# Are bank deposits risk-free in the long term?



## Andrew365 (31 Dec 2019)

I have moved these posts from this thread : 





__





						Business sold, €4m to invest?
					

Age: 41 Spouse’s/Partner's age: 43  Annual gross income from employment or profession: 225,000 (+ 50% guaranteed yearly bonus for next 3 years) Annual gross income of spouse: 65,000  Monthly take-home pay: €13,000 combined (excluding bonuses). Mortgage payments of €2,065/month lions share of...



					askaboutmoney.com
				




... the OP has achieved wealth, he has more money than his lifestyle needs and has no appetite to massively change. There is zero need to take on the risk of the stock market. Yes, it may rise 20% generating an additional 1million but to what ends?

My advice is to invest in your pension, buy whatever state investments are available and put the rest in the bank, give some to charity and congratulate yourself for a job well done.


----------



## Brendan Burgess (31 Dec 2019)

Andrew365 said:


> There is zero need to take on the risk of the stock market.





Andrew365 said:


> buy whatever state investments are available and put the rest in the bank,



Hi Andrew

That is the whole point.

A diversified portfolio of equities is less risky in the long-term  than a state investment or a bank deposit.

As most people do, you are confusing volatility with risk.

Sure, his €4m could halve over the next 12 months.  But a bank deposit could be wiped out entirely.  The Irish state finances are in a terrible position and default, while unlikely, is certainly a possibility.

And even if the banks and the state remain solvent over the next 40 years, inflation could wipe out his investment. 

I will add that to the list of  mistakes to avoid. Put your money on deposit.

Brendan


----------



## Andrew365 (31 Dec 2019)

Brendan, I have to disagree with you, inherently from market economics, a portfolio of Equities will be riskier than not investing in the market, hence why there is a risk premium for trading equities. In your point you are confusing default risk with the risk of an asset. Cash is less risky than equities as a fact. To compare apples for apples you would need to consider the probability of default of a bank vs the companies that you have invested in. A diversified equity portfolio is inherently going to have a larger Loss Given default given some sectors inherently have higher probability of defaults than Financial institutions. Banks in Ireland are in fairly good capital standing as of now, regulation over the last 10 years has ensured that. 

Lastly an individual with over 4m in wealth has access to financial products that the average person does not, there are products that can be purchased (CDS single name / Index) to protect against the default of the Government of Ireland or said Financial Institution. A well diversified equity portfolio has no protection against default risk.


----------



## Brendan Burgess (31 Dec 2019)

Andrew365 said:


> Cash is less risky than equities as a fact. To compare apples for apples you would need to consider the probability of default of a bank vs the companies that you have invested in. A diversified equity portfolio is inherently going to have a larger Loss Given default given some sectors inherently have higher probability of defaults than Financial institutions. Banks in Ireland are in fairly good capital standing as of now, regulation over the last 10 years has ensured that.



Hi Andrew 

There have been many examples of wealthy people invested in cash being wiped out.  German inflation is probably the most dramatic. 

Irish inflation has also dramatically reduced the wealth of cash investors. 

If the OP buys a portfolio of equities, it's very likely that some of them will fall to zero.  But the maximum loss on any investment will be 100%, the maximum gain on the others is unlimited and should compensate for that.

The Irish economy is in a very difficult position , and all the more so, because people don't recognise it.  Irish banks could  all topple down together.  Probably not this year or next year, but over the longer term which is his investment horizon. 

You would probably be correct if you were comparing a deposit in AIB with a €4m investment in one individual share.   But a diversified portfolio of equities is less risky than bank deposits.

Brendan


----------



## Gordon Gekko (1 Jan 2020)

I would agree that cash is more risky than equities for a 40 year old.

Volatility is not risk; it’s just things going up and down.

Inflation is an actual risk.


----------



## Andrew365 (1 Jan 2020)

Brendan Burgess said:


> Hi Andrew
> 
> There have been many examples of wealthy people invested in cash being wiped out.  German inflation is probably the most dramatic.
> 
> ...


Cash is still less risky and that is a fact. There are not many examples of individual cases your example is a macro one. 

Why are the Irish banks going to topple? What insight do you have the support that statement?


----------



## Brendan Burgess (1 Jan 2020)

Andrew365 said:


> Cash is still less risky and that is a fact.



