# Equities v Cash (SSIAs)



## Tammy (2 Feb 2003)

Take the 'hit' now. Switch to deposit based!

By doing this NOW you will still be guaranteed a positive return. 

Ignore the obvious at your (financial) peril.

The 'bear' market will continue for a number of years to come.

Yes, "units" will be purchased more cheaply but the liklihood of your 'basket' increasing at a rate necessary to recoup your 'looses' is Nil.


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## Alex (2 Feb 2003)

"the liklihood of your 'basket' increasing at a rate necessary to recoup your 'looses' is Nil"

Would you like a lesson in elementary probability???

Or spelling/typing (can't figure out which is to blame)?


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## macnas (3 Feb 2003)

*equities*

The cost of units in the equity basket is now very low so you can purchase more of them now. Hopefully the markets will sometime swing back and then you will have accumulated lots of units at low low prices and your basket will be overflowing? Remember you are going to have 25% added!


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## Damacles (3 Feb 2003)

Alex, if you can't recognise an (obvious) typo I think I'll look elsewhere for a "lesson" in  elementary probability!
 However, if you insist in applying probability theory to the issue in question you will arrive at the same basic conclusion.


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## ClubMan (3 Feb 2003)

*Equities*

_"Yes, "units" will be purchased more cheaply but the liklihood of your 'basket' increasing at a rate necessary to recoup your 'looses' is Nil."_

The likelihood is _not_ nil.  It is not possible to say more than that without specifying the term over which the losses are to be recouped.

There is no reason to assume that an SSIA investor intends to uplift his investment at the expiry of the five-year term.

_Edited by ClubMan to fix typo identified by US._


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## Alex (3 Feb 2003)

Tammy/Damacles (I presume you are one and the same person as there is an identical post to Tammy's in the SSIA area but it's from Damacles),


"the likelihood of recouping your losses is nil" (correcting 2 typos)

This means you are saying that it is a physical impossibility to recoup your losses.  Absolutely zero probability.  No chance, none whatsoever at all.  Unless of course 'nil' is a typo and what you meant to type was ',in my humble opinion, low'.

Pop into Excel and work out for yourself what sort of future return would be needed to recoup losses to date (and don't forget that (1) some funds such as Eagle Star's 5*5 are only down 10% since April 2002 according to last Friday's Irish Times and (2) some people are only 9 months into a 5 year scheme).  THEN consider whether you think there is a zero (zero!) percent chance of this future return being achieved.  Let us know how you get on.


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## Damacles (4 Feb 2003)

Alex, thanks for your prompt retort.

"This means you are saying that it is a physical impossibility to recoup your losses. Absolutely zero probability. No chance, none whatsoever at all."

No it doesn't. The "nil" is qualified by the (albeit mis-spelt)  word "likelihood ".

To come back to the central point:
A deposit bases SSIA has a certainity of outcome and notwithstanding your 'Excel' modelling the probability (likelihood) of an equity based product out-performing a deposit based product over the term of an SSIA will (now) tend towards nil.Equally, I would contend that the likelihood of re-couping the opportunity loss over the remaining term of an Investment based SSIA is likely to be NIL.


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## XXXAnother PersonXXX (4 Feb 2003)

*?*

Does it make sense to try to apply likelihood functions to essentially chaotic data?


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## US (4 Feb 2003)

*Equities v Cash*

_Take the 'hit' now. Switch to deposit based!

By doing this NOW you will still be guaranteed a positive return. 

Ignore the obvious at your (financial) peril.

The 'bear' market will continue for a number of years to come.

Yes, "units" will be purchased more cheaply but the liklihood of your 'basket' increasing at a rate necessary to recoup your 'looses' is Nil._

The logic is flawed.

Even if we accept for a moment that the likelihood of recouping losses is small if we remain in equities, it *does not follow* that we should now switch to cash.

The only reason for switching to cash would be if we beleived that, *from here on*, cash will perform better than gilts over our investment timeframe (which Damacles has not bothered to specify).  

If we _are_ satisfied that, over that time, cash will perform better than equities, then we should switch to cash *but this would be true even if we had earned thumping profits to date on equities*.

In other words, the losses we have sustained in equities to date are *wholly irrelevant* in deciding whether to switch to cash now.


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## Alex (4 Feb 2003)

Damacles' quotes:

1. "The "nil" is qualified by the (albeit mis-spelt) word "likelihood "."
2. "the probability (likelihood)"

So, you agree that likelihood is another word for probability and I'm sure you'll agree that zero is another word for nil.  Therefore, when you say that the 'likelihood is nil', this is just another way of saying 'the probability is zero'.

You should have taken me up on that elementary probability lesson.

However, hopefully US's sensible post will have got through to you.


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## Damacles (4 Feb 2003)

"....investment timeframe (which Damacles has not bothered to specify)." 

Thank you US for beginning to address the issue which Alex is too smart grasp.

