Showing posts with label fixed deposit. Show all posts
Showing posts with label fixed deposit. Show all posts

Saturday 25 February 2012

The Basics of Personal Finance Investing: Stocks, Bonds, and Short-term investments.


Overall, investing is a great way to build wealth or a 'nest egg' for your retirement. If you invest regular amounts of money on a consistent basis over a long period of time, you are more likely to be successful in reaching your financial goals. By knowing just a few investing basics, you can get started with a variety of income options.
Three Types Of Investments
There are three basic types of investments you can choose from. There are stocks, bonds, and short-term investments.

Stocks
Stocks can also be referred to as equity investments. These are investments in individual companies that are publicly held. Stocks allow you to hold a small ownership in these companies. When invested in long-term, stocks have a high potential for growth. Stocks are not without risk, however. If the price of the stock drops, so do the investor's earnings. If a company goes out of business, the owners of the stock can lose their entire investment. It is wise to invest in the stock of companies that have been around for a very long time and that have a track record of rising stock prices.

Bonds
Buying a bond is basically lending money to the company you are purchasing it from. An example of this is buying a bond from the U.S. Treasury. After purchase a bond, you would be paid back after you cash it in. Buying bonds has the potential to increase your wealth with a lower risk than purchasing stocks, as well as the benefit of having a bit of protection from economic inflation.

Short-Term Investments
Short term investments can include money market investments, certificates of deposit (CD's), and others. After a short period of time, you can earn interest on these investments. You can usually begin receiving interest in as little as one year or less. These short-term investments are much less risky than stocks and bonds, but there is lower potential for growth. This means you can not expect as large of a return on a short-term investment as you could from stocks or bonds.

Article Source: http://EzineArticles.com/1408204


The Basics of Personal Finance Investing
By Richard MacGrueber

Wednesday 7 December 2011

Comparing equity yields with term deposits is lazy


Marcus Padley
December 3, 2011

I have been getting a little bit irritated by the constant comparisons between the yield on equities and the yield on a bond or term deposit.
The argument goes that equity yields are now higher than bond yields and also higher than term deposits, so you should switch.
But the truth is that a comparison of the returns on term deposits or bonds with equity yields is simply lazy and ridiculous and reckless, because it misses the point about why people are in term deposits in the first place.
Let me explain by taking a well-known income stock - the National Australia Bank, one of the highest-yielding and safest blue-chip stocks in the market. The yield on the NAB is 7.5 per cent - 10.7 per cent including franking. That, everyone will tell you, is cheap and the argument is that all you mugs holding term deposits earning just 5.5 per cent are idiots because you get a whole extra 2.2 per cent in the NAB or 5.2 per cent including franking.
Fair enough, until you consider this exercise.
Get a chart up of the NAB over the last year (one year will do). Now mark off the peaks and troughs since January and calculate how many and how big the variations have been. You will find that the NAB has had 10 fluctuations. Five rallies and five falls.
The size of the rallies has been +12.8 per cent, +17.8 per cent, +8.3 per cent, +23.2 per cent and +26.9 per cent. The falls have been -9.8 per cent, -15.3 per cent, -23.9 per cent, -13.5 per cent and -18.7 per cent and if we picked a smaller-income stock or took NAB out over a longer period, it would be even more dramatic.
Now tell me after 10 moves of more than 7.5 per cent in just a year that I should be worrying about the 7.5 per cent yield on the NAB. Now tell me, amid that volatility and instability, that I should mention the yield on the NAB and the yield on a risk-free term deposit or bond in the same breath. Now tell me the prudence behind selling my term deposit and buying the NAB.
The NAB and almost all other income stocks in the current market, are not stable low-risk investments; they are volatile trading stocks and the message is clear and let's make it clearer, once and for all. You cannot compare the yield on an equity to the yield on a bond because one includes no risk of a capital loss (no risk of a gain either) and the other contains a currently huge perceived risk of a capital loss (or gain).
Promoting income stocks because they yield more than a bond is ignoring that extra risk and misunderstanding why people are now in bonds and term deposits. They are there because they don't want to lose any more money. Because they don't want volatility.
The only way to compare equities to bonds or equities to term deposits is if the equities came with a price guarantee, which they don't, or if you compare risk-free yields with the expected total return from equities, which includes the extra volatility and risk and not just the dividends.
In the current market, equities are nothing like a bond or term deposit because share-price risk is dominating the investment decision not the yield. Do you really think people are in term deposits to make 5.5 per cent? No, they are in term deposits to avoid losing money. The focus is on the risk not the return. Risk rules.
But it's not all gloom. The good news is that this is not a normal state of affairs. The sharemarket is supposed to be about opportunity not risk and the fact that risk is so in focus means the opportunity side of the equation is being ignored.
Also, risk can change very quickly. Ahead of the last European Union summit the market jumped 11 per cent in four days on lower perceived equity risk. The banks jumped 19.2 per cent. If the GFC doesn't reignite, the focus is going to very rapidly swing back to yields and price-to-earnings (PE) ratios. If the GFC is behind us, how long do you think the NAB is going to trade on a 10.7 per cent yield and the market on a PE of 10.7 times against a long-term average of 14 times?
Not long. In which case the game now is not debating the marginal merits of term deposits versus equities but waiting for a chink of light in the outlook for risk, because that is all that matters and because when it appears, the herd is going to smash down the door to get to those yields and PEs.
At the moment they don't believe in them. Your job is to be on the ball on the day they do.
Marcus Padley is a stockbroker with Patersons Securities and the author of sharemarket newsletter Marcus Today. His views do not necessarily reflect those of Patersons.