No.  It is your opinion.  Cash is less volatile - that is a fact. Over the long term, in my opinion, a diversified portfolio of shares is less risky than cash. 

I am not saying that the Irish banks are going to topple. But it is a risk especially when looking at a 40 year horizon.  And no investor should ignore that risk or assume that it is zero.

Brendan


----------



## Gordon Gekko (1 Jan 2020)

Andrew365 said:


> Cash is still less risky and that is a fact. There are not many examples of individual cases your example is a macro one.
> 
> Why are the Irish banks going to topple? What insight do you have the support that statement?



Over a multi-decade time-horizon, I would argue that cash is far riskier than a diversified share portfolio. The former is almost guaranteed to lose purchasing power over time. The latter should do pretty well.

And, to echo Brendan’s point, it is generally accepted that depositors would be “bailed in” if the banks hit the rocks again.


----------



## Andrew365 (1 Jan 2020)

I am sorry but in my opinion you are both wrong. What you are pointing out is that over a longer time equities will return more than cash, per the poing "cash will lose purchasing power". I agree with this sentiment, however that is different from the risk of the asset. Cash is inherently less risky than stocks, or else all deposits would be held in Equity rather than cash. 

Regarding the comment on the banks facing potential issue is just your speculation. However, every company has a probability of default, an Irish bank is riskier than a large UK bank such as Barclays but is less riskier than Greek or Italian Banks. 

What is the argument to support cash being riskier other than currently putting it on deposit is not going to beat inflation? What can actually happen to the cash or happened to it say in 2008 during the financial crisis?


----------



## RedOnion (1 Jan 2020)

Andrew365 said:


> What is the argument to support cash being riskier other than currently putting it on deposit is not going to beat inflation?


But inflation IS the risk over a 30 to 40 year horizon.  If not every 30 year old in the country would be advised to put their pension in cash. Why would it be different here?
The credit risk can be diversified away with cash, but the inflation risk can't.


----------



## Andrew365 (2 Jan 2020)

RedOnion said:


> But inflation IS the risk over a 30 to 40 year horizon.  If not every 30 year old in the country would be advised to put their pension in cash. Why would it be different here?
> The credit risk can be diversified away with cash, but the inflation risk can't.



Inflation risk is an external factor to the cash asset. If I put $100 on deposit at 1% (risk free rate) for 5 years, after 5 years providing the institution has not defaulted I will have $101. However, I can be certain that I will have $101 at the end of 5 years and that satisfies my risk appetite. In summary I have exposure to 3 risks, inflation, bank defaults, currency devaluation, and the bank is willing to pay me a risk premium of 1% to take these risks or in market theory this is called the 'risk-free rate'. The risk free rate can be described as the difference between yield on a US Treasury and Inflation and for simplicity is 1% in this example. 

If I put $100 into a broad based equity index tracker for 5 years, it may go up or it may go down, assuming the market moves 10% over the 5 years, I could end up with either $110 or $90. In this case the risk premium is 9% (10% - risk free rate). This reflects that in order to generate a larger return I need to take more risk and therefore I expect a greater return (risk premium). 

Now we live in a world with 0 or negative interest rates which is why risk free assests sometimes are generating a negative yield which makes the above slightly more nuanced because you have to come to terms that the purchasing power could be less. 

Even if inflation is the risk, it is very very very remote that it could match the potential volatility of the stock market. If it did then putting money on deposit would demand the same return as investing in the stock market. If inflation jumped to 10%, you would need the stock market to outperform that as inflation is also embedded into your stock market investment. 

The points made do not prove that Equity is less risky than cash because the risks inherent to cash are still present in Equity investments, hence why there is a larger risk premium. 

I hope this is clear but happy to clarify further.


----------



## Brendan Burgess (2 Jan 2020)

Andrew365 said:


> If I put $100 into a broad based equity index tracker for 5 years,





Andrew365 said:


> Even if inflation is the risk, it is very very very remote that it could match the potential volatility of the stock market.



Hi Andrew

You are making the common mistake of confusing risk and volatility. 

None of us would disagree that over the next 5 years, equities are more "risky" than cash.  It is quite possible that stocks will be lower than they are today. It's unlikely that inflation or a bank default will wipe out today's deposit.

