Market Corrections: am I missing something?

soren_lorensen said:

Most of the major banks will offer these kind of deals on PPOR mortgages, typically you will pay 3 or 4 hundred dollars a year to get this. They tend to be called 'Professional packages'

ANZ call theirs Breakfree, you get 0.7% off std variable and 100% offset & up to five loans (IP & LOC etc) for no extra costs, so if you have a mortgage any cash in the offset is effectively earning you money at lenders interest rate and its not taxed at the moment at typical 40% tax rate, its worth about 7 or 8% pa

NAB do a similar deal, i think this one is called 'Choice'

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I think to pay for flexability is worth it, like I pay a premium of 0.16% over the homeloan rate for a line of credit so you can whack cash in and out and your only paying for what your using. And when you concider after tax it's only .0096% a tad under a K per mill. And it pays for itself because if you see a bargain and you're a cash buyer and can act pretty quickly. The last thing you want is too have to rush arround organising money if you see something shares or real estate that you want to snap up fast. Also when you have spare cash it's parked at an effective rate as you say.

Cheers

Gary

snabbu said:

If I put my money in my cash account I think we were getting 3.5%, I suppose today we are getting 3.75% after the rise.
I want my money to be where it is earning the highest yield after tax, but take into account the different level of risk investing in a share rather than cash.

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I have just checked my trading account with ComSec the interest is

0 - 5,000 0.00%
5,000 - 10,000 0.25%
10,000 - 20,000 0.25%
20,000 - 50,000 0.25%
50,000 - 100,000 0.25%
100,000 and more 0.25%

In the investment account joined to the above account with ComSec the interest payable is

0 - 5,000 4.00%
5,000 - 10,000 4.00%
10,000 - 20,000 4.00%
20,000 - 50,000 4.00%
50,000 - 100,000 4.00%
100,000 and more 4.00%

Consider this
Bank interest at say 3.5% for term deposit
Tax payable on interest at 30%
Leaves net return after tax 2.8%
Inflation at 2%
Net wealth increase to owner = just 0.8% you may as well just spend it and be happy rather then store wealth for such a pathetic return....

Using the rule of 72 thats going to take you 90 years to double your money..... You wont be rich but your kids might be, or maybe your grand kids.....

Alternatively invest in JBH, WOW or a high ROE stock
Take JBH as an example Several of the valuers have it pegged at around $23.50 with a required rate of return at 13%.... Its currently priced at around $21
Assuming JBH meets analyst expectations and theres no real reasons not to at present thats going to provide a return of 14% p.a.
1.5% of that will be returned in full franked tax free dividend
12.5% in share price growth, which will be locked in with CGT payable on sales.... But if you hold the stock long enough eventually they should abate thier growth program and start returning capital to share holders via dividends or buy backs....

At that rate the longer they hold your money the better.....

Now theres many stocks like this and using the rule of 72 on stock like these you should double your money every 6 years........ after deducting 2% for inflation

Food for thought and comment........

This is an over simplified explanation which in no way indicates you should buy JBH or any other stock without independent advice.... ITs just an example at one point in time that is used to highlight why cash can be such a pathetic investment vehicle , especially in the long term.

condog said:

Consider this
Bank interest at say 3.5% for term deposit

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Plenty of much better rates than that available.
Investments held in Super are only taxed at 15%, or nil if in pension phase.

ITs just an example at one point in time that is used to highlight why cash can be such a pathetic investment vehicle , especially in the long term.

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Completely agree, but there's sense in moving to cash temporarily to protect capital during a downturn. Then when a recovery begins to happen, that cash will allow you to buy more shares than you previously held, with consequently greater dividend return.

The imperfection of this strategy is obviously the inability most of us have to time the market perfectly so some loss of profit is pretty inevitable.

Condog,

Assuming

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This one word is the weakness of your approach. Money in the bank has no assumptions with it, it is as effectively risk free as you can get.

The original poster was after an effective 'risk free' return by using options, taking some analyst's assumptions on stocks is not in the same ball bark.

brty

Julia said:

Plenty of much better rates than that available.
Investments held in Super are only taxed at 15%, or nil if in pension phase.

Completely agree, but there's sense in moving to cash temporarily to protect capital during a downturn. Then when a recovery begins to happen, that cash will allow you to buy more shares than you previously held, with consequently greater dividend return.

.

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This was one the points of this excercise, to get to a point where you said
at this price comparing a share to a cash return there isn't enough margin for the risk involved to stay in the share. To move out of the share into cash and wait until the price was more reasonable go back in and increase your holding.

I addition if you are taking a break and won't be monitoring your shares for a while, some of them might be better in cash, some may be better protected with hedging.

Cheers

Gary

snabbu, Thanks for the thought and spreadsheet. I think another issue to consider is that dividends can be very loosly related to profits which in turn can be very loosly related to share price. Take for example AAC their p/e is over 100 and I think they don't pay a dividend. But they own heaps of land. As long as they generate the cash to pay off that land their shreholders will do very well eventually. Compare to TLS who have taken out loans to pay dividends. This is almost a Bernie Madoff approach.

I am not saying TLS is a bad stock - it has a very high yield. Just that there is no way to simplify these matters so easily. Investment banks try to do it all the time and they often don't get very far. I suggest you look at profits or even cash flow generation rather than divdiends to work out yields.