What do you class as a successful investment?

Pincher

In text books, they typically use 5% as an example for risk free rate in equations. Financial THEORY, not actual return you can get.

In the current climate, risk free rate would be more like 1%.

In China, if you had RMB (aka CNY), the five year fixed rate was 4.55%, until a few months ago. You can currently get around 3.5% for tying up your money for five years. About seven years ago, there was a period when a five year bond was paying 6.3% annual.

Currency fluctuation due to the the Mid-price thing this week means you would be down about 4.6%. Still, 4.55% over five years makes it all worthwhile.

masonic

Pincher wrote: »

In China, if you had RMB (aka CNY), the five year fixed rate was 4.55%, until a few months ago. You can currently get around 3.5% for tying up your money for five years. About seven years ago, there was a period when a five year bond was paying 6.3% annual.

Currency fluctuation due to the the Mid-price thing this week means you would be down about 4.6%. Still, 4.55% over five years makes it all worthwhile.

It is probably worth pointing out that for someone living in the UK, whose liabilities are in £, a CNY denominated account would not be considered risk free. We do see threads from time to time from people asking 'why not open an offshore account in currency X because the rates are so much better than they are here in the UK?'

Not having really explored this savings option in any great detail, I can only assume the default risk of a Chinese savings bank is likely to be somewhat different then the default risk of a typical UK Gilt or US Treasury Bond that would conventionally be regarded as 'risk free'.

Beyond default risk, there is obviously currency risk as well. As it turns out, one could have converted £10,000 into around CNY150,000 back in 2007, saved it in an offshore account at an (assumed) rate of about 5% for 5 years, ending up with a little over CNY191,400, which could have been converted back into £ at the prevailing rate to afford somewhere north of £19,100. That's an equivalent AER of nearly 14%. Not bad, eh?

However, had the exchange rate moved by an equal amount in the opposite direction, the return achieved would have been -3.2% (or a 15% loss overall).

Pincher

masonic wrote: »

Beyond default risk, there is obviously currency risk as well. As it turns out, one could have converted £10,000 into around CNY150,000 back in 2007, saved it in an offshore account at an (assumed) rate of about 5% for 5 years, ending up with a little over CNY191,400, which could have been converted back into £ at the prevailing rate to afford somewhere north of £19,100. That's an equivalent AER of nearly 14%. Not bad, eh?

Other people went to Costa Blanca, and it went pear shaped.
I went to Gubei (Shanghai) in 2005 and onwards. I am therefore quite familiar with the 15:1 becoming 10:1 exchange rate thing.
I also know exactly what five year rate I fixed at since it's displayed every time I check. There was a heartache moment when the five year rate went to 6.3%, because redeeming the five year 4.55% bond early incurs penalties.

Risk free rate is a notional base return for judging other riskier returns.
There is no signed in blood guaranteed bond. Even the UK Treasury can go belly up.

grey_gym_sock

Pincher wrote: »

Even the UK Treasury can go belly up.

it can't (for debts in sterling), because the UK is a monetary sovereign: it issues its own currency, and sterling isn't tied to the value of anything else (e.g. another currency, or gold).

though you still have inflation risk.

Pincher

grey_gym_sock wrote: »

it can't (for debts in sterling), because the UK is a monetary sovereign: it issues its own currency, and sterling isn't tied to the value of anything else (e.g. another currency, or gold).

So we needn't have worried about Greece at all.


Argentina, Iceland, UK in the 1970s, Cyprus.


The hyper inflation in Weimar Republic was just a temporary inflation risk.


Not that it's important in Europe, the reason that Taiwan has New Taiwan Dollar, is because the old one sank under hyper inflation. The Chinese money issued by the Nationalists were obviously worthless when the Communists took over.


Money is an illusion, electronic ones doubly so.

grey_gym_sock

Pincher wrote: »

So we needn't have worried about Greece at all.

greece is not a monetary sovereign, because they're using the euro. my whole argument is about countries which have their own currency, and allow its value to float.

Argentina, Iceland, UK in the 1970s, Cyprus.

argentina borrowed in US dollars, and was pegging its currency to the US dollar. and then the peg snapped. the problem was borrowing in a currency they didn't control.

iceland had private banks, which operated internationally, on a scale far larger than the icelandic economy, going bust. not a problem with government debt. the icelandic government did initially make an implausible promise to pick up the tab for the banks, and then backtracked (after an impressive democratic uprising in iceland - perhaps we could learn from them!).

the UK in the 1970s was not in danger of going bust. the gold standard had just fallen apart in c. 1971 - which is actually what made the UK a monetary sovereign - and i suspect ppl were a bit too nervous about the new concept of having a floating exchange rate. in fact, i think the UK did borrow in bit in US dollars from the IMF at the time - a debatable move, which made it not fully a monetary sovereign again.

cyrpus is in the euro, so not a monetary sovereign, as already covered. and again, it was private banks going bust, not the government.

The hyper inflation in Weimar Republic was just a temporary inflation risk.

the main problem germany had was that they were trying to pay reparations for world war I in gold (or in foreign currencies which were themselves tied to gold). in other words, they had debts not in their own currency. 1 of the things they tried was printing marks and exchanging them for hard currencies.

Not that it's important in Europe, the reason that Taiwan has New Taiwan Dollar, is because the old one sank under hyper inflation. The Chinese money issued by the Nationalists were obviously worthless when the Communists took over.

i'm not familiar with the taiwan example. i could google it, but ...

chinese money brings up the point that you should consider political risk - not which party might win an election, but that the entire system of government might be overturned. fair enough, but i would confidently rate the UK very low risk in this respect. (and of course, if our system of government were overturned, you probably couldn't rely on the FSCS, either.)

Money is an illusion, electronic ones doubly so.

absolutely. and more practically: if you happen to be an independent country, make sure to have your own currency, and don't take on debts in any other currency. and don't make unconditional promises to bail out private banks.

Pincher

Well, I hope you made a killing on Greek Bonds.


I was looking forward to a fire sale, and Disney taking over the country, and building a Cradle of Civilisation Mega Tourist Land.


At Thermopylae, King Leonidas vs. God King Xerxes, one show a day, two on cruise ship days.


US$100 to run the Marathon, $20 extra for health insurance.


Amphitheatres that do Greek plays in English, and Chinese.


Donald Trump? I think he can smell a bargain 10,000 miles away.