Index Linking For Dummies...

JamesU

Consumerist wrote: »

I make that about 3% per year average inflation plus around 1% interest, to give about 4% pa tax-free return overall. Although the fixed interest does vary, I think that gives a fair representation of the past 20 years.

The big question now, of course, is what level of inflation we can expect in the short term while we climb out of the economic mess we're in.

Place your bets, ladies and gentlemen.

Yes, pretty good ball-park. You have to make various assumptions to do things over this time-frame, and factor in compound interest along the way. Attempted in the link below over 12 years between Feb 1998 - Feb 2010 and came up with approx 3.94% compounded.

JamesU

http://forums.moneysavingexpert.com/showthread.html?t=2382861&postcount10

Consumerist

JamesU wrote: »

. . . Attempted in the link below over 12 years between Feb 2008 - Feb 2010 and came up with approx 3.94% compounded.

Isn't that only 2 years ?

JamesU

Consumerist wrote: »

Isn't that only 2 years ?

No, it is 12 years. Have just corrected it!

JamesU

Joey122

JamesU wrote: »

I make that about 3% per year average inflation plus around 1% interest, to give about 4% pa tax-free return overall.

JamesU

So we all expect RPI to be about 3% - Given that the IR rate would be 4% (RPI + 1%) tax free I really cant see why people do not buy these...

I personally dont have these which is a shames as I am earning 3% @ Citi and pay 20% tax....

Why would someone (who does not have a view on inflation) NOT get these?

JamesU

Joey122 wrote: »

So we all expect RPI to be about 3% - Given that the IR rate would be 4% (RPI + 1%) tax free I really cant see why people do not buy these...

I personally dont have these which is a shames as I am earning 3% @ Citi and pay 20% tax....

Why would someone (who does not have a view on inflation) NOT get these?

Joey122, I am not sure how you managed to cut and paste post 45 above but this is not my original posting (see posts above) and please note I am not suggesting you can expect a future return of 4% if you buy index linked certificates right now.

If you buy index linked certificates, there is no guarantee that you will receive 4% interest after 12 months.

Just because returns were 3-4% previously, and as high as 5.4% recently, this does not mean they will be between 3-4%, in the future. The returns could be lower and they could be higher. Certainly up until July of this year, and possibly through to November, the rates might be higher than usual, but these returns are for investments made 12 months ago during a period of deflation, and are not the rates to expect if you are investing right now.

Finally I do not know if %RPI will be around an average of 3%. Any economic forecasts predicting an average %RPI of 3% in the next year or so are just that i.e. economic forecasts. They are difficult to produce, are normally not too far off the mark, but have to be taken with a pinch of salt. At this point in time, given the unprecedented economic circumstances and the current political situation, in my personal opinion, these forecasts should not be relied upon, and should be taken with a glass of whisky.


JamesU
[FONT=&quot]


[/FONT]

StevieJ

JamesU wrote: »

Just because returns were 3-4% previously, and as high as 5.4% recently, this does not mean they will be between 3-4%, in the future. The returns could be lower and they could be higher. Certainly up until July of this year, and possibly through to November, the rates might be higher than usual, but these returns are for investments made 12 months ago during a period of deflation, and are not the rates to expect if you are investing right now.

What has the fact we were in a period of deflation when a cert was taken out got to do with anything?

Consumerist

StevieJ wrote: »

What has the fact we were in a period of deflation when a cert was taken out got to do with anything?

It has much the same significance as investing in a share whose price has reached a temporary trough. Your intention would then be to sell when the price hits a temporary peak so that you get maximum gain from the price change.

Buy at the bottom, sell at the top - a standard investment mantra.

StevieJ

Consumerist wrote: »

It has much the same significance as investing in a share whose price has reached a temporary trough. Your intention would then be to sell when the price hits a temporary peak so that you get maximum gain from the price change.

Buy at the bottom, sell at the top - a standard investment mantra.

Sorry that doesn't make sense when we are discussing RPI, you will be a long time waiting for that 20% correction to the RPI table, something tells me you have the wrong of the stick here

Consumerist

StevieJ wrote: »

Sorry that doesn't make sense . . .

Sorry you can't make sense of it but RPI has ups and downs just like share prices do, albeit less marked.

Anything which has ups and downs will also have peaks and troughs.

Quite simple really.

StevieJ

Consumerist wrote: »

Sorry you can't make sense of it but RPI has ups and downs just like share prices do, albeit less marked.

Anything which has ups and downs will also have peaks and troughs.

Quite simple really.

But the RPI table generally doesn't have ups and downs (apart from a very,very rare short period last year), the RPI index nearly always increases, anyway the fact that we may have had a short period of deflation doesn't mean that the index is likely to jump more than if we had a period of high inflation in fact probably the opposite (as Japan have found).