odd thing to invest in if you're planning to retire in Singapore, but OK, whatever. Yes, there you do have explicit currency risk relative to your retirement destination. But that risk really only ramps up as you get closer to retirement.

You're probably not in the right bond fund, but let's assume you are for sake of argument. What you'd typically do starting 7 years before drawdown age -- or up to 10 years before drawdown age if you're particularly conservative -- is to start gradually, progressively adjusting your investment portfolio from an accumulation posture to a drawdown posture. The "rule of thumb" is that you'd make these adjustments over that time:

1. Shift from an 80%-20% stocks-bonds split to a 30%-70% split.

2. If necessary, shift the bond portion to bonds that are denominated in the retirement country's currency. Or, if the retirement country currency is a lousy currency (nonconvertible, prone to mismanagement, or whatever), shift to a bond fund with a reasonable global diversification in currencies. (CORP would be such an example.) Fortunately, unless circumstances change dramatically, the Singapore dollar is a quality currency and offers very reasonable bond fund choices.

So that's the good answer. You "program" a glide path from your accumulation portfolio to your drawdown portfolio, and then you execute the plan starting 7 years before drawdown (or up to 10 before drawdown if you're particularly conservative).

Let's suppose you currently have 80% of you wealth invested in IWDA and 20% in SDIA. (Probably not, but let's just go with this simple example.) You'd want your drawdown portfolio to be something like 15% IWDA, 15% ES3 (or G3B), and 70% MBH, let's suppose. And let's suppose you're going to make these adjustments over 10 years before drawdown because you're quite conservative -- and because the math is a little simpler. OK then, here we go....

1. To move from 80% IWDA to 15% IWDA, you reduce IWDA by 6.5% per year. That's roughly half a percentage point per month.

2. To move from 20% SDIA to 0% SDIA you reduce SDIA by 2 percentage points per year.

3. To move from 0% ES3 to 15% ES3, you increase ES3 by 1.5 percentage points per year.

4. To move from 0% MBH to 70% MBH, you increase MBH by 7 percentage points per year.

You're still saving and investing, so in practice it'll be a lot of "new" money buying ES3 and MBH with some IWDA and SDIA sale money also going into those funds, mostly MBH. Since ES3 and MBH can be held inside a Supplementary Retirement Scheme account, you could use that "wrapper" for some tax savings.

it bugs me that a lot of ppl in SG still have the misconception that investing in USD denominated equities is equal to taking on USD forex risk. (although technically there is a bit of forex risk if the company does business mainly in USD, and if there is a time gap between selling the counter and converting the USD back to SGD).

Doesn't help when some of the personal finance sites are also spreading this misconception.

 

[proton91]

it bugs me that a lot of ppl in SG still have the misconception that investing in USD denominated equities is equal to taking on USD forex risk. (although technically there is a bit of forex risk if the company does business mainly in USD, and if there is a time gap between selling the counter and converting the USD back to SGD).

Doesn't help when some of the personal finance sites are also spreading this misconception.

Could u explain more why forex risk should not be a major concern? I mean to buy IWDA for e.g. requires us to exchange sgd for usd. And say we liquidate this eventually, wouldn't we be subject to forex risk if we convert the sold usd back to sgd? Or am I missing something here?

 

[Ilovemathstutor]

Could u explain more why forex risk should not be a major concern? I mean to buy IWDA for e.g. requires us to exchange sgd for usd. And say we liquidate this eventually, wouldn't we be subject to forex risk if we convert the sold usd back to sgd? Or am I missing something here?

long term, it's going to be fine.
forex in the long term will have some adjustments but it's not going to be v significant.

the returns you get from a passive market index ETF means that it's compounding effect yields you more than worrying about the fx movements.

get something from irish side of things where the dividend taxes is lower than if it's based out of US side of things and you would have done your best in costs reduction.

 

[klarklar]

it bugs me that a lot of ppl in SG still have the misconception that investing in USD denominated equities is equal to taking on USD forex risk. (although technically there is a bit of forex risk if the company does business mainly in USD, and if there is a time gap between selling the counter and converting the USD back to SGD).

Doesn't help when some of the personal finance sites are also spreading this misconception.

long term, it's going to be fine.
forex in the long term will have some adjustments but it's not going to be v significant.

the returns you get from a passive market index ETF means that it's compounding effect yields you more than worrying about the fx movements.

get something from irish side of things where the dividend taxes is lower than if it's based out of US side of things and you would have done your best in costs reduction.

