Interest Rates

[VSntchr]

Agreed. The blanket statement "savers dependent on fixed interest have been poorly advised for decades" has so many things wrong with it... Just because fixed interest may not deliver much in the way of returns, it at least has the guarantee (if it's a term deposit with a well-capitalized institution) that you can draw down on the principal amount, and that amount is not at risk.

I couldn't think of anything more problematic than a retiree following this advice and dumping all their savings into bank shares (or any other 'high-yield' shares) and risk their livelihood for slightly larger returns.

Most important rule: Preservation of capital.

Also, if fixed interest is giving returns of 10% but inflation is 8%, they would be happy.
If fixed interest is giving returns of 4% but inflation is 2%, they would NOT be happy.

Its frustratingly simple, but alot of the population think this way..at least thats what Ive come across...

 

[white_goodman]

Also, if fixed interest is giving returns of 10% but inflation is 8%, they would be happy.
If fixed interest is giving returns of 4% but inflation is 2%, they would NOT be happy.

Its frustratingly simple, but alot of the population think this way..at least thats what Ive come across...

there is a reason for this and they are in part mostly right to feel happy in first scenario... from my market monetarist/NGDP macro school....

People take out loans/mortgages in NOMINAL amounts, its not a real value loan

www.themoneyillusion.com for all your NGDP targeting needs..

 

[Klogg]

Just wondering what to do with my cash ATM. I see a very long period of low interest rates around the globe and my cash will be chewed away by inflation. It is forcing people to take risks who otherwise wouldn't. I don't want to buy bank or telstra shares because I feel i think they will level off soon, and wont be worth the risk for a 5 or 6% yeild. What to do ?

Well, even in an interest-bearing account around 4%, you're not losing money to inflation. In fact, you're gaining about 1-1.5% over inflation per year (gross - the net amount would depend on your marginal tax rate).

There are the following options though:
- Government bonds
- Corporate notes (fixed, floating and convertible)
- Equities
- A house
- Other derivative products

If it were me and I was reluctant to buy equities but still worried about inflation, I'd simply go for the term deposit/interest bearing account.
It's very hard to justify corporate notes ATM, unless there's a big upside upon conversion.

But, as with all things, get professional advice.

 

[Julia]

Most important rule: Preservation of capital.

Agree absolutely. It's often said that this applies only to those approaching or already in retirement.
I've never understood why. No matter what your stage in life, surely you're going to primarily focus on preserving existing capital.

 

[Klogg]

Agree absolutely. It's often said that this applies only to those approaching or already in retirement.
I've never understood why. No matter what your stage in life, surely you're going to primarily focus on preserving existing capital.

Even the best of the best agree (I could fish up a few Munger/Buffett quotes on this) - the easiest way to make money is to avoid mistakes, rather than make amazing calls. Therefore, you only go in when you're sure... Until then, chill on the sidelines and look for the right opportunity.

 

[tinhat]

Not necessarily. I don't regard my term deposits earning 8% as being any more risky than the funds at call at a bit under 5%.

Only 8%. Depending on when you made those term deposits that may have been quite a low return compared to the alternatives. As you may recall I was posting on these fora a couple of years ago about the compelling dividend yields on offer from shares in the major banks. A couple of examples. WBC shares purchased Nov 2010 yielding 12% including franking credits this financial year plus 51% unrealised capital gain. ANZ shares purchased Aug 2011 yielding 11% including franking credits this FY plus 57% unrealised capital gain.

8% is not a bad return (especially compared to what is currently available) but it is a low return compared to the performance of bank shares over the past couple of years. I'm not making any comment about your personal situation as obviously I don't know what it is. I'm just pointing out that my argument is still valid when comparing your term deposit rate to the alternative returns on bank shares over the past couple of years.

 

[Uncle Festivus]

Well that's the real purpose of a central bank then - to make cash so disliked it's either gotta be spent or put into things that are riskier ie stocks? It doesn't necessarily mean stocks, even banks, are better but it's all that's left? Not many are talking about the fact that rates are extra low because of a good reason - the economy stinks. And that's going to hit banks hard eventually as well? The question is then timing when to exit....into boring cash:frown:

 

[Klogg]

8% is not a bad return (especially compared to what is currently available) but it is a low return compared to the performance of bank shares over the past couple of years.

This is of little comfort if you're of the belief that regulatory requirements, especially around housing, are not adequate.
Not that it's the most likely scenario, but should our housing market cop a US style beat-down on prices, bank shares will go down with it. Term deposits will stay.

(I'm not bearish on everything BTW, I'm 60% in equities ATM)

 

[inq]

This is of little comfort if you're of the belief that regulatory requirements, especially around housing, are not adequate.
Not that it's the most likely scenario, but should our housing market cop a US style beat-down on prices, bank shares will go down with it. Term deposits will stay.

(I'm not bearish on everything BTW, I'm 60% in equities ATM)

The banks haven't suffered too bad considering the significant falls in the property market of late. (10-40% drops in some areas). Not as bad as US, but for the most part bad debt has been slowly removed where possible during the GFC.

 

[Julia]

Only 8%. Depending on when you made those term deposits that may have been quite a low return compared to the alternatives.