What we are talking about here is SSIAs. The time-frame is set by the terms of of that product, and that is central to my premise. This is not a philosophical debate on Probability Theory. It concerns the performance of  equities over the past 2 years and there likely performance over the next 3 or 4 years.

What happens on expiry of that specific time-frame is not relevant. At that point we are free to make  a further judgement on the markets, whether we come from a Deposit Based or Equity Based SSIA.

My central contention is the Likelihood that those coming from a Deposit Based SSIA will have a materially larger 'pot' to re-invest than those who fail to read the signals.


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## ClubMan (4 Feb 2003)

*The time-frame is set by the terms of of that product, and that is central to my premise.*

After five years the SSIA matures and exit tax of 23% of the interest/growth is levied. However there's nothing to stop one continuing to invest the remainder with the erstwhile SSIA provider or elsewhere. In that respect the fixed five year timeframe is arguably irrelevant.


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## US (4 Feb 2003)

*Equities v Cash*

Actually, Damacles, I’m with Alex on this.

It is not correct, from a grammatical point of view, to say that the word “nil” is qualified by the word “likelihood” .  To be pedantic, the correct position is that the word “likelihood” is qualified by the word “nil”.  To say that “the likelihood is nil” does not, to an English speaker, mean that there is a small likelihood.  It means that there is no likelihood whatsoever; the event concerned cannot happen.  The likelhood of a hurricane in Dublin tomorrow may be less than 1%, but it is not nil.  The likelihood of the sun rising in the west is nil.

On the time-frame point, there is no particular reason (except, perhaps, an emotional one) to choose the fifth anniversary of commencement as the appropriate date for review of investment performance of the assets held in an SSIA.  A review can be undertaken at any time, of course - you are suggesting a review now – but there is no magic about the fifth anniversary unless, for some reason, the investor intends to liquidate his investment at that point.

And my central point remains unanswered.  Even if we assume that the probability of equities recovering their losses of (say) the last twelve months over (say) the next four years is low (and I for one am not prepared to _assume_ that) it does not follow that a switch to cash is indicated.  The question is simply whether the expected return on equities over the next four years is higher or lower than the expected return on cash over the same period.  Introducing the notion of “recovering losses” simply confuses the issue.

Evidently you feel that the return on cash over the next four years will exceed the return on equities and, if so, that is a good reason to switch.  (Obviously to persuade others you’ll want to say _why_ you think cash will outpeform equities.)  The considerations which you mentioned in your original post were not, however, a good reason to switch.

*And finally . . .*

Is it really true to say that the prospects of equities yielding a return which will enable the SSIA investor of one year’s standing to recover his losses over the next four years is very low?

Between 4 February 2002 and 3 February 2003, the ISEQ total return index fell from 7490.95 to 6134.14, a fall of 18.1%.  That fall obviously did not occur evenly over the year but if, for the sake of simplicity, we assume that it did, then I calculate (or, rather, Excel calculates for me) that an SSIA investor contributing €100 per month would, at the end of the year, have €1,105.

If he continues to contribute €100 per month, and if he is to “recover his losses” (i.e. end up with a pot of at least €6,000) what return does he have to earn over the next four years?  Excel tells me that a return of just 0.68% a year will do it.  His existing pot of €1,105 will grow to €1,136, and he will pay further contributions of €4,800 which will grow to €4,864 – total €6,000

So, on this model, what you in effect saying is that the likelihood of equities returning 0.68% p.a. or more over the next four years is nil, or close to nil.

Of course, the model is oversimplified.  And it makes no allowance for charges.  But it does illustrate that, with 80% of the term still to run and the weight of money invested all the time, recover from the stunningly bad performance of the first year can be achieved on returns which,in other circumstances, would look extremely modest.


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## suckered (4 Feb 2003)

*ssia*

Myself and the wife have a BOI deposit ssia each. what i was thinking of doing was to switch one of these to an equity based ssia, as the markets have lost so much over the last couple of years. It is my view that they will recover from these lows over the next 4 years, and in effect I would be buying in at a much cheaper rate than those who had invested a year ago in the equity based ssia.Does anyone know if this is possible, are there any pitfalls?


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## ClubMan (4 Feb 2003)

*Re: Equities v Cash*

*Does anyone know if this is possible*

Yes - it is possible to transfer an SSIA even from one provider to another (e.g. in the case where you wanted to invest in an equity SSIA from a provider other than BoI). However I don't know how easy this is in practice and haven't heard from anybody with first hand experience of transferring.

*are there any pitfalls?*

Possibly - you if you do transfer, particularly to another SSIA provider, then you will want to be particularly careful that you don't miss any monthly direct debit contributions thereby causing your SSIA to cease prematurely. You should also try to choose an equity SSIA with low charges that suits your investment strategy.

