One of the keys to fulfilling your financial goals is to clearly articulate it.

I was listening to a two-part series by Joshua Sheats on setting financial goals, and this stuck out to me.

“If you know exactly what you want, to get it is easier. “

If you do not know precisely what you want, then to get there is harder. You would argue that if your goal is to have a wealth machine that gives you rather reliable income that keeps up with inflation for 100 years, it is rather hard.

I would say not true.

You need $10 mil and put it in a broadly diversified Global stock and Global bond portfolio. This should grow between 2% to 10% a year depending on the future sequence of return.

During the initial year, you will spend 1% of that $10 mil, and for subsequent years, adjust the $100,000 a year with inflation.

$100,000 should be enough for your family.

You do not need to go to a financial planner. Just need $10 million.

A problem for many… is that they are clear what they want… but they want too much. They want so much that, they did not even get to enjoy a little bit of what they desired. They think that anything less than what they want is totally not functional.

I would say… you do not know what you really want.

Securing My Accommodation for the Rest of My Life

If I know what I want, then the solution is usually more simple.

Readers know I am the odd one in Singapore that owns no residential property.

Currently, I do have a place to stay but what if there is a dispute next time and I could not find a place to stay?

There is this common train of thought that due to inflation and growth, it is infinitely better to secure a home today, then in the future.

But I think let me practice some wargaming / red-teaming / contingency scenario planning, and clearly articulate what I want:

1. How long is “the rest of my life”? I am almost 40 years old, life expectancy due to health problems might not be long. Could be between 70 to 100 years old. Thus, looking to secure the place for 30 to 60 years
2. Due to how my life is set up, do not need close proximity to town for work purpose
3. However, prefer about 5 minutes walk to MRT station. In that way, if I need to visit somewhere it is almost close to doorstep.
4. Prefer the east side but for whatever reason, if I need to be in the other part of Singapore, I could switch easily
5. I don’t need the asset to build wealth. Have my own wealth machine that generate cash flow on the side. So I can treat this as an expense
6. As long there is a market for me to sell off the present value of future rent and get another place, I am OK
7. I want to have the option of having some privacy or the ability to sub-let out. A four-room or three-room HDB flat would be good

I wonder if this differs from what my readers are looking for. You can let me know.

If I can clearly articulate this, then I can find a solution to it.

My requirements looks like I am buying some sort of term life insurance HAHA. In fact, many have said paying for rent is a waste of money, just like paying for life insurance without cash value built up.

Would Renting or Buying Fit What I Need?

So would I prefer to rent or buy if it comes to that scenario?

I think sometimes if prices move up too fast too soon, we needed to see the effect. If I do not buy a residential property today and growth is 3-5%, I might be priced out.

But that may also mean that my wealth machine grows even better than the growth it is doing now.

Net-net, my cash flow from my wealth machine in the future can afford me the more pricy rent. That will depend on the inflation rate versus the growth of my wealth machine.

If I am not forced to buy it immediately, what are my considerations?

Mainly is this:

1. If the present value of 60 years of future rent is cheaper than the current price of HDB flat in the region, rent
2. If the current price of HDB flat in the region is cheaper than the 60 years of rent, buy

A valuation metric which is similar to this is the price to rent. It values whether a residential property is expensive or cheap relative to the rent it provides.

If the price to rent for a place is above 16 to 20 times, perhaps it is cheaper to rent. This is just a rule of thumb. There is no study there.

Let us look at some case studies.

Yishun HDB Flats Next to the MRT

I used to live in some parts of Yishun 19 years ago. It is not an unfamiliar place for me.

The places around the MRT looks pretty good. There is a huge Northpoint City to meet up with people, the MRT has an NTUC to buy the groceries.

The blocks of 740 to 760 looks to be ideal for my situation.

At 35 years old, these flats are rather old. As long as the flat I purchased is younger than 44 years old, I should be able to use CPF for financing (read the 4-year max rule).

The flat costs about $370k to $400k for 4 rooms and $290k for 3 rooms.

If I were to rent, the rent is currently about $1700 a month for the 3 room and $2000 a month for the 4 room.

