Monthly Archives: November 2014

IT guys adventures in finance – how to earn a million

I’m going to take a bit of a detour from my typical IT-focused technical posts and explore a thing that’s been a very dear subject to me recently – finance.

This post will come along with a typical header message saying that you shouldn’t take information here as the absolute truth, professional consultation advice or the only true way to go forward, post is going to be biased pretty much like everything else.

Prime subject of the post is my subjective experience with financial services in Latvia, the path I’ve taken and the inspiration sources I’ve used and of course the conclusion I’ve drawn.

On a general scale this post boils down to – “How to earn a million in Latvia”. Haha, but no, it’s a good search tag though.

How to better understand what you need financially, how to get there and how to preserve your investment and assets and how to make educated decisions – are much better statements.

Intro – live/consume now or not?

A lot of people I know are prone to the “consume now” credo. Given a bit of a historical background –  collapse of the USSR, 90s crisis, denomination of currency in Latvia, Bank Baltija collapse (Ponzi scheme), 2008 real estate crisis, this kind of approach has a solid, experience proven foundation – buy and get the services/products you can use here and now, get something that is tangible, instantly.

On the other hand there is always the option to save and preserve your current assets while adjusting their value appropriately to the changing market – investing (finance). It’s a pretty hyped term, my simple understanding is – you put some of your money away today in hopes of using it in the future while potentially earning a profit or losing all of it when nukes come falling.

My starting point

I’ve started with frustration of not understanding how Latvian banks have these “awesome” financial services that net you 60 cents for 1k investment over a year and how life insurance companies rip you off on up to 5% commission fees for your investments and cover it up by saying you’re better of enjoying the amazing tax benefits that government offers (I came to the conclusion that compounding return beats any tax benefits you can get from the state, at least in the long run (7 years+)).

I’ve been putting this off for a long time and finally got my chance to study up and jumped to a great Coursera educational course from University of Michigan that got me started.

After that there was a more scary period where I actually had to sit down and count what, how, when and why I want to have – financial plan.

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Some extra preliminary information: Here’s a peak of the historical and expected returns of some of the securities and here’s a peek of indices returns (some over 40 years+ of data). For comparison.

What’s on the Latvian market

Not going to do an all out market review, something I came over and found curious.

12% of Swedbank Latvian clients (vs 14% Lithuanians and 13% Estonians) have savings in the following form:

2012
5% Dynamic deposit
15% Life insurance
26% Funds
16% Bonds
19% Stocks
20% Private pension
+-1% somewhere
2014
12% Dynamic deposit
12% Life insurance
18% Funds
10% Bonds
23% Stocks
24% Private pension
+-1% somewhere

Data from – Swedbank 2014 presentation on their clients` savings.

Funds are down, stocks are up, one of the reasons pointed out by Swedbank during presentation is that people actually prefer ETF “stocks” the other would be my wild guess – markets are up from 2008 and people are getting bolder.

Investment deposits cruise

Now here are some of the financial services you can see our banks offering (“Swedbank” to be more precise, I even made a screenshot, just in case!)

finance_post_001

“guaranteed interest 0,06 – 0,14%, conditional interest 0,30 – 0,70%.

Investment deposit offers guaranteed interest and in addition pays fixed size conditional interest if at deposit maturity prices of all three stocks increase at least 4% or more from their initial level. If at least one stock appreciates less than 4% or depreciates – conditional interest is not paid. In all cases 100% of deposit amount plus guaranteed interest is paid out to clients at deposits maturity.”

To put it simple, if you bring the bank 1000 euros in one year you get 1000 EUR + 60 cents guaranteed. You get 60 cents per year per 1000 Euros.

There are also saving accounts with ~0.10% interest rate and similar offering from other banks, I won’t go into. No risk means no gains.

Individual stocks and bonds

I’m not a professional trader nor do I look to become one, so I haven’t investigated this option. I don’t hold any insider information and don’t have any desire to jump the Apple hype train. I don’t recommend playing this game and speculating.

Funds

At the moment of writing this I couldn’t find a fund that suits my criteria from Latvian bank offerings, either the essence what this fund represented didn’t go with, or the fund didn’t have an appropriate benchmark to measure it or the fees were ridiculous for the results it’s been delivering. 

It’s really depressing, take, for example, this SEB bank offering – http://web.msse.se/seb/sebglobal/quicktake.aspx?id=1128&ctry=en:

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It reads the following – we will charge you 1.59% annual percentage (yup, it’s a lot and it’s from your total assets, not earned that year) + up to 1% entry fee (not including any brokerage commissions, of course) compared to how much a typical index (the one, they’re actually comparing the fund against and losing) costs – 0.07%. Googling for Total Expense Ratio explains the subject in more depth.

