Crystal ball time - interest rates

mollycat

 AnotherJoe said:

Yeh, Ive done the maths* this morning and its £3k over. I'll risk it for simplicity.

* one addition sum really

Completely off topic and treading into the waters of pedancy and irrelevance; I have been aware of the modern adoption of maths, (math for our North American friends), to include the 2 subjects I was taught at school, Mathematics and Arithmetic.
Arithmetic was simple counting; division, multiplication, subtraction, addition and the deriivatives from these functions....percentages ect. 
Mathematics, ("maths/math"), was Algeba and Geometry and more complex calculations such as simultaneous equations etc.
For some reason "doing the math" always puts me in mind of some nutty professor on old BBC2 Open University rather than the modern equivalent of some bloke working out what change he will get off a £20 note for his 2 pints of Stella (other overpriced beers are available) down the pub.
No offence Joe, I'm probably just really bored, or going mad!  FWIW I also have an opinion on the modern misusage of the term "barter"....(don't get me started).
Back on topic I would say 2 years rather than 3; the difference is so small anyway.
Good luck.   

RG2015

@mollycat, I agree and in the same vein here is my all time bugbear.

You cannot times a number by another number!

Last night on the BBC News, a BBC reporter said that you would have to times that number by at least ten to get a more accurate answer.

mollycat

Of course, you could argue that Arithmetic is a part of Mathematics, in the way that cube can be cuboid but cuboid can never be cube, (The mantra of my maths teacher Mr Mazumba. He also said anyone could be PM in the future, but not if they didn't wear a tie).  Nevertheless, my contention that in the 60's and 70's they were taught as 2 seperate subjects stands.
"Do the math(s)",is an americanism that has crept in to our vocabularly in recent years. Happy to be proved wrong but I dion't think you would have heard that expression in the UK 30 years ago.

RG2015

AnotherJoe said:

I've got about £60k i dont need for 3 years. But will need it then.

In the past that was easy,  put it in a  3 year fixed account. Job done.

However 3 year accounts now dont seem to pay any better than 2.

So the crystal ball Q is, take out a 2 year fixed and then a 1 year at what then will hopefully be higher rates, but may not be. Or just a 3 year now?

I'm maxxed on PB's and this years ISA. I will pay tax on the interest.

First world problem i know.

I spent decades budgeting/forecasting for a large UK corporate (within a multinational affiliation) and often had to forecast rates in the future. The truth then was that only Mystic Meg would predict the future. However, there needs to be a plan so that any change can be incorporated as a variation, so interest rates had to be forecast.

My FD advised me to ask the bank and RBS obliged by including their projections by quarter for the next five years. Well, we know how well it worked out for them.

The market is usually the best bet and interest rates now and for the next five years are there in the existing available rates. Unfortunately, there is nobody alive that has any experience of the current climate. Without this, nobody has a better chance of than Meg of getting it right.

Today's best rates for fixed savers are as follows. 
1 year - 1.40%
2 year - 1.50%
3 year - 1.55%
4 year - 1.65%
5 year - 1.80%

In my opinion, this is all academic. The real issue is your first statement; "I've got about £60k i dont need for 3 years. But will need it then". I am not sure that anyone can be that sure of the next 3 years. The furthest forward I am going now is 1 year and even then only relatively small amounts.

PS I started senior school in 1967 and we were the first year group to study "New Maths". Algebra, geometry and arithmetic were not separated out and things like sets x,y graphs, vectors and binary numbers were added in. It drove my Dad mad "I don't know what it is but it's not Mathematics!"

With apologies for the diversion. Perhaps we should take this topic to the (socially distant) Money Savers Arms.

schiff

mollycat said:

Of course, you could argue that Arithmetic is a part of Mathematics, in the way that cube can be cuboid but cuboid can never be cube, (The mantra of my maths teacher Mr Mazumba. He also said anyone could be PM in the future, but not if they didn't wear a tie).  Nevertheless, my contention that in the 60's and 70's they were taught as 2 seperate subjects stands.
"Do the math(s)",is an americanism that has crept in to our vocabularly in recent years. Happy to be proved wrong but I dion't think you would have heard that expression in the UK 30 years ago.