The Price-to-Rent Ratio for the 3 Room HDB is 14.2 times.

The Price-to-Rent Ratio for the 4 Room HDB is 16.6 times.

Both Price-to-Rent are pretty low compared to the 16-18 times I use to determine between renting and buying. The higher the Price-to-Rent the more it feels it is better to rent.

Now let me compute the rent that I would pay if I were to rent for 60 years.

The Present Value of 60 Years Worth of Rent

Your 60 years worth of rent goes up with inflation. The rate of inflation will vary depending on luck. As a reference, for the past 30 years, the inflation rate in Singapore averages below 2%.

A lump sum that you set aside to generate this rent may grow at 2%, 4% or 6%. For those who are more investment savvy, your investment rate of return is higher at 6% for those who are less savvy, that would be between 2% to 4%.

Your investment rate of return is also your cost of capital.

In the table above, I worked out the present value of a stream of rental expense for a $1700 a month 3 room Yishun HDB flat.

If your estimation of inflation is 2%, and you are conservative with your investment rate of return (2%), then by choosing to rent, you would need the equivalent of $1.22 million in today’s money in rent.

Any of these figures are lower than $290,000.

If I throw in some much-needed renovations and furnishings, my first-year cash flow would be $80,000. My mortgage would be $1,175 a month for 25 years. At 2% investment rate of return, the present value of the mortgage is $275,280. The aggregate present cost is $80k + $275k = $355k.

By paying $355,280, it is much cheaper than choosing to rent for 60 years, unless my investment rate of return is higher than 6%.

In the table above, I have presented the present value of a stream of rent for the Yishun 4 bedroom flat. Readers would realize it is still much cheaper to pay a 25-year mortgage and buy this lease.

The margin of safety is narrower if the inflation rate is 1% and I have an investment return greater than 6%.

Punggol Flats Near the MRT

My friend told me about his place at Punggol Walk.

It sits pretty close to a large shopping center and a little off the MRT. Punggol is a town that is really out of the way. If you are still working, and work somewhere in the west, then living in Punggol can be quite a nightmare.

For someone who has a different set of life configurations, this could be a good place to operate in.

His 4 Room Flat in that area rent for $1800 a month. It used to rent for $2100 a month. He could rent it out due to special permissions but a flat that is so close by should fetch close to $500,000.

The Price-to-Rent Ratio for his 4 Room HDB is 19.8 times.

At 19.8 times, it is quite out of my buying range.

His rent would put the rent or buy an HDB leasehold decision to be more narrow. We can see that if we have a high return on investment, perhaps renting might not be a relatively poorer decision.

In all honesty, most of us would assume a large margin of safety by assuming our cost of capital/investment rate of return is closer to 2%. In this case, buying a $500,000 Punggol HDB flat that is close to Waterway point would be worth it.

If You Know What You Want, Open to Options, Life is Better

I decide to put 2 examples here but I believe if I am serious about this, there are many ideal options that fit my criteria.

I should not need to be forced to make a tough decision.

You can arrive at a good decision for a lot of your financial decisions that you need to make in life if you know very well what you want.

The decision is good if you have a good mental model about it, or have someone that has a good mental model that helps you.

Knowing what you want can be very difficult because we tend to have a herding mentality. There are some aspects of what I presented that might be difficult to swallow, such as purchasing an old flat.

If you know what you want, what you needed to do next is to be able to make the most fundamentally sound decision you could.

This sounds simple but from our experiences, people come to our office at work because either they do not know what they want, or can’t figure out the fundamentally sound solutions.

When it comes to these housing decisions, I have time to slowly evaluate because there is less of a fundamental need to move to another place. There is a non-monetary reason this is a preferred place to stay at right now.

Sometimes the non-monetary part is an important criterion. We just have to be sensible to our own situation. It cannot be the case that you decide to buy a condo near MRT because you have gotten used to living near an MRT as a child but both your finances is not ready for it. This is just one example.

A Good Article to Frame the Decaying Leasehold HDB

This week, I read this thought-provoking article by Charlie He on the Decaying HDB Lease.