But over the longer term, volatility of the stock market does not matter but the risks of inflation and bank default increase. 

You are quite entitled to your opinion that the stock market is riskier in the long term than cash and I am entitled to disagree with you. But you are not entitled to say that cash is risk-free.

Brendan


----------



## RedOnion (2 Jan 2020)

Andrew365 said:


> If I put $100 on deposit at 1% (risk free rate) for 5 years, after 5 years providing the institution has not defaulted I will have $101.


I'd hope you'd have $105?...



Andrew365 said:


> I hope this is clear but happy to clarify further.


You have suggested earlier that the best place for a 41 year old to put the money that they will use to fund the rest of the life (let's say up to 50 years) is in cash. So let's forget about 5 year horizons, and your risk appetite. Where should the OP put their money for their time horizon?

For the record, I've funds that I've invested for a 5 year horizon which I've put into state savings. I want certainty on that money in that timeframe, so that's where it is.
I've also invested for my children's future which won't be needed for 12+ years. That's predominantly in equities.
And my pension (I'm in late 30's) is 100% invested in equities.


----------



## Andrew365 (2 Jan 2020)

Brendan Burgess said:


> Hi Andrew
> 
> You are making the common mistake of confusing risk and volatility.
> 
> ...



I have not made the mistake of confusing risk and volatility? Please explain. 

I do not disagree that with an increase in time default increases but are you saying that over time banks have larger chance of default than corporates? 

I did not make the statement cash is risk-free, I described the concept of risk free rate which is the basic foundation concept of portfolio theory. 

It is just very surprising that I am having to try and rationalize investing in cash as less risky that Equities.


----------



## Andrew365 (2 Jan 2020)

RedOnion said:


> I'd hope you'd have $105?...
> 
> 
> You have suggested earlier that the best place for a 41 year old to put the money that they will use to fund the rest of the life (let's say up to 50 years) is in cash. So let's forget about 5 year horizons, and your risk appetite. Where should the OP put their money for their time horizon?
> ...



For simplicity it was 1% over the 5 years not p.a., if it was annual it would actually be $105.10.

You have just proved the point, you have a different risk appetite for different situations and investment horizons. You are invested in 100% equities for your age because you are trying to maximized returns and the time horiozon allows you to do so and can negate some of the stock market cycles. The OP has already achieved wealth, he does not need to chase it. So why take the risk that when he does need the money it is during a downturn? 

If you are in your late 30's for a significant part of your investment history you have only seen the stock market go up.


----------



## RedOnion (2 Jan 2020)

Andrew365 said:


> If you are in your late 30's for a significant part of your investment history you have only seen the stock market go up.


I probably understand the risks of stock market, and particularly stock picking, better than most. I personally lost quarter of a million during the crash (all equities).

So if you're going to be condescending you can pick somebody else.


----------



## Andrew365 (2 Jan 2020)

RedOnion said:


> I probably understand the risks of stock market, and particularly stock picking, better than most. I personally lost quarter of a million during the crash (all equities).
> 
> So if you're going to be condescending you can pick somebody else.



Based on the comments thus far people would put that down to volatility and if you held the portfolio for the long term it would eventually return. It is not that black and white or else you would maybe be saying you lose 250k but it has since been recouped by holding the portfolio for a further 12 years?

My advice for the OP remains as stated, given the current economic climate investing his 4m in the stock market carries too much risk.

The comment was not intended to be condescending, since 2009 the market has gone in one direction.

An additional thought, if the advice continues to be invest a substantial amount into the market I advice the OP to purchase downside protection via options. Do not enter the market exposed to only one direction.


----------



## RedOnion (2 Jan 2020)

Andrew365 said:


> It is not that black and white


It's very black and white in my case.
I lost the money. I think I know better what happened to my money than you do?
I never said I had a properly diversified portfolio.


----------



## Brendan Burgess (2 Jan 2020)

I see now where you are coming from.

You believe that you can time the market and that it is overvalued?  Therefore he should be in cash until the market is fair value again?

I don't have your ability to time the market. If I did know that the market was going to fall, then I would advise as you have.

However, I don't think it's possible to time the market.

Or do you accept that you can't time the market, but it's just that after such a long period,  the risk is higher? 

