# Interest rates - why focus only on borrowers?



## Tyler Durden (6 May 2012)

Everytime there is discussion of interest rates and the potential for the RBA to reduce it, it is always in the context of how it will affect the borrowers.

But why do they never seem to consider savers? My ING savings account now only pays 4% and Ubank pays 5.5%, which is a huge drop from 6.51% initially from Ubank, and it's making it harder for me to save.

So do the people at the RBA ever consider savers but the media ignores it, or does the RBA ignore it too?


----------



## Vixs (6 May 2012)

Tyler Durden said:


> So do the people at the RBA ever consider savers but the media ignores it, or does the RBA ignore it too?




It's not overlooked, it's very much the other side of the same coin. Increased interest rates are used to encourage saving, slowing down spending and therefore attempting to reign in an overheated, inflating economy.

Decreased interest rates are very much intended to make saving a less attractive proposition. Why bother putting money in savings for a net gain of nothing, or even decline, after inflation? Instead of justifying your saving it's hoped that you will decide to spend the money instead, keeping the money moving through the economy and therefore helping growth.

They might only talk about the side that benefits the people on one side of the equation, but Australia's notoriously vicious Tall Poppy Syndrome means that noone wants to talk about the negative impact on those that are living off interest alone. If you don't wear a fleuro vest or a blue shirt Australia doesn't want to talk about you nicely.


----------



## notting (6 May 2012)

Tyler Durden said:


> interest rates and the potential for the RBA to reduce it, it is always in the context of how it will affect the borrowers.



Unfortunately there is a more pathetic reason.  
When you say *"they"* you are largely referring to the cowardly irresponsible media.  Bank bashing at that time sells newspapers because people are revved up emotionally because they have to pay more money to their bank than the touted cut emplied by the media pretends they should. The morgage paying readers like their newspaper even more because it is giving them lots of dumb reasons why the banks are so bad for taking more of their money than they should! This makes them feel supported and empowered in their victimhood!
The sort of people that believe everything in the newspaper, the ones that swallow that kind of dirt, love to lap it up!
Shock jocks and talk back radio dicks pretending to be supportive to the underclass use the same crap tactics to entice listeners. Adding to the fire they quote the salaries of the fat cats as if that would make a difference.  
Of course they would not mention that if you didn't have highly paid smart people running the major banks they could all be Pyramids or Storm Financials and the whole system would be funded by the same readers taxes at a much higher cost!
Despite the fact that our banks are the best in the world, they *still had to all do capital raisings during the GFC part 1 *shenanigans.  But, they unlike, almost all the other banks in the universe did not have to tap tax funded coffers or rely on government takeovers to keep functioning during extreme conditions.
Hence they are not too profitable when measured against risk.
* That is balanced.*


----------



## Calliope (5 December 2012)

Mr Swan says he is not concerned about self funded retirees and others who may be dependent on floating interest rates for income. He says they have had it good in the past. 

His main priority is to bully the banks into passing on the full rate cuts to people with mortgages. His argument is that this group is more is more likely to be made up of Labor voters.


----------



## Aussiejeff (5 December 2012)

NAB drops interest on mortgages by 0.2% - cites "continuing high funding costs" as reason for not giving full .25% cut.

I suppose they (like the others) will still manage to pass on the full 0.25% cut to savings accounts though.....


----------



## Struzball (5 December 2012)

Low savings interest rates occur during periods of low inflation.  
Low inflation means their principal is not being devalued rapidly.
High savings interest rates means high returns, which means more tax and fast devaluing of their principal.

I can't imagine realistically savers are worse off with low inflation and low interest rates, because their goal post won't continue to shift, i.e. saving for 100k in 10 years, but in 10 years time it turns out they need 200k - not ideal.

Self funded retirees could always just spend their principal to supplement their lower income, because either way, it will be eroded by inflation during high interest rates, or eroded by spending during low inflation, on the bright side at least they'll be being taxed less at the moment.


----------



## Julia (5 December 2012)

Aussiejeff said:


> NAB drops interest on mortgages by 0.2% - cites "continuing high funding costs" as reason for not giving full .25% cut.
> 
> I suppose they (like the others) will still manage to pass on the full 0.25% cut to savings accounts though.....



Of course.

Struzball, most self funded retirees won't be paying any tax anyway.