Charlie’s piece is good in that I struggled to frame how to look at leasehold and freehold well. Charlie is an investment person and explains the contrast between leasehold and freehold as a combination of

1. Land Value
2. The Future Stream of Rent that You are Buying Upfront

All things being equal, if you wish to buy a stream of rental expense upfront, you can forgot the land value.

As the lease runs down, your leasehold will be worth close to nothing. However, that is OK because the amount you saved from not buying freehold can be invested in your own stock and bond portfolio at your required rate of return. e.g. 4% a year.

Charlie also explains that while your HDB lease might have 20 years left, if the property is well maintained, there should be little difference between your rental income earned and a flat that is newer.

There may be a sweet spot that for the next 20 years, your internal rate of return may be very high. This is because your purchase lease is low and rental income is comparable to a flat that is newer.

If there is one good article to read on the subject, it is this one.

Do Like Me on Facebook. I share some tidbits that is not on the blog post there often. You can also choose to subscribe to my content via email below.

I break down my resources according to these topics:

1. Building Your Wealth Foundation – If you know and apply these simple financial concepts, your long term wealth should be pretty well managed. Find out what they are
2. Active Investing – For the active stock investors. My deeper thoughts from my stock investing experience
3. Learning about REITs – My Free “Course” on REIT Investing for Beginners and Seasoned Investors
4. Dividend Stock Tracker – Track all the common 4-10% yielding dividend stocks in SG
5. Free Stock Portfolio Tracking Google Sheets that many love
6. Retirement Planning, Financial Independence and Spending down money – My deep dive into how much you need to achieve these, and the different ways you can be financially free
7. Providend – Where I work doing research. Fee-Only Advisory. No Commissions. Financial Independence Advisers and Retirement Specialists. No charge for first meeting to understand how it works

In the past 10 years, the government has stepped up ABSD 3 times to halt the demand for property purchase.

This kinda threw some of my peers into disarray. After you got your career going, have surplus free cash flow, you would like to build wealth for your retirement.

These ABSD serves as a deterrent for some to purchase. For others, they would still go ahead and purchase because they have no alternative, or believe that property investment is good long term.

I decide to build on last week’s post on the short term and long term returns of a 24-year-old private condo purchase with a look at how that property would do if ABSD was levied at different rates.

The long story short: If you are in it for longer-term, the ABSD seem to matter less.

The Additional Buyer Stamp Duty (ABSD)

Singapore Citizens, Permanent Residents, and Foreigners thinking of buying residential property in Singapore may have to pay an additional buyer stamp duty (ABSD). This is on top of the buyer stamp duty (BSD) that they have to pay.

For Singapore Citizens:

1. They do not have to pay ABSD on the first property
2. ABSD is 12% currently for the second property
3. ABSD is 15% for third and subsequent property

For Permanent Residents:

1. ABSD is 5% currently for the first property
2. ABSD is 15% for second and subsequent property

For Foreigners:

1. ABSD is 20%

For Developers, entities, trustee:

1. ABSD is 25%

The ABSD was lowered in the past. They could range from 3% to 10%.

A high ABSD is impeding people from buying these properties.

The reasoning is that, with low returns, they are not sure if paying the extra ABSD will be worth it. Many prospective investors, homeowners are very reluctant to make a bet using their money.

And the government is perfectly fine with this.

But the question on my mind is… how badly does this affect your property investment?

What if ABSD was levied in 1995?

My last post broke down the long term returns we will get if we invest in a private leasehold condo Astoria Park during 1995.

The property value gain 73% from 1995 to 2019. This is an annualized gain of 2.31% a year. Not super fantastic.

However, if we include the rental expense that you save if you were to invest in stocks and bonds, the return ranges from an XIRR of negative to 8% to 5%, depending on how long you hold on to it.

What I could simulate is how the returns would be, if we have ABSD levied on our property in 1995.

How ABSD Affects Your Property’s Returns.

If there is ABSD levied back then, it should psychologically impede investors from investing in private condos just like now.

The range of ABSD can be between 3% to as high as 25%.