Read more: http://www.smh.com.au/money/investing/comparing-equity-yields-with-term-deposits-is-lazy-20111202-1oakh.html#ixzz1flIYoklV

Wednesday 25 May 2011

Which direction for term deposits?


John Collett
May 21, 2011
    Illustration: Rocco Fazzari.
    Illustration: Rocco Fazzari.
    Interest rate rises don't automatically translate to better deals on deposits, writes John Collett.
    As everyone knows, the big banks have been the big winners out of the global financial crisis. Not only are they writing nine out of 10 new mortgages but they dominate the term-deposit market as well.
    About 80 per cent of the $600 billion in term deposits is with the major banks. Yet, their term deposits pay between 0.5 percentage points and 0.7 percentage points less than the best rates in the market, says the managing director of term-deposit broker The Term Deposit Shop, Grant Goodier.
    Those wanting to secure good interest rates may have to act soon as term-deposit interest rates have come down slightly over the past couple of months.
    A spokesman for InfoChoice, Dirk Hofman, says the top rates for one-year to five-year term deposits have all dropped this year.
    Growth in lending for houses has dropped to its lowest level in 10 years because of last November's interest-rate increase and the big banks' top-up to their mortgage rates.
    In recent years, the banks have secured other sources of funding and are not as reliant on retail investors.
    Even though financial markets are expecting the official cash rate to rise by 0.25 percentage points once or twice this year, that does not mean the interest rates offered on term deposits will rise, Goodier says.
    ''In fact, the banks may use any increase in the cash rate to reduce the margin they pay for term borrowings from the retail market,'' he says.
    Canstar Cannex's tables of term deposits show Teachers Credit Union, with an ''effective'' interest rate of 6.8 per cent a year, is the best-paying three-year term deposit for $25,000. Interest is paid monthly. The next best is Victoria Teachers Credit Union, which has interest paid annually, and RaboDirect, with interest paid monthly, each with effective rates of 6.75 per cent.
    The effective rate is a better indicator than the nominal rate as the effective rate includes the frequency with which interest is paid. Two term deposits may have the same ''nominal'' rate but the term deposit with the highest frequency of interest payments has the highest actual, or effective, rate.
    Credit unions
    Some of the highest-paying term-deposit rates are offered by credit unions and building societies.
    Yet the share of the term-deposit market held by credit unions and building societies is only about 5 per cent.
    Credit unions and building societies are just as safe as banks. They are regulated to the same standards as the banks and are also covered by the government's retail deposit guarantee.
    The guarantee covers each investor for cash deposits of up to $1 million per institution, provided the institution is an ''authorised deposit-taking institution'' regulated by the Australian Prudential Regulation Authority.
    To help the non-banks compete with the banks, the government has said it will retain the guarantee after it is due to expire on October 12 this year. It is expected, though, that the government will lower the limit from $1 million.
    Those with very large amounts should spread it between institutions in case the limit is lowered, Goodier says. They could also spread the money between term deposits with differing maturity dates.
    ''Put the money into smaller parcels over different terms - some short-term, some medium-term and some long-term - that way, you have a hedge against changes in interest rates paid on term deposits and access to at least some of the money,'' he says.
