# 6.51% return is pretty good today right?



## Tyler Durden (3 July 2011)

I'm close to setting up a Ubank account to get the 6.51% interest rate (currently with ING for 5%) and I can't seem to get over how good of a deal this is (or maybe I'm just a newbie/ignorant).

Given the state of the markets today, and the fact that if you were to invest *today* you'd be hard pressed to find a dividend yield of around 6.5%, wouldn't Ubank be the most attractive prospect??

I mean, this is 6.51% *risk free!* Yeah I know how taxes and inflation cuts into that, but again, given the possibility of losing your capital in the markets today, 6.51% is pretty damn good right?

Right?!?!? Or am I totally off the mark here, and investing in the market today (and I'm speaking generally) is a no-brainer option better than Ubank?


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## McLovin (3 July 2011)

The return on shares is comprised of capital + income, as opposed to a bank account which is only income. Then there is the tax implications of interest v fully franked dividends.

It's still a good rate though. It wasn't long ago that getting an at call interest rate above the cash rate was virtually unheard of.


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## Starcraftmazter (3 July 2011)

After inflation and tax it usually amounts to less than 1%.

Shares can be a lot more tax effective if held for a year or more (and they actually rise in value : )

What it is good is for preserving the value of your money without (much) risk.

As the cost of food and energy rises much quicker than inflation, even though the value of your money would be preserved, that is not necessarily true for it's purchasing power.


Bit disappointing really.


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## Calliope (3 July 2011)

Starcraftmazter said:


> After inflation and tax it usually amounts to less than 1%.
> What it is good is for preserving the value of your money without (much) risk.




Tyler won't make any money out of this, but he won't lose any either. 

Reserve Bank board member Warwick McGibbon says the global economy is a "slow-motion train wreck." Perhaps Tyler's flight to safety is a wise move before it speeds up.


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## tothemax6 (3 July 2011)

Calliope said:


> Tyler won't make any money out of this, but he won't lose any either.



Exactly how I see it. Interest is not there to make you money, government created inflation and tax ensure that. However, _in Australia_, interest currently protects your money from inflation.


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## Intrinsic Value (3 July 2011)

tothemax6 said:


> Exactly how I see it. Interest is not there to make you money, government created inflation and tax ensure that. However, _in Australia_, interest currently protects your money from inflation.




There are still good share investments out there if you do your homework.

Long term I believe if you invest in good businesses you will do much better than 6.51 percent. 

But if you aren't prepared to do your homework and take an active role in your investments I think you would be better of doing what you are doing.

I have certainly done much much better with my investments but the majority of my gains were from shares I bought last year which I sold off recently and have been slowly buying back in to companies that look good to me and are trading at significant MOS.


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## Julia (3 July 2011)

Starcraftmazter said:


> Shares can be a lot more tax effective if held for a year or more (and they actually rise in value : )



No guarantee of them rising in value.  In the present and probably forthcoming global mess, they're more likely to fall in value, unless you have the skills to avoid this.
(viz Warwick McKibbin's remarks about the slowly unfolding train wreck.)

There's a lot to be said, imo, for the peace of mind cash offers in uncertain times.


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## tothemax6 (3 July 2011)

Intrinsic Value said:


> There are still good share investments out there if you do your homework.
> Long term I believe if you invest in good businesses you will do much better than 6.51 percent.
> But if you aren't prepared to do your homework and take an active role in your investments I think you would be better of doing what you are doing.
> I have certainly done much much better with my investments but the majority of my gains were from shares I bought last year which I sold off recently and have been slowly buying back in to companies that look good to me and are trading at significant MOS.



Agreed, I just think there is more bad news to come. US is not going to recover, and we are still waiting for the inevitable crash in the Chinese fixed asset market.


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## tech/a (3 July 2011)

There will ALWAYS be uncertain times.
And when you have no cash-flow as a retiree or all of your income is committed the safety of interest bearing accounts is attractive.

BUT
Adversity begets OPPORTUNITY.
Seriously everyone MUST LEARN how to control RISK if supplementing or growing your wealth is to occur.

Mediocrity will breed mediocre result.
Over 70 % of the world population is living in poverty and of the rest 97 % live in mediocrity.

Of those above very few have the OPORTUNITY you and I have---- we live in a developed country. What a tragedy in ones life to settle for mediocrity and not take advantage of opportunity when we HAVE the chances few could even dream of!!!!!

Don't let this life slide by


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## Logique (3 July 2011)

Tyler Durden said:


> I'm close to setting up a Ubank account to get the 6.51% interest rate (currently with ING for 5%) and I can't seem to get over how good of a deal this is (or maybe I'm just a newbie/ignorant)...



Isn't that rate only if you set up a regular savings plan ($200/mth), otherwise it defaults to 6.01%? In which case you can do better. It's right there on Ubank's website. Not being critical, just trying to help.