Forex risk is something to bear in mind when investing in foreign stocks. This is especially so when you are investing in emerging markets where currency can move as much as stock indices.

For USD investments, the forex risk is lower. USD is the world's reserve currency, so extreme movements are extremely unlikely because of widespread global support for the currency. However, don't assume this will remain so if the U.S monetary authorities do irresponsible things like pandering to certain U.S politician's demands to loosen monetary conditions for their selfish political ends.

 

[Investnewbie82]

Hi all,

How big a factor is the liquidity of an ETF? Some of these Irish domiciled ETFs have very low daily volume average compared to their US counterparts. How do we judge if it's worthwhile to DCA in the long term? What are the implications? Possible it will no longer exist after a few years, etc?

 

[Zink00]

Sorry for noob qn.. the usd drop from 1.7+ to 1.3+. So does value of the etf correct itself?

 

[coastfire]

Could u explain more why forex risk should not be a major concern? I mean to buy IWDA for e.g. requires us to exchange sgd for usd. And say we liquidate this eventually, wouldn't we be subject to forex risk if we convert the sold usd back to sgd? Or am I missing something here?

For the same reason if you buy gold in USD. The value is supposedly independent of the currency it's quoted in.

You can buy gold in SGD, no forex risk.
You can also choose to convert the same amount of SGD to USD to buy the same amount of gold. No forex risk as well.
In the end, you sell the gold. You will not get more or less if you choose to sell it to USD and convert it back.

IWDA is a stock fund comprising of stocks operating in various countries. You are buying ownership in these companies and not the currency. A bond is different because you are sort of holding the currency it's denominated in.

 

[tangent314]

How big a factor is the liquidity of an ETF? Some of these Irish domiciled ETFs have very low daily volume average compared to their US counterparts. How do we judge if it's worthwhile to DCA in the long term? What are the implications? Possible it will no longer exist after a few years, etc?

When it comes to ETF, volume means very little when it comes to liquidity. You are not necessarily purchasing/selling the ETF from/to other traders but most of the time it is to the market makers. These are the people setting the buy/sell prices and spreads on the stock exchange for the ETFs so unless your trade volume is gargantuan, you will always be able to buy/sell at those prices.

 

[Investnewbie82]

While I understand the value of IWDA, for STI ETF, due to the heavy weighting, what do you think of just owning 3 banks and 2 Reits in lieu of ES3? What other major sg stocks will you add if we did have a basket of stocks to replace?

 

[chrisloh65]

For Singaporeans who want to diversify to other foreign currencies, other than US$, any better choice out there?

Forex risk is something to bear in mind when investing in foreign stocks. This is especially so when you are investing in emerging markets where currency can move as much as stock indices.

For USD investments, the forex risk is lower. USD is the world's reserve currency, so extreme movements are extremely unlikely because of widespread global support for the currency. However, don't assume this will remain so if the U.S monetary authorities do irresponsible things like pandering to certain U.S politician's demands to loosen monetary conditions for their selfish political ends.

 

[BBCWatcher]

For Singaporeans who want to diversify to other foreign currencies, other than US$, any better choice out there?

Answering the question directly, the world's top 10 most traded currencies are, in order:

1. U.S. dollar
(big gap)
2. Euro
3. Japanese yen
4. British pound
5. Australian dollar
6. Canadian dollar
7. Swiss franc
8. Chinese renminbi (*)
9. Swedish krona
10. New Zealand dollar

(*) Sort of; it's complicated.

 

[bobobob]

Can we have a quick and dirty answer to the forex risks when buying equity etf question?

Like:

If USD falls your etf value will just go up because the value of the underlying stock stays the same.

If sgd rises against USD then your returns will suffer. If sgd falls then you will suffer if you want to spend in other currency.

Hence good to hold both sti and global etf.

I'm only a novice so correct me if I got anything wrong there, but I think all the long paragraphs don't adequately or succinctly answer this question.

 

[hwckhs]

If USD falls your etf value will just go up because the value of the underlying stock stays the same.

If sgd rises against USD then your returns will suffer. If sgd falls then you will suffer if you want to spend in other currency.

I'm also a novice. Just offering my humble opinion as someone invested in VWRD.

Take a look at the geographical or currency exposure of IWDA or VWRD. These only show exposure based on the currency/location a stock is listed in/at. Many companies conduct business worldwide, and so their underlying profit may be subject to movement in various currencies too. Just like companies on SGX also do business in other countries, so you are not completely shielded from forex movements even in SGX.