    DIY term deposits
    Investors do not just have to accept the term offered by financial institutions on their term deposits.
    Banks will generally be flexible and the investor can specify their desired maturity date for term deposits, says a financial analyst at Canstar Cannex, Adam Beu.
    Perhaps an investor wants to settle on a house purchase and the settlement date is in three months and 10 days' time. Investors can ask for a term deposit that matures then.
    ING Direct, for example, has a calendar on its website where investors can put in the date they need to have their money returned - up to one year - and the interest rate is provided.
    ''A lot of the term-deposit market is negotiated,'' Beu says. ''Particularly for amounts of more than $100,000.
    ''Local bank branches also have manager specials from time to time, because the local bank branch has targets to hit.''
    Beware rollover rates — don't let inertia cost you dearly
    Investors may think there is no more simple investment than a term deposit. But in the race to secure the cash of small investors, financial institutions have been engaging in some slick and tricky practices.
    Last year, the Australian Securities and Investments Commission released the results of a survey of term deposits that showed many financial institutions engaged in "dual pricing", where new savers are paid a higher rate to put their money in a term deposit than existing investors, who roll over into a new term deposit of the same term.
    Dual pricing was found mostly in deposit terms of less than one year. The regulator warned investors not to allow themselves to be passively rolled over into lower-paying term deposits but to shop around.


    Read more: http://www.smh.com.au/money/saving/which-direction-for-term-deposits-20110520-1ewlq.html#ixzz1NJR3kxdS

    Tuesday 15 February 2011

    Beware of Inflation

    Beware of inflation.

    The longer you leave your money in fixed deposit, the higher the risk of inflation eating away the purchasing power of your money.

    Money market investments are safest when the money is needed in the short-term.

    The very same safe investments become high risk the longer they stay invested.


    Stocks are on the opposite track. They are high risk investments in the short-term, but are lower risk investments in the long term:

    Fixed deposit 
    1yr = Low risk 

    10 yrs = High risk

    Stocks 
    1 yr = High risk 

    10 yrs = Low risk


    http://myinvestingnotes.blogspot.com/2008/10/risks-of-investments.html

    Sunday 18 October 2009

    Take a little more risk to boost your returns

    From The Sunday Times October 18, 2009

    Take a little more risk to boost your returns

    Fund managers are targeting those who live off the income from savings and investments with a raft of fund launches, some of which offer yields of up to 7%. However, advisers urged anyone moving from the safety of a deposit account to remember that their capital could be at risk — as a general rule, the higher the income, the greater the risk of losses.


    http://www.timesonline.co.uk/tol/money/investment/article6878902.ece

    Friday 28 November 2008

    How safe is too safe

    Ask the Expert Retirement questions answered
    How safe is too safe

    By Walter Updegrave,
    Money Magazine senior editor
    November 10, 2008 5:18 pm

    Question: Are stable-value funds a safe investment? —Rexford, Syracuse, New York

    Answer: That depends on what you mean by safe.
    Stable-value funds, which are available only in 401(k)s (and currently offered by more than half of such plans), invest for the most part in high-grade short- to intermediate-term bonds. The managers of these funds also buy “wrappers” - or contracts from insurance companies and banks - that guarantee principal and accumulated interest against loss.