----------



## McLovin (5 December 2012)

Tyler Durden said:


> Everytime there is discussion of interest rates and the potential for the RBA to reduce it, it is always in the context of how it will affect the borrowers.
> 
> But why do they never seem to consider savers? My ING savings account now only pays 4% and Ubank pays 5.5%, which is a huge drop from 6.51% initially from Ubank, and it's making it harder for me to save.
> 
> So do the people at the RBA ever consider savers but the media ignores it, or does the RBA ignore it too?




Actually, the RBA considers both savers and borrowers. Borrowers in the context that lower interest rates encourages borrowing and savers in the context that lower interest rates encourage spending instead of saving.


----------



## Aussiejeff (5 December 2012)

McLovin said:


> Actually, the RBA considers both savers and borrowers. Borrowers in the context that lower interest rates encourages borrowing and *savers in the context that lower interest rates encourage spending instead of saving.*




I wonder how effective that old economic theory is/will be in the age of the Geriatric Planet? Surely, if a significant proportion of your income is cash/deposit based interest, losing some of that spending powere overnight is NOT going to encourage you to spend more, is it? Not unless you are an inherent risk-taker.

Pensioners & retirees (whether self-funded or on legit age or supporting pensions) have been much-maligned of late. Yet I suspect if all the money thrown at the economy for everyday living essentials & discretionary spending by these same retirees and pensioners was withdrawn overnight, the economy would likely tank _bigtime._

It's ironic, the word "retiree" seems almost like a swear word now...how things change from the 90's when _retiring_ early was what EVERYONE aspired to!)

IMHO.


----------



## Ves (5 December 2012)

McLovin said:


> Actually, the RBA considers both savers and borrowers. Borrowers in the context that lower interest rates encourages borrowing and savers in the context that lower interest rates encourage spending instead of saving.



At this point of the cycle two things need to happen according to the RBA:

Weakening of the AUD
Re-invigorate the construction / housing industry

The macro-environment and fiscal policy seems to be different than it once was, so using interest rates as a tool to achieve these two things is arguably not as effective any more: but is there really any other option?

To all the self-funded retirees - lower interest rates have been on the wall for quite some time now.  Increasingly weaker economic data and the yield-curve have been pointing to this.


----------



## Bill M (5 December 2012)

Ves said:


> To all the self-funded retirees - lower interest rates have been on the wall for quite some time now.  Increasingly weaker economic data and the yield-curve have been pointing to this.





Yes we all know or at least should know that. The problem is that a lot of retired people of age (say 65 up) do not want to take on any risk. There is no scope for most of them to go back to work. Any number of multiple dooms day scenarios can play out and the the stock market could drop another 30% or so. In other words they are absolutely mortified at the thought of losing even a brokerage fee in capital, that is the problem. They will continue to hold cash and fixed interest products, getting 4% income is still better than losing any capital, they think. They will adjust their lifestyle and spend less and when their income drops below a certain level then they will be entitled to Centrelink benefits and will queue up to get them. Low interest rates are very counter productive under these circumstances.


----------



## McLovin (5 December 2012)

Ves said:


> At this point of the cycle two things need to happen according to the RBA:
> 
> Weakening of the AUD
> Re-invigorate the construction / housing industry
> ...




You're right. The accelerator only works when the engine is switched on. 

The GDP numbers today weren't too crash hot. And the government sector isn't helping (-0.8%). Just what we don't need, with mining falling away and construction still at generational lows.


----------



## Julia (5 December 2012)

Aussiejeff said:


> I wonder how effective that old economic theory is/will be in the age of the Geriatric Planet? Surely, if a significant proportion of your income is cash/deposit based interest, losing some of that spending powere overnight is NOT going to encourage you to spend more, is it? Not unless you are an inherent risk-taker.
> 
> Pensioners & retirees (whether self-funded or on legit age or supporting pensions) have been much-maligned of late. Yet I suspect if all the money thrown at the economy for everyday living essentials & discretionary spending by these same retirees and pensioners was withdrawn overnight, the economy would likely tank _bigtime._
> 
> ...



Agree.  The notion that because interest rates are low, retirees are going to spend more wouldn't be accepted by any retiree I know.  On the contrary.