My comment was in response to your suggestion that returns on bank deposits are low because "low risk = low returns". I was attempting to point out that imo the risk on my bank deposits was no different now at call earning about half the interest of the term deposit. I could also have noted the minimal yield offered by some widely held companies, eg BHP et al. 8% for no risk seems OK to me.

As you may recall I was posting on these fora a couple of years ago about the compelling dividend yields on offer from shares in the major banks.

Sorry. No, I don't recall. Don't recall what various posters have said a week ago in most instances.

A couple of examples. WBC shares purchased Nov 2010 yielding 12% including franking credits this financial year plus 51% unrealised capital gain. ANZ shares purchased Aug 2011 yielding 11% including franking credits this FY plus 57% unrealised capital gain.

Yes, they were good. The returns on the banks, however, didn't represent the market as a whole.

8% is not a bad return (especially compared to what is currently available) but it is a low return compared to the performance of bank shares over the past couple of years. I'm not making any comment about your personal situation as obviously I don't know what it is.

Obviously your recall of my posts over the last couple of years is as minimal as mine of yours,)) because I've made it pretty clear that my focus is these days on capital preservation and minimal risk. I spent many years taking some risks, 90% of which paid off well, always with a carefully calculated target of accumulated capital, and the plan that I'd then opt for the peace of mind of a low risk environment. That target achieved quite a few years ago, I'm happy with not worrying about the potential of the market tanking if I don't bother to follow it for a week.

Well that's the real purpose of a central bank then - to make cash so disliked it's either gotta be spent or put into things that are riskier ie stocks? It doesn't necessarily mean stocks, even banks, are better but it's all that's left? Not many are talking about the fact that rates are extra low because of a good reason - the economy stinks. And that's going to hit banks hard eventually as well? The question is then timing when to exit....into boring cash:frown:

+1.

This is of little comfort if you're of the belief that regulatory requirements, especially around housing, are not adequate.
Not that it's the most likely scenario, but should our housing market cop a US style beat-down on prices, bank shares will go down with it. Term deposits will stay.

Exactly. And the number of people adversely affected by the GFC indicates few have much idea about how to jump off a trend when it reverses.
I do have some shares also.

 

[tinhat]

My comment was in response to your suggestion that returns on bank deposits are low because "low risk = low returns". I was attempting to point out that imo the risk on my bank deposits was no different now at call earning about half the interest of the term deposit. I could also have noted the minimal yield offered by some widely held companies, eg BHP et al. 8% for no risk seems OK to me.

Out of interest, when did you take out the term deposit that is paying 8% and for what term?

 

[FlyingFox]

Out of interest, when did you take out the term deposit that is paying 8% and for what term?

I'll take a stab, would've been 2008 for 5 yrs??

 

[Julia]

Out of interest, when did you take out the term deposit that is paying 8% and for what term?

I'll take a stab, would've been 2008 for 5 yrs??

Wrong, actually.

Look, fellas. How about you put up a full statement of all your financial decisions over X years?
I have already disclosed more than most people about my personal affairs, and frankly don't feel obliged to answer questions on a public forum that are entirely my business.

 

[MrBurns]

Wrong, actually.

Look, fellas. How about you put up a full statement of all your financial decisions over X years?
I have already disclosed more than most people about my personal affairs, and frankly don't feel obliged to answer questions on a public forum that are entirely my business.

Fair enough Julia, just leave it at that.

 

[FlyingFox]

Wrong, actually.

Look, fellas. How about you put up a full statement of all your financial decisions over X years?
I have already disclosed more than most people about my personal affairs, and frankly don't feel obliged to answer questions on a public forum that are entirely my business.

Apologies Julia, didn't mean to offend.

 

[ROE]

Get high get junkies -
Some junk and hybrid bonds with careful research can delivery very good rate
With a possibility of capital appreciation...

I got some westpac hybrid now trading close to 102 on face value of $100 paying 3.2% over 90 days bank bill...

 

[tinhat]

Wrong, actually.

Look, fellas. How about you put up a full statement of all your financial decisions over X years?
I have already disclosed more than most people about my personal affairs, and frankly don't feel obliged to answer questions on a public forum that are entirely my business.

God bless you. I've been quite interested to read most of what you have had to say. I don't know anyone here from a bar of soap. Only here to learn from others. I've been here for about four years. I've learnt so much - so much more to learn. But not from you obviously. I'm not here for titillation. Only to learn.

 

[Julia]

Apologies Julia, didn't mean to offend.

Thanks Flying Fox. No offence taken.

 

[Julia]

God bless you. I've been quite interested to read most of what you have had to say. I don't know anyone here from a bar of soap. Only here to learn from others. I've been here for about four years. I've learnt so much - so much more to learn. But not from you obviously. I'm not here for titillation. Only to learn.

:headshake

 

[sydboy007]

I'd argue better to invest in either ILBs of some sort. From what I can see there's still the opportunity to lock in at over 3.5% + CPI for extended periods - up to 2030.

Considering a lot of balanced super funds target cpi + 3.5% over the long term, seems t be an ILB provides a similar return with little to no volatility in the underlying assets.

I'm really hoping that over the next few years we'll start to see decent corporate bonds listing on the ASX. Less hybrids crap and more traditional fixed / floating rate / inflation bonds that provide income over the long term.