    As a 2007 study shows, the result is an investment that provides long-term returns similar to those you would get with intermediate-term bonds, but with stability comparable to a money-market fund’s.

    Would I put stable-value funds in the same category as FDIC-insured bank deposits when it comes to principal protection? No. They’re not federally insured. But given the high quality of the funds’ underlying securities and the fact that they also diversify risk by purchasing wrappers from 10 or so financial institutions on average, I think it’s fair to say that stable-value funds provide a high level of security and adequate protection against losses.

    So in that sense I’d say yes, they’re a safe investment.

    Playing it too safe

    But when it comes to investing for retirement, I believe you should to take a broader view of safety. Specifically, you’ve got to consider whether your investments are safe in the sense that they’re likely to deliver the returns you’ll need to build a nest egg large enough to support you comfortably in retirement.

    And that’s where I think people who’ve been flocking to stable-value funds lately - in September alone, 401(k) investors switched $921 million out of stock funds and moved $733 million into stable-value funds - have to be careful.

    Understandably everyone is freaked out about declining balances of 401(k)s. Those losses and fears that even more may lie ahead make investments that promise security especially appealing today. But you don’t want to plow too much of your money into investments that offer a refuge from market losses.

    There may be few concepts you feel you can count on in the investing world today. But here’s one you can bank on: The more secure an investment is, the lower its long-term returns are likely to be. So by focusing too intently on safety in the short-term, you could jeopardize your long-term retirement security by sacrificing growth potential.

    Which is why I think you shouldn’t view stable-value funds as a haven to flee to during periods of market turmoil, but as a core part of a diversified portfolio that also includes stocks and bonds. Basically, you should consider stable-value funds an investment choice for the fixed-income portion of your 401(k), along with bond funds.

    As for how much of your 401(k) you should put in stable-value and bond funds, the answer largely comes down to how far along you are in your career and how much risk you’re comfortable taking. I know everyone is wary about investing in stocks right now. But if you’re young and early in your career, you don’t have to be so concerned about falling stock prices. You’ve got decades before you’ll tap your 401(k), so you should focus on getting a competitive long-term return. And that means keeping most of your money in stocks.
    Although there’s no assurance stock prices won’t fall even farther from here, history shows that you’re likely to earn the best long-term returns from shares you buy in the wake of major market declines.


    As you get closer to retiring, you still need long-term growth - after all, you may spend 30 or more years in retirement - but you also want more stability. You don’t have as much time to recoup losses. So you want to gradually increase the amount going into stable-value funds and bonds as you age.

    So if it’s safety you’re looking for, yes, stable-value funds can be a reasonable choice. But make sure they’re part of a long-term investing strategy. Otherwise, the price of feeling safe today could be less retirement security down the road.

    -----

    Filed under Uncategorized16 Comments Add a Comment

    Great article! Don’t worry and don’t to even bother your little head about “timing”. So many selfless professionals are dedicated to your prosperity.
    Posted By M, GSO, NC: November 17, 2008 10:13 am

    I agree with Charles Shaw in Liverpool NY. One way to restore confidence is for the top leadership of these failing banks and finanancial institutions to not be able to retire with massive golden parachutes, and for the average working person to see that justice really is served. Pauslon is now changing the rules midstream as to where all of our dollars will go. Why not have the wealthiest on Wall Street be forced to retire on “only” $100,000 a year and have the rest of their assets go to help those who were truly hurt by this mortgage crisis. The greed of those at the very top using mortgage debt and leveraging should be punished.
    To Jonathan in Seattle: I am not sure who you were referring to in your comments, but it is not the “little guy” who is moving the market up and down these days with “panic selling.”Send your message to the big institutional investors and mutual fund managers who are the main ones moving this market.
    Posted By Iris, Rochester NH: November 16, 2008 9:14 am

