Crystal ball time - interest rates

kinger101

Ronder33 said:

If the UK government keep creating imaginary money to avoid economic reality then sooner or later inflation will spike.
USA and Europe following similar path of imaginary money creation.
In my opinion I would invest the £60k into £20k gold, £20k silver, £10k bitcoin and £10k in Yuan.
Sterling is not to be trusted until the government begin to run a budget surplus and start paying back the borrowed billions. 

So you don't like sterling, euros or dollars because it's imaginary money, but bitcoin is fine.

Ronder33

bitcoin is all about storing value , there will only ever be 21 billion bit coins, no more. Already 18 billion in circulation. 

Problem for bitcoin is the coin value is difficult (Too high) for Use in every day life.
even bitcoin cash its values are probably too high for every day life. 

There will be another Crypto currency soon Enough that will be the go to for every day transactions, I don’t think bitcoin cash will be it. 

coachman12

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% !

Bringing the thread back to earth after its esoteric meanderings and the oldest joke about binary known to mankind, I think you made the right decision days ago, Joe  (as above). And , of course, the slight breach of the "limit" is surely only what you give your valet as a Xmas bonus 
Hope the purchase in 3 years time is as exciting as you make it sound 

Mr.Saver

bowlhead99 said:

Mr.Saver said:

Personally I'm a risk taker. I'd construct the problem this way:
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%.

While your analysis probably deserves an A+ for effort, the assumptions you describe as 'pessimistic' are, (perhaps due to your nature as a risk taker) too optimistic to be considered pessimistic.  

If you take 1 June 2007 to 1 June 2010 as an example, the FTSE All World Index dropped 32%. 

Granted, that doesn't include dividends, but dividends paid in the period were not high as a fraction of the opening balance, and I haven't adjusted the return down for inflation so it's not outrageously misrepresenting the return. Also, it's all world rather than developed world, but although emerging markets had a few percent deeper drawdown they bounced back faster, and are only a small portion of the all world index, thus not massively affecting the overall returns over that period of v-shaped market movement.

The main reason the ~30% figure is different from your ~17% figure is that the All World index is measured in USD, and during the global financial crisis the dollar strengthened, meaning a significantly worse fall when measured in dollars (peak to trough total return drop of 58% for the index between autumn 2007 and march 2009, while for GBP it was closer to 40)

Around 90-95% of the global equities by marketcap are listed on markets outside the UK and those companies have their assets and revenues substantially in non-sterling. So, if sterling depreciates (as in 2016) a world index is suddenly worth a lot more sterling while if it appreciates you would get the opposite effect. What happened to dollar investors in a world index in 2007-9 was that when dollars strengthened at the same time as the equity markets fell, they lost a lot more value on the half of the global equities that weren't US-listed.

At that time, we fared better because our currency weakened against the USD, so people from the UK think that the global financial crisis / credit crunch era was just a 30-40% blip that fixed itself in a few years. But that is not to say the currencies would always play nicely and insulate us from the world events  - next time, it could be GBP that strengthens, adding a 20-30% currency swing to the underlying terrible market performance. 

Mr.Saver said:

Did you factor in exchange rates? Yes, the returns have taken GBP exchange rate and GBP inflation into consideration.

The observation is that you didn't factor in what could happen to exchange rates, you factored in the GBP historic returns where we were insulated from a very large slump in equities in dollar terms by the fact that GBP fortuitously weakened at the same time. If it didn't, or if it moved the opposite direction and strengthened, that could give a significantly worse outcome.

You may think it far fetched that GBP would strengthen if some disaster hits the rest of the world. But generally I think of world  equity indexes as things that can fall 50% and won't always recover within a year or two or three.  The idea that GBP indexes have never been down more than 17% over rolling three year periods and so 20% is likely worst-case scenario for a UK investor, is really undercooking the potential volatility IMHO, and comes from your 'risk taking' character, as people who like risks are generally optimists about what they can get from the market (which is why they are happy to take the risks).

That said, we have of course already had a drop over the last 3 months so would be unlucky to get another 20-30% to come over the next rolling 3 years.