A world ETF indirectly/subtlely exposes you to a basket of currencies, and not just USD. In my view, if you are investing for the long term (instead of short term trading), growth in stock price will more than offset the movements in currencies. So, no need to think too much.

 

[BBCWatcher]

If USD falls your etf value will just go up because the value of the underlying stock stays the same.

Yes, as a first order effect. However, there are plenty of other effects in a dynamic global financial system.

Just to pick one example, if the stock fund is holding shares of Apple (AAPL), that’s a company that’s holding an enormous amount of cash and cash equivalents, mostly in U.S. dollars. So if the U.S. dollar falls in value relative to other currencies as some one-off, exogenous event, then the cash portion of Apple is less valuable and therefore Apple is less valuable, other things being equal.

On the other hand, consider Caterpillar and Boeing. Those are major manufacturers that export a lot of big products from the U.S. A devaluation in the U.S. dollar is terrific for them (a “weak” currency typically helps exporters), so their value should go up, ceteris paribus.

If sgd rises against USD then your returns will suffer.

Not necessarily unless you’re holding U.S. dollars in some form, and you’re not if you’re holding stocks. If you’re holding a stock fund consisting of U.S. exporters (in whatever currency it’s quoted in) then that stock fund should go up in value, actually.

If sgd falls then you will suffer if you want to spend in other currency.
Hence good to hold both sti and global etf.

Currency really doesn’t matter, even for bond funds, until you get close to drawdown age. Yes, when you’re actually drawing down assets to buy real goods and services using a particular currency then currency matters. But then you wouldn’t be holding all that many stocks either.

I'm only a novice so correct me if I got anything wrong there, but I think all the long paragraphs don't adequately or succinctly answer this question.

These questions have been asked and answered many times, but if you’re still confused then just start with this very basic fact and think about it for a while: when you exchange any currency for something that’s not a currency and rather far removed from a currency — you use British pounds to buy a Picasso painting, for example — do you have currency risk between British pounds and some other currency because you now own a Picasso? No, you own a Picasso.(*) You may have art valuation risks since that’s what a Picasso is, but you don’t have currency exchange risks. Nor oil valuation risks — a Picasso is not a barrel of oil either. (OK, maybe the value of your Picasso can go up or down a bit when the price of oil does, because art collectors in petroeconomies have more or less wealth based on the price of oil, but that’s not a direct effect.)

The Singapore dollar itself is loosely pegged to a basket of other currencies weighted according to Singapore’s trade flows with other currency zones. So when the U.S. dollar fluctuates, so will the Singapore dollar to some extent because the U.S. is a significant trading partner for Singapore. Same with the Australian dollar, Malaysian ringgit, and many others.

(*) A Picasso is an example of a globally traded and valued asset, as global stock funds are. And that’s an important requirement/assumption. Singapore National Day t-shirts, in contrast, are going to remain correlated in value with Singapore dollars after you buy them because almost all global demand for such t-shirts is here in Singapore.

 

[Fcesca]

These questions have two very different answers.

If you don't know which country you'll retire in, then a global corporate bond ETF is a good bet, one with exposure to USD and euros and yen and pounds... etc etc. CORP (listed in London) is a good pick in this case.

If you're going to retire in the UK (though I'd encourage you to reconsider that plan, the weather in the UK sucks), you'll want to focus on GBP-denominated corporate bonds. SLXX (again listed in London) is the pick here.

Thanks once again for your advice! Yes, i'm not a fan of the UK weather either.. although with the world becoming a lot stricter on immigration policies, it might be my only option!

 

[Investnewbie82]

Can we have a quick and dirty answer to the forex risks when buying equity etf question?

Like:

If USD falls your etf value will just go up because the value of the underlying stock stays the same.

Hmm.. Now I'm confused. Is the above true?

Let's say we buy IWDA now and sell in 20 years, 1USD=1.35 SGD. If 20 years later, 1USD=1.2 SGD, our returns will suffer right? If 1USD= 1.5 SGD then, we will earn even more than the capital gains. This is what we mean by currency risk. (I've accepted this risk as inherent if we want to buy overseas equities)

Where does the ETF value according to currency come in?

 

[eD1s0n]

Hmm.. Now I'm confused. Is the above true?

Let's say we buy IWDA now and sell in 20 years, 1USD=1.35 SGD. If 20 years later, 1USD=1.2 SGD, our returns will suffer right? If 1USD= 1.5 SGD then, we will earn even more than the capital gains. This is what we mean by currency risk. (I've accepted this risk as inherent if we want to buy overseas equities)

Where does the ETF value according to currency come in?

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