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## Tyler Durden (3 July 2011)

Starcraftmazter said:


> Shares can be a lot more tax effective if held for a year or more (and they actually rise in value : )




I'm not so sure about this. I bought TAH pre-GFC at $15. Then post GFC it floated around $7. Now after the de-merger, it's around $3.

I usually tell people - what goes up, must come down 



tothemax6 said:


> Exactly how I see it. Interest is not there to make you money, government created inflation and tax ensure that. *However, in Australia, interest currently protects your money from inflation.*




I'm not sure I understand the bolded part, care to explain?



tech/a said:


> There will ALWAYS be uncertain times.
> And when you have no cash-flow as a retiree or all of your income is committed the safety of interest bearing accounts is attractive.
> 
> BUT
> ...




I know, but I try to keep an open perspective about things. I'm sure out of 10 people who said that, a few would've failed and thought it would've been better to just sit tight.



Logique said:


> Isn't that rate only if you set up a regular savings plan ($200/mth), otherwise it defaults to 6.01%? In which case you can do better. It's right there on Ubank's website. Not being critical, just trying to help.




Yeah, I've got no problems setting up the plan.


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## tech/a (3 July 2011)

Yeh your absolutely right there are 1000s of people who have tried and failed I was one.
But those who have tried again and succeeded make the few % who have given it their best shot.
It's those who are frozen with fear of failure who are doomed to mediocrity.

Enough said


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## So_Cynical (3 July 2011)

Tyler Durden said:


> I'm close to setting up a Ubank account to get the 6.51% interest rate (currently with ING for 5%) and I can't seem to get over how good of a deal this is (or maybe I'm just a newbie/ignorant).
> 
> Given the state of the markets today, and the fact that if you were to invest *today** you'd be hard pressed to find a dividend yield of around 6.5%, *




Just of the top of my head...and straight outa my portfolio.


IMFG yielding around 9%
APN 9.1%
CFX 7%
ALZ 7.4%
 
Jezzzzz even HDF is yielding 6.3% with lots of upside and what 200 million in the bank.

Yep really hard to find any decent yield in this market.


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## Wysiwyg (3 July 2011)

So_Cynical said:


> Just of the top of my head...and straight outa my portfolio.
> 
> APN 9.1%



Gee whiz.  Fantastic if you like to sell at a loss or worse, hold as the price depreciates every week.


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## Tyler Durden (3 July 2011)

So_Cynical said:


> Just of the top of my head...and straight outa my portfolio.
> 
> 
> IMFG yielding around 9%
> ...




Wow, all those have fallen fairly significantly. I can't see how getting into those would be equal to or better than Ubank at 6.51%.


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## So_Cynical (3 July 2011)

Wysiwyg said:


> Gee whiz.  Fantastic if you like to sell at a loss or worse, hold as the price depreciates every week.




Yield is what it is...and we are talking about the yield at current SP, fair chance the yield will hold too.


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## Tyler Durden (3 July 2011)

So_Cynical said:


> Yield is what it is...and we are talking about the yield at current SP, fair chance the yield will hold too.




That's true, but I also referred to the degree of risk. Maybe it's a game of pick your poison? Keep capital and earn 6.51% but open to inflation and tax, or lose capital and earn 9%...


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## Julia (3 July 2011)

So_Cynical said:


> Just of the top of my head...and straight outa my portfolio.
> 
> 
> IMFG yielding around 9%
> ...



I can't believe you're ignoring what is happening with the capital!!  This is the most important part imo, i.e. protecting your capital.

Just taking APN as an example, Etrade has the yield at 8.5% with only 28% franking.
Presumably you are grossing up the yield when you quote 9.1%.

If we assume a capital investment about a year ago of $10,000 when the SP was around $2.20, and if we take the last close at $1.30, that's a reduction in your capital ofabout $4000!!
Add to that your dividend of 9.1% and you are still down around $3500 for the year.

It's one of the most basic errors made to focus on yield without giving proper consideration to what's happening to the capital.

I'm sure you're smart enough to figure this out, Tyler.


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## Tyler Durden (3 July 2011)

Julia said:
			
		

> I can't believe you're ignoring what is happening with the capital!! This is the most important part imo, i.e. protecting your capital.
> 
> Just taking APN as an example, Etrade has the yield at 8.5% with only 28% franking.
> Presumably you are grossing up the yield when you quote 9.1%.
> ...


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## So_Cynical (3 July 2011)

Julia said:


> I can't believe you're ignoring what is happening with the capital!!  This is the most important part imo, i.e. protecting your capital.
> 
> Just taking APN as an example, Etrade has the yield at 8.5% with only 28% franking.
> Presumably you are grossing up the yield when you quote 9.1%.
> ...