If I need to pay a 5% ABSD on Astoria Park in 1995, the returns will range like this:

Your returns do go down.

You would pay $37,500 more, on top of the $150,000 down payment. Your cash outflow is jacked up by 25%.

Instead of a peak XIRR of 8.41% in 2005, the peak XIRR was 6.92% in 2008.

The stabilized XIRR is still around 5.58% in Year 40, compared to the 5.96% if we did not have to pay the ABSD.

This means that if you held the private condo long enough, the effect of a 5% ABSD is not felt.

What if the ABSD is like 12% Today?

This is the kicker that turned many away.

You would pay $90,000 more, on top of the $150,000 down payment. Your cash outflow is jacked up by 60%.

Your compounded total return curve would look like this:

Instead of a peak XIRR of 8.41% in 2005, the peak XIRR is 5.71% in 2012.

The stabilized XIRR goes down to around 5.12% in Year 40, compared to the 5.96% if we did not have to pay the ABSD.

What we observe is that the XIRR curve becomes smoother and smoother between the peak XIRR and the stabilized XIRR.

What the ABSD Does to Investors

Here is the Range of Returns if a different level of ABSD from 0% to 21% is applied:

There are a few things you might notice:

1. The Peak XIRR goes down. No surprises there.
2. You needed more initial cash outlay. No surprises there. It restricts additional property purchases to those who could.
3. The Peak Year goes down. The maximum that you could extract from your property gets delayed longer and longer.
4. The Stabilized XIRR goes down but in terms of percentage not as much
5. In the grand scheme of things, this affects the absolute gain if you sold off at year 40, but not by a lot
6. The Peak XIRR approaches close to the Stabilized XIRR with greater ABSD

And I guess this is how the ABSD lever work. It delays your return and make investors wait longer. Unless there is a short term price spike (that is speculation)

For foreigners, if they wish to extract value, they could still do it. Same for locals and PR. They just have got to sit on this long.

If you are long term into a residential property like this, the benefits that you could extract from your property can be much more than these short term measures.

This can be rental income, can be rent saved so that you do not have to rent another place or price appreciation.

The unique thing about the Astoria Park example is that many commenters expressed that this is not a good example because it is at a peak in the 1990s.

If you asked me, this is probably the best example since, if it is so challenging, and it does decent, then what about times when it is less challenging?

Do Like Me on Facebook. I share some tidbits that is not on the blog post there often. You can also choose to subscribe to my content via email below.

I break down my resources according to these topics:

1. Building Your Wealth Foundation – If you know and apply these simple financial concepts, your long term wealth should be pretty well managed. Find out what they are
2. Active Investing – For the active stock investors. My deeper thoughts from my stock investing experience
3. Learning about REITs – My Free “Course” on REIT Investing for Beginners and Seasoned Investors
4. Dividend Stock Tracker – Track all the common 4-10% yielding dividend stocks in SG
5. Free Stock Portfolio Tracking Google Sheets that many love
6. Retirement Planning, Financial Independence and Spending down money – My deep dive into how much you need to achieve these, and the different ways you can be financially free
7. Providend – Where I work doing research. Fee-Only Advisory. No Commissions. Financial Independence Advisers and Retirement Specialists. No charge for first meeting to understand how it works

After more and more people come out to say that leasehold will go down to zero value, more and more are preferring to purchase freehold than leasehold.

There is also this saying that only freehold and no leasehold.

So I wonder if you cannot get a decent compounded return if you held a leasehold for a long time.

So in this article, I will show everyone a case study of a local private leasehold and how its return profile looks like in the past and in the future.

Last week, I put my home and my friend Caveman’s home through my property spreadsheet to compute how the long term return prospects will look.

Both our place is about 21, 22 years old and without factoring any rental expense we saved had we choose to rent instead, the rate of return based on XIRR is about 1% to 2%, depending on how long we hold on to the HDB flat.

If we have factored in the annual expenses saved, then my Seng Kang home will have a terminal XIRR of around 7-8% while Caveman’s place will be 13%.

