Time, Leverage, and Currency Rate (Refresh)

Saturday, 17 April 2010
Read on reflection after GFC? Time, Leverage, and Currency Rate

Read? Beware the so-called Investment Gurus of SG


It’s not just gold

Now, before anyone thinks that this is a post against gold, let me throw in another example of a mistake when ignoring foreign currency flucuations.

Some years ago (roughly, 6-7 years if my memory serves me correctly), the local banks were encouraging many retail investors to take advantage of higher interest rates in countries such as Australia and New Zealand.

The basic idea was to convert your SGD to the either the Australian (AUD) or New Zealand (NZD) dollar, deposit it in a time-deposit in the banks there and earn the higher interest rates there.

Unfortunately, someone forgot to tell these investors that there is something called ‘Interest Rate Parity’. 1 AUD then used to trade for around 1.3 SGD but alas, now the almighty AUD trades for slightly less than 1 SGD. What seemed like an additional 4-5% return a year basically got negated by the 30% hit in currency terms.

It’s very basic but investors sometimes forget that (a) inflation matters, (b) transaction costs matter, and (c) local currency matters.


Walau!

After donkey years; the above post may have reminded some Merdeka and Pioneer folks how silly at that time when there was no Internet and they were blindly following the Crowd of the Day to the banks!

Uncle8888 learnt hard lesson on Currency Risk and chopped fingers. Those days FD in New Zealand banks could earn as high 10 to 12% on 2 to 3 years Fixed Deposits.

After 3-yrs FD maturity and NZD-SGD crash; Uncle8888 took his money back on NEGATIVE interest rate after currency conversion from NZD to SGD!

Chop fingers! 

Did your parents or grand-parents also kena but diam diam?

LOL!