Ves said:


> To all the self-funded retirees - lower interest rates have been on the wall for quite some time now.  Increasingly weaker economic data and the yield-curve have been pointing to this.



Agree.  
When deciding to lock funds into five year term deposits while rates were high, I was not entirely happy about doing so, but - anticipating what's now happening - am glad I did.
Pretty obviously at call money will fall the full .25%.  That will bring mine at ANZ under 5%, the tipping point when my plan was "time to pay attention to the market again".  Sigh.  I've enjoyed sitting aside.



Bill M said:


> Yes we all know or at least should know that. The problem is that a lot of retired people of age (say 65 up) do not want to take on any risk. There is no scope for most of them to go back to work. Any number of multiple dooms day scenarios can play out and the the stock market could drop another 30% or so. In other words they are absolutely mortified at the thought of losing even a brokerage fee in capital, that is the problem. They will continue to hold cash and fixed interest products, getting 4% income is still better than losing any capital, they think. They will adjust their lifestyle and spend less and when their income drops below a certain level then they will be entitled to Centrelink benefits and will queue up to get them. Low interest rates are very counter productive under these circumstances.



+1.  And when you look at City Pacific, Banksia, et al, you can totally understand their caution.


----------



## Julia (5 December 2012)

Calliope said:


> Mr Swan says he is not concerned about self funded retirees and others who may be dependent on floating interest rates for income. He says they have had it good in the past.
> 
> His main priority is to bully the banks into passing on the full rate cuts to people with mortgages. His argument is that this group is more is more likely to be made up of Labor voters.



Did Swan actually say he is not concerned about self funded retirees and others dependent on floating interest rates?   Can't believe even he would be so foolish as to dis such a large group.  Do you have a link to his remarks?

Only about a third of the population has mortgages.  Far more have money as savings.


----------



## McLovin (5 December 2012)

Aussiejeff said:
			
		

> I wonder how effective that old economic theory is/will be in the age of the Geriatric Planet? Surely, if a significant proportion of your income is cash/deposit based interest, losing some of that spending powere overnight is NOT going to encourage you to spend more, is it? Not unless you are an inherent risk-taker.




The overwhelming majority of retirees live on the pension, so they're immune from interest rates. That will probably change over the coming years but at the moment self-funded retirees are a small miniority of Australians. The average retiree, retires with something like ~$150k in superannuation. Hardly a nest-egg.



> For many people, their main source of personal income during retirement changed from that at the beginning of retirement with more people becoming reliant on a 'government pension/allowance'. While 1.4 million (45%) of those aged 45 years and over who had retired reported that a 'government pension/allowance' was their main source of personal income at retirement, almost 2.1 million (66% of all those who were retired) indicated that this was now their main source of current income. This represents an increase of 46% compared with the number of people who stated that it was their main source of personal income at retirement. The next most commonly reported main sources of current personal income were 'superannuation/annuity/allocated pension' (17%) and 'dividends or interest' (8%).
> 
> Although women reporting 'no personal income' as their main source of personal income decreased from 39% at retirement to 6% for current income, 79% reported 'partner's income' as their main current source of funds for meeting living costs.




http://www.abs.gov.au/ausstats/abs@...6238.0&issue=July 2010 to June 2011&num=&view


----------



## white_goodman (5 December 2012)

McLovin said:


> You're right. The accelerator only works when the engine is switched on.
> 
> The GDP numbers today weren't too crash hot. And the government sector isn't helping (-0.8%). Just what we don't need, with mining falling away and construction still at generational lows.




well you could game GDP figures through the govt sector if u want, dont know how crash hot that will be for other economic metrics/consequences


----------



## white_goodman (5 December 2012)

Eihorn commented on this recently...


----------



## McLovin (5 December 2012)

white_goodman said:


> well you could game GDP figures through the govt sector if u want, dont know how crash hot that will be for other economic metrics/consequences




No gaming, just a government that is driven toward some ideological surplus.


----------



## white_goodman (5 December 2012)

McLovin said:


> No gaming, just a government that is driven toward some ideological surplus.




if its an ideology they must be committing seppuku at its spiritual alter in light of recent years


----------



## young-gun (5 December 2012)

To all the media bashers, just flicked over to today tonight and there is a story on savers being hurt by rate cuts, in particular self funded retirees.(fair call if anyone raises the credibility of journalism produced on current affair programs.)