    Inflation and taxes are unavoidable.
    I would not invest my money in risky investmnts just to make a higher return. Investing is not about how much you mak, but about how much you keep.
    The truth is that unless you make over $250,000 a year for 20 years or more and save at least an average of 10% a year, you are not going to be rich when you retire.
    The median income is around $46,000 in America. If a person invests 10% of his gross income and makes around 5% a year, he will not have millions of dollars after 35 years.
    The myth of retirement is going to terrorize many Americans in the next 20 years. Many of those who are retired and are too old to make a decent income will suffer. They will have reduced Social Security benfits to look forward to and little savings to live off of.
    There is no such thing as playing it too safe. Either you have a lot of money, a little money, or no money. Those that have a lot of money or no money will get by just fine. Those with a little money, the middle class, will be taxed higher and will receive less benefits.
    Posted By Yadgyu, Harkyville, TX: November 13, 2008 5:24 pm

    I don’t why so call experts always keep on saying keep your money where they are or you’ll end up missing the upswing. If i had not moved my money to the stable fund, i would’ve easily lost 30-40% of my meager 401k fund. But now, I am still getting some returns and I am not throwing away monthly contributions. Wake up so called experts. It would take years for me to recoup the 30-40% I would’ve lost.
    Posted By Jun, Brentwood, CA: November 13, 2008 2:53 am

    People seem to lose track of the key points in these comments. 1)Stable funds are a fantastic capital preservation tool. 2)To build a 401K to the level needed to support decades of retirement(hopefully)you have to have the return rates that equities provide. There are two ways to do this. 2) a) Buy and hold. Or… 2) b) Market timing. There is a lot of literature that market timing doesn’t work. And yet… there is some evidence that you can sidestep the big drops sometimes. Not always. There have been two big market declines in the past 8 years, and foreseeing them was not very tough, if you are paying attention. The first one I didn’t have the confidence to manage. This time I slowly transitioned to my stable value fund. Always move in modest increments, because you could be wrong! In any case, I’m down 14% this year… that much only because I got over-burdened at work and home and acted later than I intended… however, I would otherwise be down 30-35% as of today. I love my stable value fund!! I’ll buy back equities slowly, maybe 5% per month, starting next year. Equities are still over-valued, given the level by which future earnings are over-stated by wall street. I may miss a few big up days… heck I missed the biggest one ever last week, but guess what? I can now buy at a lower price than before that run up. I have more to gain by misssing the big down days. I now have a 15% head start on the market, my opportunity cost is pretty small, and the beauty of it is I don’t need to ‘time’ to get back into the market. A little DCA does the trick.
    Posted By John in Colorado: November 12, 2008 2:48 pm

    To the first poster, commenting that he would have been better off in stable value for the last 25 years…The market is up roughly 600% over the last 25 years. How exactly would being in stable value make you better off than “riding the ups and downs” that have you up 600%?
    Posted By Jon, Parsippany, NJ: November 12, 2008 9:26 am

    People wake UP! There is nothing new under the sun. 8 years ago you were the same people saying we are on the brink of economic collapse. And you were saying the same thing in 1992, and during everyother economic pull back. Do yourselves (and us) a favor and put all of your money into a nice FDIC insured savings account, where you will get a negative return because of inflation. You’ll be poorer by the day but at least those of us who invest in the market won’t have to deal with your panic selling.
    Posted By Jonathan Seattle, WA: November 12, 2008 2:45 am

    I am not sure why we are still holding to the underlying assumption that we are going to “retire.” It may that this 20th-century invention will have to go the way of quill epns and inkwells.
    Posted By Julieanne, Waterbury, CT: November 11, 2008 5:50 pm