Brendan


----------



## Andrew365 (2 Jan 2020)

Brendan Burgess said:


> I see now where you are coming from.
> 
> You believe that you can time the market and that it is overvalued?  Therefore he should be in cash until the market is fair value again?
> 
> ...



Where did I say that? 

Based on your comments you are mixing and matching different topics to support your point but to a person with a detailed understanding of risk management it is clear there are gaps in your logic. From what I can see you think Irish Banks defaulting are more likely over the long term versus any Corporate in a well diversified Equity Portfolio. Therefore holding cash in a bank is riskier than putting it in the stock market. 

So for my understanding you believe that if I have $100 to invest for 20 years, with the goal of having $100 (plus nominal bank interest) in 20 years time (zero risk appetite), the less risky option is to invest Equities rather than hold it as cash?


----------



## Gordon Gekko (2 Jan 2020)

Andrew365 said:


> Where did I say that?
> 
> Based on your comments you are mixing and matching different topics to support your point but to a person with a detailed understanding of risk management it is clear there are gaps in your logic. From what I can see you think Irish Banks defaulting are more likely over the long term versus any Corporate in a well diversified Equity Portfolio. Therefore holding cash in a bank is riskier than putting it in the stock market.
> 
> So for my understanding you believe that if I have $100 to invest for 20 years, with the goal of having $100 (plus nominal bank interest) in 20 years time (zero risk appetite), the less risky option is to invest Equities rather than hold it as cash?



Firstly, when I use the term “risk”, I am not referring to volatility; I believe that over 20+ years, keeping my money in cash is more risky than investing in a diversified portfolio of global equities. With the former, my view is that I’m almost guaranteed to lose money in real terms. With the latter, I believe that I’m almost guaranteed to make money in real terms.


----------



## RedOnion (2 Jan 2020)

Gordon Gekko said:


> With the former, my view is that I’m almost guaranteed to lose money in real terms


And the markets have that exact expectation.
As a barometer to what a real risk free return would look like, there is a German inflation linked bond maturing in April 2046. 26 years from now (taking OP to 67). Based on today's price, it's currently yielding -1.04%.  I think it's close enough to being risk free to use as an example.
So for every 134.00 Euro invested today which gets you 100.00 of bond, you will receive 0.10 interest annually, plus inflation based on 100.00, plus your original 100 Euro back in 26 years. In other words, investing 4m will give you back roughly 3m in today's value in 26 years time.


----------



## Brendan Burgess (2 Jan 2020)

Andrew365 said:


> From what I can see you think Irish Banks defaulting are more likely over the long term versus any Corporate in a well diversified Equity Portfolio.



No. I think that if you have a diversified portfolio of equities, some of them will default. But the 100% loss on these will be more than compensated for by the 100%+ rise in some of the others. 

Red's figures are very interesting. If you invest in a German bond, you will  lose 25% of your money over 26 years.   

There will be no volatility if you keep it to maturity. Therefore most people would think it's not risky.  Madness. 

Brendan


----------



## Andrew365 (3 Jan 2020)

Brendan Burgess said:


> No. I think that if you have a diversified portfolio of equities, some of them will default. But the 100% loss on these will be more than compensated for by the 100%+ rise in some of the others.
> 
> Red's figures are very interesting. If you invest in a German bond, you will  lose 25% of your money over 26 years.
> 
> ...



Honestly, this is blowing my mind. Please let me know the shares your think are going to rise 100% over the next 26 years. 

Red's numbers are correct, but my point was cash is less risky, than an equity portfolio. You are thinking about Risk the wrong way, maybe you should take it up with the European Central Bank or Federal Reserve as neither of them stress cash in their annual stress tests. I have 15 years experience in managing risk, and have studied it. 

What I can see here is that your view on risk is what your ending point will be which is fair enough for a retail perspective. But what is astonishing me is that you keep mixing concepts to support your point, the comment above regarding 100% returns, is just astonishing. 

I am still interested to hear what your supporting material is for the comments made regarding the Irish Banks defaulting?


----------



## RedOnion (3 Jan 2020)

Brendan Burgess said:


> Red's figures are very interesting. If you invest in a German bond, you will lose 25% of your money over 26 years.
> 
> There will be no volatility if you keep it to maturity. Therefore most people would think it's not risky. Madness.