If we evaluate this solely based on capital appreciation, it does not look fantastic, and that is probably the wrong way to think about a property’s return profile.

This week, I have decided to do the same thing but with a private leasehold property.

The 24-Year Old Astoria Park

Since the 2 flats done the last time around was rather dated, I thought it is more appropriate to base this week’s case study on one that is around the same period.

Eastpoint Green that started in 1998 became a very good candidate to profile until I realize that after 21 years the capital appreciation is less than 1% a year. For some other owners that bought not at the launch, their experience will be rather different.

So in the end, I chose Astoria Park in Kembangan.

This is a medium-size condo of 350 units situated very close to an MRT station. In today’s climate, this will be a project that would attract enough buyers.

This condo first started selling in 1995 and we will assume that there is an owner who purchased one back then as an investment property and how much he would have made in terms of our standard return today (2019).

The buyer purchases an 1173 sqft 3-bedroom condo for $750,000 back in 1995. $750,000 is probably a lot of money back in 1995.

99.co has become a good place that provides some data on historical transactions. The great thing is that they have transactions that go back all the way to 1995.

For those of you who wish to do research, you can take a look at how price changes.

Price Appreciation

For a similar unit, listings are trying to sell at $1.3 million. Transacted units go at around $1.3 million.

In terms of absolute appreciation, the property went up 73% above the price they purchased 24 years ago.

If you annualized the 73% return over 24 years, the compounded rate of return is 2.31% a year.

That is a return lower than Singapore government bonds, or the 2.5% to 3.5% XIRR of insurance endowment plans.

As an investment property, a part of the return is that you rent it out and collect rental income.

In terms of growth, I do find that the appreciation and the leasehold decay canceled out each other typically on the 80th year. Currently, it would have been worth 1.45 mil if it is a freehold. Value should go down over time.

Rental Income Growth

URA keeps a record of private property rentals on their website. It does not go back a long period but it is better than nothing.

Here are the gross rental income agreed upon from 2016 to 2019:

The gross rental income does not show an upward or downward trend for the past 3 years. Remarkably, it gyrates around $3250 per month.

Typically, real estate agents will estimate the net rental income to be 10 months of gross rental income (you can tell me if this is a good estimation). Thus, the net annual income is around $32,500 a year for the past 3 years.

The owner today would almost have fully paid off the condo, and his net rental income yield based on his capital outlay would be 4.3% a year.

Looks pretty good.

If you add the capital appreciation + rental income the total return is about 6.6% a year. Pretty decent.

However, if you purchase the home today at $1.3 mil your net rental income would be 2.5% a year. You would hope the growth rate is better than in the past.

XIRR – The Internal Rate of Return

As an investor, you will

1. put in a small 20% down payment
2. pay renovation and furnishing costs at the start
3. pay interest payment over 25 years
4. pay for rental expenses annually

Think of XIRR as the “compounded interest rate” you earn per year for the stream of cash outflow that you have put in over the years.

In our calculation, we factored in a rent growth of 1% a year in the past and in the future and an initial $15,000 renovation and furnishing cost.

This return factors in the leverage factor. However, because you paid off the leverage over time, eventually your returns factor in the total cost of your home + interest payment.

The XIRR starts off low, peaks at 8.4% before stabilizing at 5%. Here is a better illustration:

The XIRR is useful to compare against other investments, be it Singapore Savings Bonds, low-cost passive portfolio, hedge-funds you came across.

You will ask can these investments can beat a terminal XIRR of 6% for such a long duration.

En-Bloc and Collective Sale Potential

One of the advantages of a private property is that you can exit the property through a collective sale or otherwise known as en-bloc.

The whole environment gets very excited because suddenly there are many automatic millionaires. They have so much money that they could pay for 2 condos, and rent out one of them.

I wonder how would the returns look if we factor in En-Bloc Sales.

So let us compare the XIRR and absolute return before and after En-Bloc. In this way, we can visualize the difference in compounded percentages and not get too crazy.

The issue with collective sales is that the collective sale premium, which is the amount above current market valuation, varies across projects and time. It can be 25% to 100%.