----------



## Julia (5 December 2012)

McLovin said:


> The overwhelming majority of retirees live on the pension, so they're immune from interest rates. That will probably change over the coming years but at the moment self-funded retirees are a small miniority of Australians. The average retiree, retires with something like ~$150k in superannuation. Hardly a nest-egg.
> http://www.abs.gov.au/auss
> [/QUOTE...ent.  More than the ABC seems able to manage.


----------



## Ves (5 December 2012)

Julia said:


> Plenty who are partly self funded, however, who will be affected.
> Also younger people who are trying to save.



Yes - affected by their own decisions.  This happens at this time of the business cycle. And will continue to keep happening.  Yet people always act surprised and cry poor.  You would think they would learn!!!


----------



## Julia (5 December 2012)

Ves said:


> Yes - affected by their own decisions.  This happens at this time of the business cycle. And will continue to keep happening.  Yet people always act surprised and cry poor.  You would think they would learn!!!



I've about given up on that idealistic notion.

You might be being a bit unreasonable, however.  I haven't heard anyone 'acting surprised', just a few people pointing out that it's not all positive when rates go down.

Further, many people are profoundly irritated by Wayne Swan's joyful recognition of the rate cut and the ridiculous way he claims it has happened because the economy is so strong, with an anticipated surplus, whereas a couple of years ago he was decrying the same 3% as an 'emergency level' which denoted a crisis!

So maybe don't misinterpret irritation as surprise.


----------



## Calliope (6 December 2012)

Julia said:


> Did Swan actually say he is not concerned about self funded retirees and others dependent on floating interest rates?   Can't believe even he would be so foolish as to dis such a large group.  Do you have a link to his remarks?
> 
> Only about a third of the population has mortgages.  Far more have money as savings.




No he didn't. Politicians never say what they are really thinking. I used the cartoonist's trick of having him uttering his real thoughts after I listened to him on the ABC once again berating the banks for short-changing the "working family" mortgagors.


----------



## Ves (6 December 2012)

Julia said:


> So maybe don't misinterpret irritation as surprise.



Maybe so.  Some of the comments on the bottom of the articles on the major news site were certainly full of irritation and victim mentality (ie. "why are they punishing us?").  I could be confusing "surprise" something else.


----------



## McLovin (6 December 2012)

Ves said:


> Maybe so.  Some of the comments on the bottom of the articles on the major news site were certainly full of irritation and victim mentality (ie. "why are they punishing us?").  I could be confusing "surprise" something else.




A bank account is a store of value, IMO. It should hold it's value relative to inflation but that's about all. IMO, using a bank interest (and even worse, at call interest) as a primary source of income is very risky. You're completely at the mercy of the economic cycle. Sometimes it seems as though many retirees (not on here, but what you hear on the news, read etc) are looking for a risk free investment that offers upside but no downside.


----------



## Julia (6 December 2012)

McLovin said:


> A bank account is a store of value, IMO. It should hold it's value relative to inflation but that's about all. IMO, using a bank interest (and even worse, at call interest) as a primary source of income is very risky. You're completely at the mercy of the economic cycle. Sometimes it seems as though many retirees (not on here, but what you hear on the news, read etc) are looking for a risk free investment that offers upside but no downside.



Sure.  A bit like those who buy shares for that oh so reliable dividend yield and are devastated when they lose capital because the SP actually goes down.

Regarding interest as primary source of income being risky, why, if you've locked in an interest rate which delivers net about twice as much as one needs to live on?


----------



## McLovin (6 December 2012)

Julia said:


> Sure.  A bit like those who buy shares for that oh so reliable dividend yield and are devastated when they lose capital because the SP actually goes down.




Hardly. I was actually thinking about fixed income. Before this round of cuts, 10 and 15 year yields were over 4.5%. NSW TCorp was at almost 5%. How many retirees utislised the ability to lock in income for long periods?


----------



## Ves (6 December 2012)

Julia said:


> Regarding interest as primary source of income being risky, why, if you've locked in an interest rate which delivers net about twice as much as one needs to live on?



People in this position are the minority and they have obviously done really well to get there.  They have scope to do lots of things to protect their income and capital.