Brendan, with respect you seem to have a lack of knowledge of risk theory.

Let me explain.

That's a risk free rate. You're guaranteed to lose 25% of your investment. With equities you _might_ lose money, but there's no guarantee. Why take the risk?


----------



## Brendan Burgess (3 Jan 2020)

Andrew365 said:


> the comment above regarding 100% returns, is just astonishing.



Hi Andrew

Are you saying that in a diversified portfolio of shares, some will not return over 100% over 26 years?  Just to be clear that is a compound annual growth rate of 2.7%. 

I don't know why you would be astonished by that. 

Brendan


----------



## Brendan Burgess (3 Jan 2020)

Andrew365 said:


> maybe you should take it up with the European Central Bank or Federal Reserve as neither of them stress cash in their annual stress tests



So they never stress tested cash in Italian, Greek, Irish or Spanish banks? 

Seems like that was a mistake.  But maybe they are forced to make that mistake as to do otherwise would probably cause a run on the banks. 

Back in 2006, did your organisation have deposits in Anglo and the Irish Nationwide? 

Brendan


----------



## Andrew365 (3 Jan 2020)

Brendan Burgess said:


> Hi Andrew
> 
> Are you saying that in a diversified portfolio of shares, some will not return over 100% over 26 years?  Just to be clear that is a compound annual growth rate of 2.7%.
> 
> ...



I misread your point, but this would again require you to be able to time the market, which I don't believe you can do. 



Brendan Burgess said:


> So they never stress tested cash in Italian, Greek, Irish or Spanish banks?
> 
> Seems like that was a mistake.  But maybe they are forced to make that mistake as to do otherwise would probably cause a run on the banks.
> 
> ...



Again you are mixing concepts. The individual banks are stress tested, but the cash product is not stressed. In the financial Crisis did the Euro get affected? No, it did not, what was affected was the Bank that held your Euros. This is the point I am trying to make, cash is not risky, but the institution you hold it in does have risk. When I say cash I referring to the Euro as a safe currency. 

If you believe that there is going to be an issue that the value of the Euro significantly decreases then by default your Equity portfolio is going to see a significant downturn. 

Is this clear yet? 

I would be grateful with your experience why it is a mistake for Central Banks not to stress Cash?


----------



## Brendan Burgess (3 Jan 2020)

Andrew365 said:


> this would again require you to be able to time the market, which I don't believe you can do.



Hi Andrew

No, it would not and I can't time the market. 

If I had €4m now, I would invest it in the market. 

If I get €4m in 6 months, I will invest it in the market. 

Brendan


----------



## Brendan Burgess (3 Jan 2020)

Andrew365 said:


> This is the point I am trying to make, cash is not risky, but the institution you hold it in does have risk. When I say cash I referring to the Euro as a safe currency.



So where would you suggest that the OP put his €4m?   Can he put it in euro but not be subject to bank risk? 

Brendan


----------



## Brendan Burgess (3 Jan 2020)

Andrew365 said:


> If you believe that there is going to be an issue that the value of the Euro significantly decreases then by default your Equity portfolio is going to see a significant downturn.



A diversified portfolio will have income streams in all the major currencies. 

They will all be affected by inflation, but the return on equity should exceed that inflation over the longer term.

Brendan


----------



## Brendan Burgess (3 Jan 2020)

Andrew365 said:


> why it is a mistake for Central Banks not to stress Cash?



It was certainly a mistake not to "stress" cash deposits in the Irish Nationwide and Anglo.  There was a significant risk of default.  However, if the Central Bank did that, they would have precipitated a default. 

By "stress" here, I mean that they should have required AIB to have higher reserves against their deposits in Anglo. 

Brendan


----------



## Sunny (3 Jan 2020)

Andrew365 said:


> I misread your point, but this would again require you to be able to time the market, which I don't believe you can do.
> 
> 
> 
> ...



I don't really get your point about stress tests. Banks don't want to be long cash. It's a drag on profitability so they manage it. No bank is sitting on hundreds of millions of euro sitting in their vault or own bank accounts because they see cash as 'safe asset' and part of their investment portfolio and strategy. If the cash isn't working for them, they are losing money so will only hold what they have to meet liquidity and regulatory requirements. Banks don't choose cash as an Investment option.