I wouldn't argue with that. My estimations is probably only pessimistic from a risk-taker's point of view.
For a risk-averse investor, they may prefer to use more conservative estimations, say 60% downturn in 3 years and 3% median annual returns. In this case, the investor would need to put a much smaller amount in equities - only 4377.87. This portfolio's estimated median return will be 3032.66, this is still £200 better than put everything into a 3 years fixed-rate savings account. And the OP would have a nice surprise if the annual return of equities turns out to be higher than 3% in the next 3 years.
The fact is, even if the equities can loss up to 90% of their value over 3 years, one can still safely put nearly £3000 in equities and guarantee the 60k is not at risk.

kinger101 said:
The last 50 years has been a better period that the 50 years before that.  So using the more recent period is cherry picking.  I do not think one can reasonably assume the next three years will be more like three picked between 1970 and 2020 than 1920 and 1970.  Some might say the earlier period might be more relevant given current events. But both of us here are GUESSING.
Sure, that's fine. If you want to play it safe, just use an unrealistically pessimistic estimation, say up to 90% loss in 3 years, as above.

March 2020's annual CPI figure was 1.5%, so a 1.55 % interest rate is going to match inflation.  I think a reasonable estimate based on the last decade is that interest rates might be 0.5-1.0 % below CPI.  So in three years, at -1 %, OP might have £58,218 instead of £60,0000.  While equities has a better chance of beating inflation, it has a better chance of not doing so.  By a spectacular amount.
You can know the past (March), but cannot predict the future. Inflation can suddenly jump up, so you can't guarantee the £60k would have at least £58,218 buying power at the end of the 3 years if saved in a fixed savings account. In fact, a diversified portfolio would have a better chance to produce positive real returns than a cash-only portfolio. But as I'll explain below, inflation should be part of the discussion for budgets, not portfolios.

If you're agreeing they might be a downturn, then by default, you're accepting they can afford to lose some of the money.  Your scenario ignores inflation.  And history isn't the same as the future.
If one can't afford to lose even a single penny, they can use an unrealistic estimation for the equity downside risk.
Even if the equities can be 100% wiped out, OP can still invest £2,700 in equities and expect a better return on average, as long as the savings interest rate is fixed at 1.55% and the equities have at least 50% chance earning more than the interest.
My post was using a specific example based on an estimated 20% equity downside risk and 6.5% CAGR to give the general idea of combining equities and cash savings. I've never said those numbers are cast in iron. Everyone can use their own assumptions based on their own situation, but changing the assumptions doesn't invalidate the idea itself.

What OP is buying in 3 years is irrelevant here, be it a deposit for a house in the UK or a fancy sport car imported from the EU, it has been budged for 60k in GBP. The budget should consider the currency movements, inflation and the future price, not the portfolio.

Sentence two seems contradictory to sentence one.  But currency risk and inflation risk are never irrelevant. Hedging against currency risk would be sensible if it's sports car manufactured in Italy.
No, they are not contradictory to each other. The budget and the investment strategy are two separate things.
A budget should consider the currency movements, inflation and the future price.
A investment strategy should aim at achieving the budgeted amount of money in given time frame with reasonable accuracy.
A forward contract or rolling future contracts can be used to mitigate the exchange rate risk at a cost, but that should not be a part of the portfolio, unless the budget is in EUR rather than GBP.

To summarize, there's no point pretending equities are a suitable home for short-term investments where one's aim is preservation of capital.
No, that is entirely true. To preserve the real value, cash-only is unlikely to success in 3 years time. Even the goal is the preservation of capital's nominal value, equities can still be used. As I said above, even assuming equities can be 100% wiped out, as long as the interest rate on cash is not zero, and the equities has a good chance to beat the interest on cash, equities can still be used as a building block for an investment strategy that's suitable for the short-term goal.

While savings accounts are likely to under-perform inflation, it's by a small and relatively predictable amount.  Anything in equities is a bit of a punt over that short a time.
I wouldn't agree it's always "small and relatively predictable", the rate of inflation could suddenly go up, and that may be neither small nor predictable.
Cash savings is not a risk-free asset, the real value is depending on the interest rate and the rate of inflation.
The modern portfolio theory suggests that owning different kinds of assets is less risky than only one. So why exclude equities?

coachman12

As I was saying, Joe, in bringing your thread back to the original question you raised , after so many esoteric meanderings, I think you will benefit from your "Atomic"  choice. All the very best. Cheers

2unlimited91

Ronder33 said:

2unlimited91 said:

Ronder33 said:

If the UK government keep creating imaginary money to avoid economic reality then sooner or later inflation will spike.
USA and Europe following similar path of imaginary money creation.