But the strategy that you suggested worked really, really well for those who did it in the US five or six years ago.

BUT now those who used it are learning about a thing called "reinvestment risk."  They won't lose their capital (until they have to start drawing on it), but they won't have a source of income either. 

It is not uncommon for rates locked in for five years to go from 8% to 2%.  So if they had double the income at 8%, then they have just enough at 4%.  Then 2% they only have half as much as they actually need...

Don't laugh, because it's a story that is fast coming to Australia IMO. We will be earning next to nothing in interest within five years.


----------



## McLovin (6 December 2012)

Ves said:


> People in this position are the minority and they have obviously done really well to get there.  They have scope to do lots of things to protect their income and capital.




Yes and we seem to be getting into smaller and smaller groups of people. As you say, this would be a very small portion of the population, we're talking about people with >$1m in savings.



Ves said:


> But the strategy that you suggested worked really, really well for those who did it in the US five or six years ago.
> 
> BUT now those who used it are learning about a thing called "reinvestment risk."  They won't lose their capital (until they have to start drawing on it), but they won't have a source of income either.
> 
> ...




And this is what I mean. You should be looking to lock in over 10+ years if you intend to live off interest income, so that your income remains unchanged through the cycle. If the credit boom of the last thirty years produced an anomaly in interest rates, then we might need to all get used to sub 5% rates.

Also what are the penalties on five year term deposits if, say, inflation spiked and you had to withdraw after three years to preserve capital?


----------



## Julia (6 December 2012)

McLovin said:


> Hardly. I was actually thinking about fixed income. Before this round of cuts, 10 and 15 year yields were over 4.5%. NSW TCorp was at almost 5%. How many retirees utislised the ability to lock in income for long periods?



No idea.  It's not my responsibility to monitor what other people do.

You and Ves seem to have the idea that, if someone chooses to go to cash *for reasons best understood by themselves*it is with the intention of being thus locked in to cash for ever after.

Do you seriously think I don't realise that reinvestment conditions could be very different in a few years time?
Of course I do.  It could also be that the rate cycle has turned and rates are on the way up again.

I have already said that with funds that are at call, once that 5% becomes 4.75% that will be my trigger point to stir myself into re-entry to the share market.  Not because it's financially necessary but on principle.

Consider that you may be looking at a retiree's situation through the filter of your own younger situation.
Some retirees have 'enough'.   I'm not going to be specific for obvious reasons, but even if I lived to be very old (grandmother finally departed at 103), I wouldn't exactly be worried about being dependent on a government pension.  I spent many years working hard to make money, but only for the purpose of providing a carefully calculated level of security.  I'm not driven to keep on making more and more money.  Have never been into money for its own sake.

I don't actually enjoy owning shares, watching the market, making sure I'm on top of all that's happening.
Would much rather be on the beach with my dog, gardening, out with friends.

So perhaps try to recognise that different folk have different aspirations and different needs, rather than assuming they are too stupid to understand potential reinvestment environments.


----------



## McLovin (6 December 2012)

Julia said:


> You and Ves seem to have the idea that, if someone chooses to go to cash *for reasons best understood by themselves*it is with the intention of being thus locked in to cash for ever after.
> 
> Do you seriously think I don't realise that reinvestment conditions could be very different in a few years time?
> Of course I do.  It could also be that the rate cycle has turned and rates are on the way up again.
> ...




Your first paragraph no, I was not implying that at all. I've been arguing the merits of whether holding cash forever is wise, IMO, it's not.

On your second and third paragraphs, I'm not sure when this became a discussion about your investment decisions. I haven't mentioned you once and that wasn't my intention to have a dig at you. What you or anyone else does with their money doesn't really interest me. 

I made a couple of statements that if one intends to live solely off interest income then they should lock in a rate that will run right through a business cycle. That's my opinion. Otherwise, they're living with high fixed costs and an income stream that will vary according to the economy. 





Julia said:


> I don't actually enjoy owning shares, watching the market, making sure I'm on top of all that's happening.
> Would much rather be on the beach with my dog, gardening, out with friends.
> 
> So perhaps try to recognise that different folk have different aspirations and different needs, rather than assuming they are too stupid to understand potential reinvestment environments.