So let me set these parameters:

1. Enbloc potential only after 50 years
2. Premium of 75% above the prevailing value
3. Exit cost of 4%

Here are the results:

The lifetime cash flow gain measures all the net cash inflow that the investor earns for holding on to the investment rental property all these years.

So a lifetime cash flow gain of $2.8 million means all the rental cash inflow, net off the expenses, net off the mortgage payment plus the cash inflow that the investor get from the sale of the property at market valuation.

If the investor was lucky to En-Bloc his property, the gain would become $4.4 million. That is substantially better.

However, if we look at the XIRR, after 50 years the differences get narrower and narrower. My interpretation is that the majority of the gain comes from rental income, not from the sale of the asset.

While the absolute amount looks great, if we look in terms of compounded returns, you might get a different perception.

Summary

An investment property has the following main cash flows:

1. Downpayment (- negative cash flow)
2. Mortgage (interest payment + principal) (-)
3. Rental Income (+)
4. Rental Expenses (-)
5. Renovation and furnishings (-)
6. Sale of property (+)

The property’s eventual value is zero.

However, even though the value eventually is zero, a property investor investing in a leasehold can extra a good return from it. Your mileage will depend on your purchase price and what you do with it.

When viewed using XIRR, we can compare it to other investments.

We can compare this investment property to your Singapore Savings Bonds, bank interest rates, a low-cost passive portfolio, hedge fund returns, cryptocurrencies.

So if the XIRR for a decaying leasehold can be 5 to 7%, your active or passive portfolio over 40 to 50 years needs to average 5 to 7% in XIRR or more in order to be comparable.

Yet if you compare to the previous XIRR of the HDB that I have done (7-8% for mine and 13% for my friend), the compounded returns of a private condo is not always better. It depends very much on different time periods as well.

Of course, each investment has its nuances. You may not have $200,000 for downpayment, and a stock or fund portfolio might be easier for you to start. You may not like to actively managed tenants (In recent times, I been hearing this is a big niggling reason people sell off part of their property portfolio)

Your mileage may differ if you got it at a good price. But if you sell it off, you got to reinvest it well.

Do Like Me on Facebook. I share some tidbits that is not on the blog post there often. You can also choose to subscribe to my content via email below.

I break down my resources according to these topics:

1. Building Your Wealth Foundation – If you know and apply these simple financial concepts, your long term wealth should be pretty well managed. Find out what they are
2. Active Investing – For the active stock investors. My deeper thoughts from my stock investing experience
3. Learning about REITs – My Free “Course” on REIT Investing for Beginners and Seasoned Investors
4. Dividend Stock Tracker – Track all the common 4-10% yielding dividend stocks in SG
5. Free Stock Portfolio Tracking Google Sheets that many love
6. Retirement Planning, Financial Independence and Spending down money – My deep dive into how much you need to achieve these, and the different ways you can be financially free
7. Providend – Where I work doing research. Fee-Only Advisory. No Commissions. Financial Independence Advisers and Retirement Specialists. No charge for first meeting to understand how it works

Since they started, I have been using Standard Chartered Online Trading as one of my main trading platform for the past 8 years.

Since then, a few other platforms have sprouted up, notably FSMOne and Interactive Brokers. They look to be competent platforms and would fit my needs, but we can observe high behavioral switching costs working here.

My rates are 0.18% for SGX Trades and 0.20% for other exchange trades with no minimum. This is because I am on Priority Banking. If not the rates are 0.20% and 0.25% respectively and there is a 10 dollar minimum.

While I should switch, as long as the platform is not too lousy, we find it a hassle to do a lot of things to move our funds over to another platform. FSMOne like many of the pre-funded brokerage accounts in Singapore, provide cheaper commissions if you pre-fund it.

The disadvantage for me is that currently, they do not allow us to trade in the London Stock Exchange. Interactive Brokers would solve this problem and they have very low commission as well.

Cheaper Currency Rates

Another notable advantage is that on Interactive Brokers, you can achieve close to spot currency rates. Basically, the platform allows you to navigate the currency markets as to how professional currency traders do.