....separate... (from one pedant to another) 

Mr.Saver

Personally I'm a risk taker. I'd construct the problem this way:
I have 60k to save or invest or do a little bit of both.
At the end of 3 years, I have to spend the 60k, and I get to keep anything left of it, be it the interest, dividends or capital gains.

Which means I need to guarantee that in the worst case scenario that I have 60k after 3 years, and I'd like to have a good chance to do better than a 3 years fixed term savings account. To achieve that, I will use a fixed rate savings account and a global developed world equities index tracker.

My assumptions are:
* Global developed world equities can lose up to 20% of their value in 3 years
* Global developed world equities has a median compound annual growth rate (CAGR) of 6.5% in 3 years
Reason: those are pessimistic estimations based on the past performance of global developed world equities in the last 50 years. In all rolling 3 years period over the last 50 years, global developed world equities GBP inflation adjusted returns have never been down by more than 17%, and the GBP inflation adjusted median CAGR is 6.9%.
* The AER of a 3 years fixed savings accounts is 1.55%
Reason: https://www.moneysavingexpert.com/savings/savings-accounts-best-interest/#fixedsavings
* There's no trading commissions, platform fees, fund management fees, transaction costs, taxes, etc. payable
Reason: this is purely for the sake of keeping it simple, and you should take fees and taxes into your consideration in the real world.

So, my goal is to have no less than 60k at the end of 3 years, and the return beats a 3 years fixed savings account in most cases (i.e. more than 50% of the time). The total return of a 3 years fixed savings account is easy to calculate, it's:
60k * ((1+1.55%)^3 - 1) = 2833.46

Now, instead of that, if I put the amount x in a global developed world equities index tracker, and the amount 60k - x in the savings account, and to ensure I have zero chance of have less than 60k at the end of 3 years, I'll need to assume the equities have only 80% of their value left. So the amount x can be found by solving this equation:
EDIT IN PROGRESS, the equations and calculations are incorrect!
(60k - x) * (1+1.55%)^3 + x * 80% = 60k
60k * (1+1.55%)^3 - x * (1+1.55%)^3 + x * 80% = 60k
60k * (1+1.55%)^3 - (x * (1+1.55%)^3 - x * 80%) = 60k
x * (1+1.55%)^3 - x * 80% = 60k * (1+1.55%)^3 - 60k
x * ((1+1.55%)^3 - 80%) = 60k * (1+1.55%)^3 - 60k
x = (60k * (1+1.55%)^3 - 60k) / ((1+1.55%)^3 - 80%)
x = 11461.12

If we put 11461.12 in global developed world equities, there's 50% chance we cloud make
11461.12 * ((1+6.5%)^3 - 1) = 2372.45
or more returns from the equities.

Because the rest of the money is saved in a fixed savings accounts, we are also guaranteed to earn
(60k - 11461.12) * ((1+1.55%)^3 - 1) = 2291.02
interest from the fixed savings account.

So in total we have 50% chance to make at least 4663.48. That is a lot better than the 2833.46 from only using the fixed savings accounts. But, what's the chance of this portfolio making less than 2833.46? Or, let me rephrase the question. What is the chance that the equities has a CAGR of 1.55% or less in 3 years? It's certainly in between 0% and 50%. Therefore, I will take my chances for the 50+% chance of making more than that, and knowing that I will have at least 60k left after 3 years. The other advantage of this? You get to use the PSA, dividends and CGT allowances, so it may be a bit more tax efficient for people who has unused dividends and/or CGT allowances.

Yellowvest23

AnotherJoe said:

Thanks all. Think I'll go for a 2 year Atom at 1.5% * I've already got some Atom fixes so the ease of use is known, and one less provider to deal with outweighs the small amount of extra return i could get.

DAMN. Just realised I'll be breaching he £85k limit. hmmmmmm

* especially as the 3 year is 1.45% !