All money is based on trust: on being part of a society, in which certain tokens have a generally recognized value. Seen in that light, there is nothing "imaginary" about the currencies of the UK and the USA. They are currencies which have a value because the UK and USA are functional societies (notwithstanding that they are in some ways dysfunctional), and their currencies are deeply embedded in how those societies operate.

Yes although your missing a basic economic supply and demand fact.

if you create more pounds , euros or dollars out of thin air the value of existing pounds, euros and dollars will decrease. 

I think you're fundamentally misapplying the (valid) idea of supply and demand.

You're looking at the quantity of (for instance) pounds out there. But that's not a supply, it's a stock. There is a greater stock of pounds, but that doesn't (directly, at least) affect the prices of goods and services.

The prices of goods and services are indeed determined by supply and demand. If demand rises faster than supply can keep up with, then prices will rise. But what is happening to all the new pounds that have been created? Are people rushing to spend them? Mostly, no. For instance, many of them are held by pension funds, other institutions, and so on, who wouldn't be spending money anyway; they are just shuffling their assets around.

AnotherJoe

coachman12 said:

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% !

Bringing the thread back to earth after its esoteric meanderings and the oldest joke about binary know to mankind, I think you made the right decision days ago, Joe  (as above). And , of course, the slight breach of the "limit" is surely only what you give your valet as a Xmas bonus 
Hope the purchase in 3 years time is as exciting as you make it sound 

No, the valet just gets a damn good thrashing if there's any bird poop on the Tesla. One doesnt encourage the staff to expect anything more than minimum wage.

As for the exciting purchase, it's not even mine, as I mentioned but easy to miss amongst the esoteric meanderings This thread has diverted into that I look at in bemusement, my daughter will be getting it to help buy a house but she won't be in a position to do that for three years.  And isn't aware of my intention. 

bowlhead99

AnotherJoe said:but she won't be in a position to do that for three years.  And isn't aware of my intention. 

She is now, since you posted it on a public forum. And you have a pretty distinctive portrait in your avatar...

coachman12

AnotherJoe said:

coachman12 said:

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% !

Bringing the thread back to earth after its esoteric meanderings and the oldest joke about binary know to mankind, I think you made the right decision days ago, Joe  (as above). And , of course, the slight breach of the "limit" is surely only what you give your valet as a Xmas bonus 
Hope the purchase in 3 years time is as exciting as you make it sound 

No, the valet just gets a damn good thrashing if there's any bird poop on the Tesla. One doesnt encourage the staff to expect anything more than minimum wage.

As for the exciting purchase, it's not even mine, as I mentioned but easy to miss amongst the esoteric meanderings This thread has diverted into that I look at in bemusement, my daughter will be getting it to help buy a house but she won't be in a position to do that for three years.  And isn't aware of my intention. 

 I agree with you about the "bemusement"  one feels about how a thread can be taken over by posters who just want to ramble at length about a different agenda----you just can't get the staff these days. I bet your daughter will be pleased( and surprised , given how you treat your valet ).
You old softie, Joe 

Sailtheworld

AnotherJoe said:

coachman12 said:

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% !

Bringing the thread back to earth after its esoteric meanderings and the oldest joke about binary know to mankind, I think you made the right decision days ago, Joe  (as above). And , of course, the slight breach of the "limit" is surely only what you give your valet as a Xmas bonus 
Hope the purchase in 3 years time is as exciting as you make it sound 

As for the exciting purchase, it's not even mine, as I mentioned but easy to miss amongst the esoteric meanderings This thread has diverted into that I look at in bemusement, my daughter will be getting it to help buy a house but she won't be in a position to do that for three years.  And isn't aware of my intention. 

There are some benefits to potential buyers when the mortgage company asks where the deposit came from they can say savings rather than my dad gave it to me last week. 

Also could your daughter get a better return if it went into her name earlier? Is it important that she doesn't know about this intention?