Sunday, 5 July 2020
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!
CW,
ReplyDeleteEh?
We are no longer the lonely 2 dots in the Tao symbol anymore ;)
Its good to have more diverse opinions and not always about singing like a canary just because we can get paid to do so...
Isn't financial literacy is all about spotting Emperors who are not wearing any clothes?
The moral of the story ...
ReplyDeleteHigh return. Low risks cannot exist over longer term e.g 2 to 5 yrs
Hi CW,
ReplyDeleteExactly, many years ago, my cousin told me he had extra cash and he recommended me to convert to ringgit (2.5) to put in MayBank which offered really good rates (I cannot rem).
I told him it was dangerous due to the currency exchange rate. He said 2.5 is already very low. I said, must well buy SG govt bonds, he said he do not know how to and refuse to learn.
When AUD is at 1.2 with SGD, I owned AU stocks. Luckily I sold all of them. Otherwise double whammy, stock decline, forex losses.
Best lessons learnt are through our own lessons.
DeleteYeah I liquidate my Aus shares with losses as ex rate drop to 1:1 back then.
DeleteNow it’s even worst! Not just the ex rate losses, Aus economy is not doing well and all those stocks had fallen significantly in pricing