    You know what I think is safe, keeping my money, or spending it now.Why would I invest into anything in the market, when robber barons can steal my money, like they have this year? These crooks have had not one conviction, not one arrest, when any reasonable person knows this melt down was caused from insider trading and fraud.You want the return of confidence? Then somebody better start talking about the schemes that have lead to the greatest depression since 1929. The people will not feel their money is safe in any investment until we see justice done.Time to fill the jails up with the very well connected in Wall Street and Government who conspired to rob the American Citizen of their savings and retirement.
    Posted By Charles L. Shaw, Liverpool, NY: November 11, 2008 4:56 pm

    I have to agree with the commentor about the canned answer, but I disagree with the other commentors saying they are better off in stable income. BTW, 4.5% interest after an inflation of 3.5% (US Average) equals 1% real return; basically under the Rule of 72, it will take you 72 years to double your money after inflation.
    The big problem is people are taking too much risk for their own good and thereby losing their shirts. Unfortunately people need to do their homework before investing. Face it folks a lot of the brokers out there are paid via commission and therefore may not have your best interests at heart.
    I would recommend Bogle Heads Guide to Investing & Automatic Millionaire as good books to do some research about personal finance. You’ll be amazed how easy it is to save and invest after reading these two books. Just set and forget.
    Another thing, do your age in bonds. If you are 30 years old, you should have 30% of your assets in bonds and/or stable income.
    One other thing about stable income; remember these are insurance contracts, if the insurance company goes insolvant because too many bonds it backed turned to worthless paper, you could end up losing your cash.
    Posted By Pat, Albany, NY: November 11, 2008 4:53 pm

    i have made a ton on stocks in the past and of course i lost some recently, but the idea that we can only accept the good and have none of the bad will keep you poor and on the side lines, mad at those who succeed.
    Posted By URB left coast CA.: November 11, 2008 4:36 pm

    I’m done paying attention to all these financial “experts”….who advised me where to put my money the last 35 years. Let’s see …..one year I’ve lost 25%? Where were the experts when everything was melting down? Obviously they were pulling money out of equities while telling those of us in a 401K to “stay the course”!
    Posted By Kay, Portland, Oregon: November 11, 2008 4:15 pm

    Our financial system is completely broken and you are advising people, who have consistently been deceived by Wall Street, to do what now?
    Posted By BxCapricorn, Vegas, NV: November 11, 2008 12:14 pm

    In a diversified long-term portfolio, does it make sense to buy insurances against market losses in bonds instead of just investing directly in intermediate-term bonds to take maximum advantage of the benefits of diversification (bonds go up in many scenarios when stocks go down and vice-versa) instead of trying to guarantee a minimum level of return?
    Posted By Andy from Miami, FL: November 11, 2008 11:44 am

    As far as I am concerned, stable value funds are the ONLY way to go in today’s unstable market. I am 47-YO and THANKFULLY I have 100% of my 401K invested in stable value. While other funds offered in my plan are losing between 20 & 50% in value, I am getting approximately 4.1 to 4.2% return on my stable value fund. In essence, while the rest of the ‘world’ is losing the shirts off their backs, I am making money. It might not equate out to 10, 12, 15% return, but at least I am not LOSING anything that will take YEARS, and I DO MEAN YEARS to make up. Of course, I do have other SAFE Investments as well such as FDIC Insured Certificate of Deposit Accounts.
    Posted By Jerry, Hagerstown, MD: November 11, 2008 10:31 am

    I feel that the answer provided was too canned and does not take into consideration the historic events of the current economic crisis. Since there is nothing really to compare the current market to, saying that stable funds are “too safe” is very naive. A fund that is down 40 to 50% may take years and years to ever get back to 0, or may never. I have been investing in a 401K for over 20 years(I’m 45) and I may have been better off over those years putting the money in stable funds than riding the ups and downs of the market. Remember, it’s not “return on” any more, but “return of” our investments that we worry about.
    Posted By Wesley, Richardson, TX: November 10, 2008 7:42 pm
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    http://asktheexpert.blogs.money.cnn.com/2008/11/10/how-safe-is-too-safe/