----------



## Andrew365 (3 Jan 2020)

Sunny said:


> I don't really get your point about stress tests. Banks don't want to be long cash. It's a drag on profitability so they manage it. No bank is sitting on hundreds of millions of euro sitting in their vault or own bank accounts because they see cash as 'safe asset' and part of their investment portfolio and strategy. If the cash isn't working for them, they are losing money so will only hold what they have to meet liquidity and regulatory requirements. Banks don't choose cash as an Investment option.



Sunny,

I am not making the point that Banks invest in cash. Brendans point was that as an investor holding cash is riskier than a diversified equity portfolio. What I was trying to explain is that Cash is not risky but the institution you hold the cash in has risk of default. The use of stress test is to support that as Central Banks do not stress Test cash as an asset class. 

I agree with your points banks only hold the cash needed to meet capital requirements.


----------



## Andrew365 (3 Jan 2020)

Brendan Burgess said:


> It was certainly a mistake not to "stress" cash deposits in the Irish Nationwide and Anglo.  There was a significant risk of default.  However, if the Central Bank did that, they would have precipitated a default.
> 
> By "stress" here, I mean that they should have required AIB to have higher reserves against their deposits in Anglo.
> 
> Brendan



How do you stress a cash deposit? You don't you stress the Bank, stress the leverage ration, include additional capital buffers. It is worth baring in mind here that we are now in 2020 and not 2008, the capital requirements, and stress testing regimes have been completely overhauled. If 2008 happened today, it would not have the same impact on Banks as it did back in 2008. That is why I have been challenging your comments around the credit worthiness of Irish Banks. To the outside eye Banks are unchanged and still the bad guys, but there has been significant positive regulation over the last 10 years.


----------



## Andrew365 (3 Jan 2020)

Brendan Burgess said:


> It was certainly a mistake not to "stress" cash deposits in the Irish Nationwide and Anglo.  There was a significant risk of default.  However, if the Central Bank did that, they would have precipitated a default.
> 
> By "stress" here, I mean that they should have required AIB to have higher reserves against their deposits in Anglo.
> 
> Brendan



The below is the indication of a well capitalized institution that you should not be concerned with depositing money with. 


_The transitional CET1 ratio increased to *21.1% (11 billion)* at 31 December 2018 from 20.8% at 31 December 2017, and is significantly in excess of the minimum capital requirement. 

At 31 December 2018, the Group’s CET1 requirement of *9.725%*, comprised of a Pillar 1 requirement of 4.5%, Pillar 2 requirement (“P2R”) of 3.15%, a Capital Conservation Buffer (“CCB”) of 1.875% and a 1% UK Countercyclical Capital Buffer (“CCyB”) requirement that equated to a Group requirement of 0.2%.



			https://aib.ie/content/dam/aib/investorrelations/docs/se-announcements/2018/Pillar-3-2018.pdf
		

_


----------



## Brendan Burgess (3 Jan 2020)

Hi Andrew 

There is no doubt that Irish banks are safer today than they were in 2008. 

That does not mean that they are risk-free. 

If you don't take my word for it, would you take S&P's?


----------



## Andrew365 (3 Jan 2020)

Brendan Burgess said:


> Hi Andrew
> 
> There is no doubt that Irish banks are safer today than they were in 2008.
> 
> ...



Brendan, again you are twisting my words. I have never said that the Banks are risk free.

I am going to write up a post at the weekend to describe the difference between risk and rate of return which is what you have been confusing as risk.


----------



## Duke of Marmalade (3 Jan 2020)

Ahhh!  Let's try putting a few numbers on this.
_5 year horizon:_
Worst 10% for cash (in real terms)  €3.9m
Best 10% for cash €4.0m
Worst 10% for diversified equity portfolio €2m
Best 10% for equity €8m
_40 year horizon:_
Worst 10% for cash €3m
Best 10% for cash €4.5m
Worst 10% for equities €4.5m
Best 10% for equities €25m.

So I hope I have reflected both camps' views here.  The short term risk of equities are greater but the long term risks of cash are greater.  But we still can't tell which is best for OP.   We need to know his "utility curve" or as it is sometimes called his risk appetite.  It is possible that the prospects of seeing half your money blown in 5 years are so horrendous that it overrides all else in which case you don't touch equities notwithstanding the better long term prospects.