Again, I haven't said anything about the sharemarket, you introduced it to the discussion with your comment about dividends. All I said, is that if someone is retiring and planning to live solely off interest on their savings, they are better trying to fix their income for as long a period as possible. This has nothing to do with growing their pie, it's about realising that as they age a substantial amount of their living expenses will be fixed, so they'd be far better, IMO, taking a lower fixed income than a possibly temporarily higher variable one.


----------



## medicowallet (6 December 2012)

Julia said:


> I have already said that with funds that are at call, once that 5% becomes 4.75% that will be my trigger point to stir myself into re-entry to the share market.  Not because it's financially necessary but on principle.




Almost identical triggers for me..

I re-entered into some shares for yield a couple months back, and it seems that they are doing well with potentially people moving the same also, probably should have got on the Telstra boat at the beginning of the year, but missed that one!


I wouldn't be surprised to see a bounce in high dividend yield shares, with the confidence in housing wavering, I guess time will tell. 

In saying that, i am sticking mostly to cash for the moment.


----------



## Julia (6 December 2012)

McLovin said:


> Your first paragraph no, I was not implying that at all. I've been arguing the merits of whether holding cash forever is wise, IMO, it's not.



I don't know where you got the idea that holding cash forever was a favoured strategy by anyone.  I've never seen such a reference.  Agree totally that it would be foolish.



> On your second and third paragraphs, I'm not sure when this became a discussion about your investment decisions. I haven't mentioned you once



I was responding to your saying:


> You should be looking to lock in over 10+ years if you intend to live off interest income, so that your income remains unchanged through the cycle.




I cannot speak for others so used my own situation as an example.  I don't know why you insist the interest rate cycle is 10+ years?   In April 2009 the cash rate was 3%.  It rose to 8%.  It is now, less than four years later, back to 3%.
So I don't understand your insistence that rates need to be locked in for 10+ years.

We don't know what will happen in the next few years.  We could be at the bottom of the rate cycle or rates could have further to fall.



> I made a couple of statements that if one intends to live solely off interest income then they should lock in a rate that will run right through a business cycle.



As above.  I may be missing something when it comes to what you say is the relationship between interest rates and the business cycle.

You also asked







> Also what are the penalties on five year term deposits if, say, inflation spiked and you had to withdraw after three years to preserve capital?



They are very considerable indeed.  Which is why I always place deposits in multiples of just $50K each.
Also, there is always several years' living expenses at call so the possibility of having to break any term deposit is remote.



> Again, I haven't said anything about the sharemarket, you introduced it to the discussion with your comment about dividends.



Yes, in a reference to those many people who buy shares for their yield and then find in a downturn they have lost in capital many times what that yield has provided.  I suggested that such a strategy is less than useful and for many people the preservation of capital via guaranteed capital is preferable.



> All I said, is that if someone is retiring and planning to live solely off interest on their savings, they are better trying to fix their income for as long a period as possible.



And all I have said is that I doubt many people adopt such a strategy as anything other than a temporary protection of capital whilst enjoying a passive income.  Depending on age and financial situation, many people will prefer to avoid the fluctuations of the volatile share market, and opt for cash until some stability occurs.

I understand your point about fixing income for as long a period as possible, but regard it as perhaps rather flawed, given the unpredictable nature of the interest rate cycle as pointed to above.

That said, I'll be surprised if we don't see low interest rates for a fairly sustained period now given all the circumstances.


----------



## Ves (6 December 2012)

Julia said:


> I don't know where you got the idea that holding cash forever was a favoured strategy by anyone.  I've never seen such a reference.  Agree totally that it would be foolish.



Really?  My partner is an ex-assistant bank manager.  She said they're a dime a dozen.  I see lots of them in my own vocation too.  

I thought that McLovin made some excellent points, myself. 

I've lost track about what you two are arguing about - it seems you agree?? 

Julia - would you have done better or worse jumping on the gold or silver bandwagon in 2007 (or earlier) when it was trending?  Is it part of your market timing strategy?


----------



## Julia (7 December 2012)

Ves said:


> I've lost track about what you two are arguing about - it seems you agree??



Essentially, yes.  (I think)

I'm just trying, perhaps incompetently given how unsuccessful I seem to be, to suggest that not everyone is driven by the desire or need to make more and more money, and that for some people, in some circumstances, a passive approach for a time is preferable to worrying about what the market in anything might be doing.