Yeh but were are not talking about a year ago  current SP is about $1.30 the last 2 dividends add up to 12 CPS (net) so if we factor that forward we have a yield of 9.1% (approximately) from this point forward.

---------------------------

Julia the stock market is all about capitol risk...that's what is at the heart of the market, that risk has to be managed and i don't think keeping your money in the bank is a valid stock market risk minimization strategy. 



Tyler Durden said:


> Wow, all those have fallen fairly significantly. I can't see how getting into those would be equal to or better than Ubank at 6.51%.




Then perhaps you had better reassess your continued participation in the market...its simply not for everyone.

---------------------------

ill put them in a portfolio and we will see how they perform against your 6.5%


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## Julia (3 July 2011)

So_Cynical said:


> Julia the stock market is all about capitol risk...that's what is at the heart of the market, that risk has to be managed and i don't think keeping your money in the bank is a valid stock market risk minimization strategy.



We will have to disagree about the most appropriate risk minimisation strategy.
To me a risk minimisation strategy is not represented by a very substantial loss of capital, irrespective of yield which - in the case under discussion - goes nowhere near making up for that loss of capital.


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## So_Cynical (3 July 2011)

So_Cynical said:


> Just of the top of my head...and straight outa my portfolio.
> 
> 
> IMFG yielding around 9%
> ...






Tyler Durden said:


> Wow, all those have fallen fairly significantly. I can't see how getting into those would be equal to or better than Ubank at 6.51%.






So_Cynical said:


> ill put them in a portfolio and we will see how they perform against your 6.5%




Done...this should be interesting.
~


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## Intrinsic Value (3 July 2011)

tothemax6 said:


> Agreed, I just think there is more bad news to come. US is not going to recover, and we are still waiting for the inevitable crash in the Chinese fixed asset market.




Yes but even if there is a crisis or GFC mark 2 the market will eventually bounce back.

The trick is and i now i am repeating myself here is to buy good businesses when they are very cheap.

If you are absolutely convinced there is a catastrophe looming you would actually go and get your money out and bury it in the backyard because it sure wont be safe in any financial institution if there is a cataclysmic world financial meltdown.


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## Muschu (3 July 2011)

Julia said:


> We will have to disagree about the most appropriate risk minimisation strategy.
> To me a risk minimisation strategy is not represented by a very substantial loss of capital, irrespective of yield which - in the case under discussion - goes nowhere near making up for that loss of capital.




As always it is fine to disagree.  Factors of age [I'm a mere 66], risk profile, assets and previous experiences are just a few of the "mix".  

I do consider that at some point or age I will be likely to move into the "high yield - don't watch the market" phase. Yields plus franking credits should cover nursing home costs -- unless the market plummets and stays there throughout my lifetime..


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## Tightwad (3 July 2011)

The higher interest rate with UBank is just to compensate you for the slow online banking you get with this account.


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## tothemax6 (4 July 2011)

Tyler Durden said:


> I'm not sure I understand the bolded part, care to explain?



As I am sure you are aware, money is worth less each year. I would have a rough guess that this 'inflation rate' is about 5% (not 3% as they try to claim, stuff I buy like food etc is definitely not 3% more expensive than last year). And of course, you get taxed on your interest, so I would make a rough guess and say you actually get about 5% return after tax. 
5% interest - 5% inflation = 0% real return. If it were 1% interest (like say, in US or UK), you would be losing 4% a year by holding cash. Hence, since Australia's interest rate is higher than inflation, the purchasing power of your money is protected. 


Tyler Durden said:


> Wow, all those have fallen fairly significantly. I can't see how getting into those would be equal to or better than Ubank at 6.51%.



Perhaps one should look at corporate bonds (there is a 'hybrid securities' thread). Some have a ~10% interest rate, albeit with more risk (no gov guarantee, no guarantee the company will stay afloat etc). One could argue that these sit between shares and bank accounts on the risk/return scale. (Don't hold, DYOR etc)


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## Tyler Durden (4 July 2011)

tothemax6 said:


> As I am sure you are aware, money is worth less each year. I would have a rough guess that this 'inflation rate' is about 5% (not 3% as they try to claim, stuff I buy like food etc is definitely not 3% more expensive than last year). And of course, you get taxed on your interest, so I would make a rough guess and say you actually get about 5% return after tax.
> 5% interest - 5% inflation = 0% real return. If it were 1% interest (like say, in US or UK), you would be losing 4% a year by holding cash. Hence, since Australia's interest rate is higher than inflation, the purchasing power of your money is protected.
> 
> Perhaps one should look at corporate bonds (there is a 'hybrid securities' thread). Some have a ~10% interest rate, albeit with more risk (no gov guarantee, no guarantee the company will stay afloat etc). One could argue that these sit between shares and bank accounts on the risk/return scale. (Don't hold, DYOR etc)




Many thanks


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## Starcraftmazter (4 July 2011)

Julia said:


> No guarantee of them rising in value.  In the present and probably forthcoming global mess, they're more likely to fall in value, unless you have the skills to avoid this.
> (viz Warwick McKibbin's remarks about the slowly unfolding train wreck.)
> 
> There's a lot to be said, imo, for the peace of mind cash offers in uncertain times.