The biggest gripe for Standard Chartered Online Trading has always been that if I were to purchase some stocks denominated in US Dollars, Hong Kong Dollars, or Australia Dollars, the rates can be as bad as 0.80% difference from what is listed in some sites such as XE Currency.

This differs from currency pairs to currency pairs. Some currency pair like SGD to USD has a tighter spread, some more obscure ones like SGD to HKD are wider.

Standard Chartered has sought to improve this over the years.

Recently, they introduce this LiveFX thingy.

It feels like a separate platform that allows you to exchange currency when the rates are getting better and to keep it.

Honestly, in my head, I wonder what is the big difference. Prior to this, we can also exchange when currency is better beforehand. Perhaps some of you could explain things better to me. It does look exciting though.

I just did a transaction for the first time on LiveFX a few days ago. I must say that it does not feel much difference.

Ultimately, it is whether you could narrow the spread.

The following table shows the spread difference between LiveFX and XE Currency, a popular currency website which we get our currency data from:

While the Sell vs Buy spread is 0.8%, the difference between XE Currency is around 0.40%.

I like that the spread for most pairs are more equal now. It can be a pain wondering if you get a lousy or a reasonable spread.

They say that FSM FX Rate is better so I have tabulated something similar to the one on top:

Hmm… seems that other than the USD to SGD, FSMOne’s currency conversion can be worse.

Does this Currency Cost Matter In the Grand Scheme of Things?

The debate for whether the currency cost difference between different platform matters or not depends on what is your investing strategy.

I have frequently given this reasoning that if each of your trade earns you 20%, a 0.4% cost doesn’t matter. I sort of survive on a not super efficient commission structure and currency rate because I made it up in the stock prospecting front (I am an active stock investor).

However, if you can, you could achieve better currency and commission efficiency by using a better platform and be a good investor at the same time. By all means.

How Stable are these Rates on these Platforms?

The other thing to think about is outside of Interactive Brokers what kind of rates can you get?

I do not use Standard Chartered Online Banking exclusively and used another traditional platform.

The spread I get from that platform in currency conversion for HKD can be 0.58%. I have shown you the rates for FSM FX. You can determine if it is worth it.

If these currency spread keeps changing, you and I are going to have a very tiring time chasing after the best currency rates.

That is one of my reasoning that maybe… if we place more effort on just ensuring we put our money in fundamentally sound financial instruments, stocks with a margin of safety, not scammy stocks, stocks with greater expected returns, it will be a better use of our time.

We try our best if we can to go with the best platform.

For Low Cost, Passive Investors

Low-cost investors are more cost-conscious.

Each basis points is a loss to them. I would think currency conversion may be a one-time thing.

It is not a recurrent cost so it is better.

You have to be aware as well that the currency your exchange-traded fund (ETF) trades in is just a middle man.

Ultimately it is between the currency you spend in and the basket of stocks or bonds in the ETF.

For example, if you buy a China ETF denominated in USD. You exchange $1,000 SGD to USD. The ETF then purchases a basket of China companies denominated in RMB.

Suppose in 2019, the returns of this ETF is 10%.

SGD <–> USD <–> RMB

If the USD weakens severely against both the RMB and SGD, the returns of the China stocks gets boosted to maybe 15%. What you see on paper is greater returns.

But this return will have to be converted back to SGD when you sell it so that you can spend it. The 15% gain might go back to only 11%.

Ultimately, it is between SGD and the basket of stocks. So if you buy a basket of world equity in MSCI World, it is how SGD move versus the earnings of those basket of stocks.

Summary

These currency costs do matter. Go with as good of a platform as you can. But these platforms do change their spreads over time so I am not sure if it is a good idea to keep switching.

Do they matter significantly in the grand scheme of things? Focus on the big wins.

Ultimately, the currency movement is volatile. It is like the debate over whether liquidity matters if you are a long term investor.

If you try to save on 0.3% in spread but the long term trend is that USD depreciates 30% against the SGD, then does it matter? Same for liquidity if we save on 0.2% and eventually markets do better.

Let me know what you think.

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