> Julia - would you have done better or worse jumping on the gold or silver bandwagon in 2007 (or earlier) when it was trending?  Is it part of your market timing strategy?



This sort of question is what I'm trying to explain above.  I don't know how further to make you understand that some people - after years of striving to achieve a given target - are simply not driven to "do better".


----------



## McLovin (7 December 2012)

Julia said:


> Essentially, yes.  (I think)
> 
> I'm just trying, perhaps incompetently given how unsuccessful I seem to be, to suggest that not everyone is driven by the desire or need to make more and more money, and that for some people, in some circumstances, a passive approach for a time is preferable to worrying about what the market in anything might be doing.




I think there was some misunderstanding initially, regarding length of time in spent in cash and that led to the confusion. But now I understand, I think we're broadly in agreement

Regarding interest rate cycles and business cycles. They definiately to not need to be 10 years long, you'd hope they'd be shorter. Having as long a time period as possible gives one some flexibility on reinvestment.

Julia, you might be interested to know that in the US retirees are almost completely invested in bonds with very little (0-20%) in equities. The reverse of here. I think most planners there would be aghast if they saw the level of equity investment many retirees have here that's been sold to them as being "safe blue chips".


----------



## Julia (7 December 2012)

McLovin said:


> Julia, you might be interested to know that in the US retirees are almost completely invested in bonds with very little (0-20%) in equities. The reverse of here. I think most planners there would be aghast if they saw the level of equity investment many retirees have here that's been sold to them as being "safe blue chips".



That is interesting.  What's the return like on those bonds?

What do you think is behind the overweight position in equities here?
I'm not sure if it's derived via people investing directly in shares or is it rather people being advised into managed funds of equities?
In the latter case, then perhaps adviser commissions have a role?

Rabodirect have today sent out the following email:


> As you probably know, on 4 December 2012, the Reserve Bank of Australia (RBA) dropped the official cash rate. And although it's not what you want to hear, we're dropping our standard variable rates by 0.30%.
> 
> There is good news though, as a loyal customer you'll continue to get the bonus rate of
> 5.16%p.a.* on 'new money' you put into your High Interest Savings Account (HISA) until 31 January 2013. This is a whopping 2.16% above the RBA's cash rate.




Wow, down .30%.  The claim by the banks that they are under pressure because of a 'deposit war' is starting to look a bit thin.


----------



## McLovin (7 December 2012)

Julia said:


> That is interesting.  What's the return like on those bonds?
> 
> What do you think is behind the overweight position in equities here?
> I'm not sure if it's derived via people investing directly in shares or is it rather people being advised into managed funds of equities?
> In the latter case, then perhaps adviser commissions have a role?




Couple of things...

1) Non means tested pension payments; Warren Buffett and Bill Gates are eligible for the pension in the US. And they wonder why they're running out of money!

2) The availability of long dated inflation protected treasuries. At retirement a retiree can buy a 30 year inflation adjusting US treasury. They won't lose purchasing power and they likely will never have to worry about reinvestment risk. It's actually a really good product.

As for returns, well they were once good; 4-5%. The 10 year is now down around 1.6% and the 30 year is about 2.75%, moving out a bit, AAA corporates are around 3.25%.

I don't think advisors have much of a role in the preference. It is an interesting difference between Australia and the US.


----------



## craft (7 December 2012)

McLovin said:


> 2) The availability of long dated inflation protected treasuries. At retirement a retiree can buy a 30 year inflation adjusting US treasury. They won't lose purchasing power and they likely will never have to worry about reinvestment risk. It's actually a really good product.




Aus has a Sep 2030 CPIadjusted Govt bond - yields about 0.9% at the moment.


----------



## McLovin (7 December 2012)

craft said:


> Aus has a Sep 2030 CPIadjusted Govt bond - yields about 0.9% at the moment.




0.9% + CPI?


----------



## craft (7 December 2012)

McLovin said:


> 0.9% + CPI?




Capital value is adjusted by CPI. Yield paid on adjusted capital.


http://www.aofm.gov.au/content/_download/Treasury_Indexed_Bond_Information_Memo_21_July_2011.pdf


----------



## Julia (8 December 2012)

McLovin said:


> Couple of things...
> 
> 1) Non means tested pension payments; Warren Buffett and Bill Gates are eligible for the pension in the US. And they wonder why they're running out of money!