Then just put £57k in and 3k in something else.
0.1% difference on £3k over 2 years ? £6

mollycat

schiff said:

....separate... (from one pedant to another) 

I wrote it correctly....then changed it
For some reason it's the one I can never remember.

kinger101

RG2015 said:

Algebra, geometry and arithmetic were not separated out and things like sets x,y graphs, vectors and binary numbers were added in. It drove my Dad mad "I don't know what it is but it's not Mathematics!"

There are 10 types of people.  Those that understand binary and those that don't.

kinger101

Mr.Saver said:

Personally I'm a risk taker. I'd construct the problem this way:
I have 60k to save or invest or do a little bit of both.
At the end of 3 years, I have to spend the 60k, and I get to keep anything left of it, be it the interest, dividends or capital gains.

Which means I need to guarantee that in the worst case scenario that I have 60k after 3 years, and I'd like to have a good chance to do better than a 3 years fixed term savings account. To achieve that, I will use a fixed rate savings account and a global developed world equities index tracker.

My assumptions are:
* Global developed world equities can lose up to 20% of their value in 3 years
* Global developed world equities has a median compound annual growth rate (CAGR) of 6.5% in 3 years
Reason: those are pessimistic estimations based on the past performance of global developed world equities in the last 50 years. In all rolling 3 years period over the last 50 years, global developed world equities GBP inflation adjusted returns have never been down by more than 17%, and the GBP inflation adjusted median CAGR is 6.9%.
* The AER of a 3 years fixed savings accounts is 1.55%
Reason: https://www.moneysavingexpert.com/savings/savings-accounts-best-interest/#fixedsavings
* There's no trading commissions, platform fees, fund management fees, transaction costs, taxes, etc. payable
Reason: this is purely for the sake of keeping it simple, and you should take fees and taxes into your consideration in the real world.

So, my goal is to have no less than 60k at the end of 3 years, and the return beats a 3 years fixed savings account in most cases (i.e. more than 50% of the time). The total return of a 3 years fixed savings account is easy to calculate, it's:
60k * ((1+1.55%)^3 - 1) = 2833.46

Now, instead of that, if I put the amount x in a global developed world equities index tracker, and the amount 60k - x in the savings account, and to ensure I have zero chance of have less than 60k at the end of 3 years, I'll need to assume the equities have only 80% of their value left. So the amount x can be found by solving this equation:
EDIT IN PROGRESS, the equations and calculations are incorrect!
(60k - x) * (1+1.55%)^3 + x * 80% = 60k
60k * (1+1.55%)^3 - x * (1+1.55%)^3 + x * 80% = 60k
60k * (1+1.55%)^3 - (x * (1+1.55%)^3 - x * 80%) = 60k
x * (1+1.55%)^3 - x * 80% = 60k * (1+1.55%)^3 - 60k
x * ((1+1.55%)^3 - 80%) = 60k * (1+1.55%)^3 - 60k
x = (60k * (1+1.55%)^3 - 60k) / ((1+1.55%)^3 - 80%)
x = 11461.12

If we put 11461.12 in global developed world equities, there's 50% chance we cloud make
11461.12 * ((1+6.5%)^3 - 1) = 2372.45
or more returns from the equities.

Because the rest of the money is saved in a fixed savings accounts, we are also guaranteed to earn
(60k - 11461.12) * ((1+1.55%)^3 - 1) = 2291.02
interest from the fixed savings account.

So in total we have 50% chance to make at least 4663.48. That is a lot better than the 2833.46 from only using the fixed savings accounts. But, what's the chance of this portfolio making less than 2833.46? Or, let me rephrase the question. What is the chance that the equities has a CAGR of 1.55% or less in 3 years? It's certainly in between 0% and 50%. Therefore, I will take my chances for the 50+% chance of making more than that, and knowing that I will have at least 60k left after 3 years. The other advantage of this? You get to use the PSA, dividends and CGT allowances, so it may be a bit more tax efficient for people who has unused dividends and/or CGT allowances.

The problem is your probabilities and growth rates are at best estimates based of historic values, and at worse, guesses.