----------



## Brendan Burgess (3 Jan 2020)

Hi Andrew

I look forward to your longer piece on this. 

I certainly do not set out to twist your words, but I assumed from everything you have been saying and from your initial post, that you consider deposits in banks to be risk-free. 



Andrew365 said:


> My advice is to invest in your pension, buy whatever state investments are available and put the rest in the bank





Andrew365 said:


> There is zero need to take on the risk of the stock market.



So let's be clear. Do you agree that bank deposits are not risk-free?


----------



## Brendan Burgess (3 Jan 2020)

Duke of Marmalade said:


> Worst 10% for cash €2m
> ...
> Worst 10% for equities €4.5m



Hi Duke

Where are you getting these figures from?

And what do they mean? 

Are you saying that 10% of the time, a depositor will lose half their cash over a 40 year horizon?

Brendan


----------



## Andrew365 (3 Jan 2020)

What seems to happen here often is that when discussing cash held on deposit, inflation is brought into it. However when discussing equity returns inflation is never brought into it. 

This post should be titled 'Is Cash Risk Free'. 

Lastly everyone seems to be confusing the return on investment with Risk...........that is not industry standard. 

If I put $4m in a Bank account today earning 0% interest, in 5 years time providing the bank does not default I will have $4m. Now the purchasing power of the money will be effecting by inflation but I will not have physically lost any money. 

It is the same as if you invest $4m in Equities with a 10% total return over 5 years you will now have $4.4m. However, if the total inflation happened to be 15%, would you say you had lost money?


----------



## Duke of Marmalade (3 Jan 2020)

Brendan Burgess said:


> Hi Duke
> 
> Where are you getting this figure from?
> 
> Brendan


_Boss _everything off the top of my head.  I was just suggesting that over 40 years the 10% worst outcome for equities is probably as good as the best 10% outcome for cash.  I am just drawing pictures, it is the perspective that counts.  Do you have a different picture of the risk profiles?
_*  I have edited the cash 10% figure to a real loss of €1m over 40 years._


----------



## Andrew365 (3 Jan 2020)

Brendan Burgess said:


> Hi Andrew
> 
> I look forward to your longer piece on this.
> 
> ...



Cash is a close to being risk free as possible. Holding cash on deposit in a bank introduces the potential of Loss Given Default of the Bank. So yes they are not risk free, but a cash deposit in the bank is still less risky than an investment in Equities, if you were right and it was more risky then by default cash deposits would offer a higher rate of return than Equities.


----------



## Duke of Marmalade (3 Jan 2020)

I raised the issue of utility curves, or the relative value that people put on gains versus losses.
It seems to me that at one extreme billionaires have a completely neutral utility curve. Losing a few hundred million is no worse in pain terms than gaining a few hundred millions is in pleasure terms.  Therefore they seem to invest heavily in real assets - the risk premium is a free lunch for them, in fact they probably enjoy taking the risks.
The opposite would be true for someone struggling to get by who inherits a modest sum of money.  The prospects of losing a significant amount of that on stockmarkets would deter him from such a pursuit.
One might like to speculate on OP's utility curve.  His income and prospective pension would seem to be adequate for his own foreseeable personal consumption needs.  Possibly he should be considering the utility curves of his prospective beneficiaries.  Would they prefer the certainty of €4m or the prospects of €25m?


----------



## Brendan Burgess (3 Jan 2020)

Andrew365 said:


> This post should be titled 'Is Cash Risk Free'.



Hi Andrew

The realistic option for most people is to put their money on deposit with a bank.  And I want to tease out whether this is risk-free. 

Cash is hugely risky as it can easily be stolen.

Brendan


----------



## Brendan Burgess (3 Jan 2020)

Andrew365 said:


> What seems to happen here often is that when discussing cash held on deposit, inflation is brought into it. However when discussing equity returns inflation is never brought into it.



Good point which I have often wondered about. 

A good review of historical returns should show the return on cash compared with the return on equities compared with inflation.  And both should be adjusted for inflation. 

Cash has very little chance of exceeding inflation. Equities would be expected to beat inflation over the longer-term.