I would encourage further research before making a decision.

Pensions

Pensions are fun too. The obligatory, guaranteed one (“Information about the insured person pension capital“) is found here and there is nothing fancy about it. The optional one is much more exciting, detailed information here – manapensija.lv or “The Association of Commercial Banks of Latvia (ACBL)” or this:

finance_post_003

The cons are:

  • you’re not going to see any of that money before you hit 55
  • or unless you become an invalid (with an asterix *)
  • the returns do not include the fund manager’s commission (up to 1.6%!), subtract that
  • the returns are not inflation adjusted
My super math skills didn’t add up at this point.

ETF

Exchange-trade funds sounded like a lot of fun on paper. They’re easy to understand, offer a wide range of market options cover lot’s of things and are in essence a passively managed funds, meaning instant profit on lower commission fees (except the brokerage, of course) and not being suspicable to any particular company’s stock plummeting.
To buy ETF you need to find a broker, it’s challenging, there are requirements to starting capital, commission fees and loads of documentation to read. For example:
  • recently DNB upped their initial deposit requirements from 500 EUR to 2000 EUR
  • Swedbank and SEB will completely choke you with commissions which are absurd (monthly % for holding securities in your name,  as high as 50 EUR minimum commission for a stock purchase and other things)
  • SAXO Bank requires a minimum of $10k for even considering to open an account ($500,000 for a Platinum Account)
I won’t be pinpointing all the PROs and CONs and bank offerings here. For me the conclusion is that while the security choice itself is solid, the lack of competitive and acceptable brokerage services is disturbing.
 
Forex and currency speculation

Taxes, legal and nuances

USA IRS declarations, additional tax on commodities and securities with value over N dollars held in USA, local taxation choices are just some of the things that can be encountered along the way.
One of the more depressing concerns is the capital gains tax and lack of tax relieved retirement/savings accounts in Latvian legislation. For example – Estonia has this. In simple terms it means if you buy a stock or a bond and in 5 years decide you want to change this investment allocation to another security type (another stock, bond, etf, whatever) – you will have to sell, declare capital gains, pay the government and finally buy the security you wanted in the first place. It doesn’t matter if you didn’t even had money on hands at any point.
Real estate
After reading lots of materials on the subject of buy vs rent or having this asset class as an investments – I certainly don’t see anything bad about it, but it’s even more specific on location, timing and the standing offer to comment on something in general, except one thing – Latvians have this mentality that real estate is the only real investment option and tend to make up real estate prices out of thin air.
Conclusion

I had lots of fun with this subject. It’s certainly proven to be one of the most useful recent experiences.

Latvia is still in early baby steps in terms of mass adaptation of financial services and public literacy on the subject.

By my impression Latvia is at least two decades behind USA – immature pension system, lack of appropriate taxation legislation (if we’re talking precisely it’s the lack of tax relieved bank accounts for long-term investment and retirement).

While this is bad on one side – there are opportunities in this market for companies that are willing to provide competitive financial services.

From all the asset classes I personally favor ETFs and real-estate.

I like ETFs because they are the representation of market, you’re taking the side that says – “ok, human ingenuity and creativity will always flourish and economy will always grow in the long term, top companies will still be making money and be profitable”. It’s simple and great (winning combo). There’s no one managing these funds actively and trying to outsmart someone else (with statistical data proving that in the long term they don’t). I guess, that Bogleheads sold me this line and I’m happy with it.

My guess is as good as any, but I strongly feel that real-estate market in Latvia will decline with a price correction in the coming 2-3 years and after that only certain type of real-estate segment will continue the average annual basis growth (~2%-ish) – new projects, good location, affordable price. Why? Because the people who haven’t migrated yet will not favor the secondary market and USSR times buildings, but just can’t afford the overvalued prices of some of the real estate offers right now and I just like to hope that Latvians will be making educated choices in the future. 🙂

tldr; love what you do, work a lot, always ask yourself “how much it’s worth”.

Information sources I’ve enjoyed, a lot:

Reddit – US Based community on personal finance and their FAQ

Bogleheads – investing enthusiasts who participate in the Bogleheads Forum. The forum’s members discuss financial news and theory, while also helping less experienced investors develop their portfolios. Their WIKI even has some EU related articles.

manapensija.lv – Get acquainted with the pension system in Latvia, investment plans and fund managers.

Vai ir vērts ieguldīt pensiju 3.līmenī? – a Latvian financial guy’s blog about actual questions.

http://www.etf.com/etf-education-ce – general info ETF site and educational materials.

http://www.etfinfo.com/en/statistics/ – Great site, awesome data. fundinfo is the leading international platform for information and mandatory publications of investment funds. We believe that sustainable, profitable investments require well informed fund investors.

Updates and further revisions are pending.