Fortunately we have derivatives for those sorts of predictions 



tech/a said:


> There will ALWAYS be uncertain times.
> Adversity begets OPPORTUNITY.
> Seriously everyone MUST LEARN how to control RISK if supplementing or growing your wealth is to occur.
> 
> ...




This is pretty inspiring mate, I salute you!



Tyler Durden said:


> I'm not sure I understand the bolded part, care to explain?




Let's say you have $1000 invested, and get $651 in bank interest. You lose $333 of that straight away (currently) - that is to say, your investment has lost that much of it's purchasing power in that last year because of inflation, so that should not be counted as an actual return, and if you wanted to spend your returns for instance, you would need to reinvest that portion at least to maintain the value of your investment. And this is just inflation, CPI is higher (ie. rising cost of food and energy), and housing in Australia is just crazy.

But after that there is another $300 or $450 in tax (depending on your tax rate). So what is left is likely to be less than $100 of actual returns - depending on your tax bracket.


Overall, in my view, if you want to even maintain the value of your money in real terms, it will take a reasonable significant amount of effort in the stockmarket.


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## Tyler Durden (4 July 2011)

It can actually be quite scary when one thinks about it. It seems that merely to 'keep' your own money at the same 'level', 6.51% is barely (or perhaps not) enough. Hence to actually go beyond this, one needs to risk his or her own money.


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## Starcraftmazter (4 July 2011)

Tyler Durden said:


> It can actually be quite scary when one thinks about it. It seems that merely to 'keep' your own money at the same 'level', 6.51% is barely (or perhaps not) enough. Hence to actually go beyond this, one needs to risk his or her own money.




Couldn't agree more, such is the curse of economic systems producing inflation, and the taxing of directly (and indirectly) putting money in productive parts of the economy instead of buying imported goods.

Pretty ridiculous, but what's even worse is that most people don't understand this.


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## addison (5 July 2011)

Logique said:


> Isn't that rate only if you set up a regular savings plan ($200/mth), otherwise it defaults to 6.01%? In which case you can do better. It's right there on Ubank's website. Not being critical, just trying to help.




yes, thats correct, ive got some cash in ubank im just sitting on atm and about to use some more to buy a car soon, so for this the interests really good, but as a useful account it has limitations, you cant use paypal or bpay and transfers are not instant


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## tothemax6 (5 July 2011)

addison said:


> so for this the interests really good, but as a useful account it has limitations, you cant use paypal or bpay and transfers are not instant



I guess they kind of have to do this, to make the account more 'savings-like'. If it was used more or less as a chequing account then they wouldn't be able to extend as much credit, and hence they would be unable to offer a higher interest rate.

Which begs the question, why is it that UBank offers this rate on an account that can be withdrawn _on demand_, at 6.5%, and yet 6m term deposits are at lower rates? Anyone have any insight into this?


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## Starcraftmazter (5 July 2011)

tothemax6 said:


> Which begs the question, why is it that UBank offers this rate on an account that can be withdrawn _on demand_, at 6.5%, and yet 6m term deposits are at lower rates? Anyone have any insight into this?




Marketing - a way to get customers to join the bank, you also need to deposit at least $200 a month. They are probably betting on most people using this product to actually save money and not take it out.


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## Julia (5 July 2011)

tothemax6 said:


> I guess they kind of have to do this, to make the account more 'savings-like'. If it was used more or less as a chequing account then they wouldn't be able to extend as much credit, and hence they would be unable to offer a higher interest rate.
> 
> Which begs the question, why is it that UBank offers this rate on an account that can be withdrawn _on demand_, at 6.5%, and yet 6m term deposits are at lower rates? Anyone have any insight into this?



 Banks offer various 'specials' according to their needs for funding which will vary.
At call rates are usually only offered for a few months at a time, so the bank is not committed to paying X% if soon after offering this they are able to source their funds at a cheaper rate.
In contrast if they commit to a longer term deposit period, they're bound by this and thus limited in terms of their own flexibility.

Also, the high at call rate, as has been suggested, is to attract new customers on the assumption that most people are lazy and apathetic and will forget when the offer period has concluded that those invested funds have then dropped back to around the cash rate.

The same principle applies with term deposits.  At the end of the term the bank just rolls the TD over, probably hoping you won't notice that the interest is now way less than it was!

It's not hard to maintain awareness of what are the best at call offers around and just move your money accordingly.


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