The same applies in New Zealand.  However, the pension is included in overall taxation so the government claws much of it back if it's going to the more wealthy.  (I am avoiding any comment on tax dodges.)



> 2) The availability of long dated inflation protected treasuries. At retirement a retiree can buy a 30 year inflation adjusting US treasury. They won't lose purchasing power and they likely will never have to worry about reinvestment risk. It's actually a really good product.



Does sound useful.  Not the same thing, but you used to be able to buy similar principle here in an annuity.
I have a small annuity which pays a lifetime fixed rate of 6% which I rather regret not putting more into.



> As for returns, well they were once good; 4-5%. The 10 year is now down around 1.6% and the 30 year is about 2.75%, moving out a bit, AAA corporates are around 3.25%.



I'd find it hard to get too excited about that.



> I don't think advisors have much of a role in the preference.



No?  Given the general lack of financial literacy across the Australian population, I think they would.
Perhaps it would be more relevant to say that it's Fund managers who have the influence, in that much compulsory Super in Australia seems to by default go into a Balanced option where the Fund managers have chosen to be overweight equities.


----------



## drsmith (9 December 2012)

It would be interesting to see the yields on CPI indexed bonds from the 80's and early 90's when inflation was much higher than it is now.

I'd bet that like conventional bonds, the yield then was much higher than it is now.


----------



## prawn_86 (9 December 2012)

Julia said:


> I'd find it hard to get too excited about that.




I think that sums up the Aussie attitude a lot to be honest. In all my financial dealings with Australians is they tend to be a lot more casuaul and adopt "she'll be right" attitude. Not saying that you do Julia, just in general as to why we probably dont have a lot of people invested in bonds

A bond like McLovin described is, in theory, the only way you can safely protect your savings from inflation, without being at the mercy of a financial istitution. You know what you will get from a gov bond, you wont have to complain each time your bank drops deposit rates, and the government is a lot less likely to go broke than a bank (especially a lot of the small American banks that went under over the last 5 years).


----------



## Julia (9 December 2012)

Prawn, is the general public actually able to buy government bonds?  I was under the impression (perhaps quite incorrectly) that they're not available at a retail level.

Is there an inflation adjusted product such as McLovin describes?

When I said I'd find it hard to get excited, I was referring to the low interest rate, not the principle of bonds.


----------



## craft (9 December 2012)

Julia said:


> Prawn, is the general public actually able to buy government bonds?  I was under the impression (perhaps quite incorrectly) that they're not available at a retail level.
> 
> Is there an inflation adjusted product such as McLovin describes?
> 
> When I said I'd find it hard to get excited, I was referring to the low interest rate, not the principle of bonds.




Small Investor Bond Facility via the reserve bank.

http://www.rba.gov.au/fin-services/bond-facility/index.html


----------



## McLovin (9 December 2012)

Julia said:


> Prawn, is the general public actually able to buy government bonds?  I was under the impression (perhaps quite incorrectly) that they're not available at a retail level.
> 
> Is there an inflation adjusted product such as McLovin describes?




Yes and yes. The RBA has a retail facility for buying small parcels of government securities. Per craft's post earlier in this thread there is a inflation adjusted bond available in Australia.

http://www.rba.gov.au/fin-services/bond-facility/


----------



## Julia (9 December 2012)

Thanks, prawn and McLovin.  The yield is hardly tempting.


----------



## sydboy007 (4 January 2013)

I find the fixed interest space in Australia nearly third world.  We are so far behind the US and Europe in this.

As a retail investor it's VERY hard to buy quality corporate debt.  I don't consider many of the hybrids listed on the ASX to be of decent quality - a lot can withhold interest payments, and many are no cumulative so any missed interest payment is lost to the investor.  Quite a few have gone past their first call date and lost a lot of value, or become perpetual and lost a lot of value.

I wish there were more listed companies like AKY.  They have bought into higher yielding corporate debt and offer a quite tasty 6% fully franked dividend.  Only prob is they are small and rarely traded.  For my SMSF it's a perfect fit.

I would argue Govts focus on borrowers because they are usually younger with families, and they tend to be more linked into pressure groups that Govts take notice of.


----------