Brendan


----------



## EmmDee (3 Jan 2020)

The measurement of risk, volatility and the combination of both versus an alternative are well discussed topics - Alpha & Beta returns and Sharpe Ratio analysis are probably worth being familiar with if thinking of alternatives for capital


----------



## NoRegretsCoyote (3 Jan 2020)

Brendan Burgess said:


> Sure, his €4m could halve over the next 12 months.  *But a bank deposit could be wiped out entirely.  The Irish state finances are in a terrible position and default, while unlikely, is certainly a possibility.*



This claim is absurd.

Bank deposits <€100k are protected by the Deposit Guarantee Scheme.

If that is exhausted resolution of large banks in Ireland is backed up by the EU Single Resolution Fund which is now at €30bn.


----------



## Brendan Burgess (3 Jan 2020)

This guy has €4m.  Is that covered?  Or is €100k of it covered? 

Brendan


----------



## Gordon Gekko (3 Jan 2020)

Andrew, you seem to be just taking the definition of ‘risk’ as ‘volatility’ and beating people over the head with it.

Most other people, myself included, seem to be consciously and deliberately applying the ordinary meaning of the words ‘risk’/‘risky’/‘riskier’.

I stand by my contention that over a 20+ year time horizon from this point, a €4m cash deposit is ‘riskier’ than €4m invested in (say) an MSCI All Country World Index tracker. Inflation is a real risk for cash deposits (no pun intended). A ‘bail-in’ of depositors is also a risk, albeit a less significant one.

People are less concerned with inflation in the context of equities because both the nominal returns and the real returns tend to be positive over time. Deposits, on the other hand, seem destined to yield negative real returns for the foreseeable future.

Taking the original poster, he/she has €4.2m in cash, no debt, they’re 40, and they still earn a substantial income. Volatility should be of no relevance to this person; it’s a very poor ‘measure’ of risk.


----------



## Duke of Marmalade (3 Jan 2020)

This conviction that equities are "bound" to outperform over the longer term is borne of a fairly limited historic experience.  Who could have foreseen the technological developments of the last 100 years?  Markets continued to underestimate and under price that.  Are they overpricing a repeat of the phenomenon over the next 50 years or so?
Imagine a meteor hit the planet killing millions and causing economic chaos and destruction.  Stockmarkets would all but be wiped out as we struggle to cope and rebuild.
Hey, I am not saying we should worry about the risk of a major meteor hit.  But there are those (myself somewhat skeptical) who predict that climate change if not addressed will have such a catastrophic effect. The world seems reluctantly coming to the consensus (once The Donald has passed) that the risk is real and that of itself will cause huge efforts to head off this "meteor".  There will of course be some winners (Tesla to name but a few) but on balance this enormous defensive project must become a huge drag on world economic progress.  Is climate change to be the negative mirror image in the next 50 years of the technological miracle of the last 100 years?


----------



## Brendan Burgess (3 Jan 2020)

Hi Duke

There is no such thing as a risk-free investment. That is the main point I am trying to establish in this thread.  Bank deposits are not risk-free.

We know that equities are risky.

If you accept that bank deposits are risky, then you have to decide for yourself which has the least risk.

History would suggest that equities have less long-term risk and more upside potential.

But this time might well be different.

If a meteor hits, the banks will probably go down as well.  But if we are burnt to a cinder, we won't care. 

Climate change is a more likely occurrence and a definite risk to everything.

Brendan


----------



## NoRegretsCoyote (3 Jan 2020)

Brendan Burgess said:


> This guy has €4m.  Is that covered?  Or is €100k of it covered?
> 
> Brendan



€100k per bank.

But think if you wanted to take the odd step of keeping €4m on deposit you'd probably go to the trouble of opening accounts in multiple countries.....


----------



## RedOnion (3 Jan 2020)

NoRegretsCoyote said:


> take the odd step of keeping €4m on deposit


Ah, you missed all the fun!
That's exactly the context of the discussion.


----------



## NoRegretsCoyote (3 Jan 2020)

RedOnion said:


> Ah, you missed all the fun!
> That's exactly the context of the discussion.



I know!

Even €100k in every Irish deposit-taking institution is more cash than I think anyone sensibly needs on deposit.

Normal retail depositors in the EU are pretty well covered IMHO.


----------