Also - analyses of the market state and future direction other than your own (e.g. that it will continue to fall and that equities will not outperform deposits over the lifetime of the SSIA) are equally valid (or invalid!) as you have seen earlier...


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## Dynamo (4 Feb 2003)

*Congratulations*

to US on a splendid demolition job.


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## Damacles (5 Feb 2003)

US, I am delighted to see that you have gone to quite some trouble in attempting to demolish my contention that the wiser course of action at this juncture is to switch out of equity based SSIAs.

My original posting was intended to provoke argued opinions for, and against , remaining in Equity Based SSIAs. Regrettably, nothing I have seen to date changes my mind that a wiser (and more prudent) course is to crystallise losses now and switch to a Deposit Based SSIA.

I will concede to your “pedantic” interpretation regarding the positioning of the word “likelihood” (although take care that you don’t incur the wrath of our mutual friend Alex when misspelling it!)  in my original posting. However, I had rather hoped that by following the thread of my later postings, that a reasoned rebuttal of my viewpoint would be forthcoming. As I said in an earlier posting, it was not and is not my intention to enter into a philosophical debate on the use and abuse of the English language. Nor is my opinion meant to indicate a general preferance for cash as opposed to equities – that is a debate I would welcome at another time. So now let me deal with the ‘meat’ of your argument as it relates to the subject that I had hoped would start a real debate: CASH V EQUITIES (SSIAs)  


The subject is about SSIAs. These products have an absolute term of 60 months – nothing more and nothing less. Most of the other salient points surrounding the operation of these a/cs are widely known and are probably not relevant to this debate at this point. On the expiry of the 5 years the SSIA will cease to exist (unless of course a then Minister decides to extend the scheme). Therefore, the “time-frame” is not “emotional” , it is actual. You, and indeed I, may well choose to maintain our investments after the expiry of  the 5 years in question and the certainty at that point is that they will not then enjoy SSIA status and therefore are not relevant to this subject.

I have no recollection of saying, nor implying, that the return on cash over the next 3 or 4 years will “exceed” the return on equities. It may do, it may not. What I certainly feel is that the return on a Deposit Based SSIA will exceed that of an Equity Based SSIA  over it’s remaining term. Equally I believe, that for cyclical and structural reasons, virtually all cash based SSIAs will outperform their equity equivalents*. This is my strongest reason for recommending a switch to the deposit SSIA – it is, I believe, clearly indicated. All investments are about timing and I believe the time is now.

US, you believe that the introduction of “the notion of recovering losses” confuses the issue. Naturally I disagree. Only the foolish, or those who are easily ‘sold’ invest for reasons other than to maximise return against given risk. I am pleased that you went to the trouble of calculating what you believe to be the accretion required to achieve a break even point,  and for that I genuinely thank you. I will not argue your figures with you at this point but again I believe your conclusions are wrong. Let me again bring you back to the subject: EQUITIES V CASH (SSIAs). The important thing here is VERSUS. Maybe you might crunch a few more numbers. For a more valid comparison take the cash value of  the notional (existing) equity based SSIA (in your workings I think you are indicating it is €1,105) and assume a conversion to a deposit product for the residual term. Calculate the maturity value. Now tell me the  percentage increase on (the former) equity SSIA necessary  to match that figure. For speed, don’t even bother with the ‘interest paid  by the Deposit Taking Institution, but to discount the “charges” on an equity product is an error in principal. I have not done the sum and I am not a mathematician, but I will confidently state that the result will be far greater than your 0.68%. Now let me come back to recovering ‘losses’. In your workings you have clearly shown a loss to date (again, I won’t argue your figures at this point). I am not sure if, in your example, you are indicating that €1,105 is the net surrender value of the units àfter one year’s contribution (incl. Of Gov. Bonus) amounting to €1,500. &nbsp &nbsp &nbsp &nbsp If that is the case then I would state the investment to be at a ‘loss’ of  €395 or ‘down’ by 26.33%.&nbsp &nbsp &nbsp &nbsp I don’t understand why you bring up the “ ISEQ total return index” and I fail to see how it adds to your argument. For some reason you have chosen SSIA products effected in the past year. I have no immediate quarrel with that other than to note that some Investors and Depositors have been in for nearly 2 years now. You might run your slide rule over that period also (if only to add to your position – or mine!). But let’s stay with your chosen example. I say “switch” and be GUARANTEED a payout of €7,105 plus net interest (est. c.€390) which for rounding I’ll call €7,500 net for a personal investment of €6000.

 Yes, the market may boom over the coming 3 or 4 years. There again they might languish or fall further. It is our prerogative to form a view. My view on SSIAs is that the certainty of the return on the Deposit Product wins hands down over the “ifs”, “buts” and “maybes” of a (to date) poorly performing Equity Product*. 

Regards.

D O’C

*No doubt there is some exotic hybrid product out there which has bucked all the trends. If so, please let me know.


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## Dynamo (5 Feb 2003)

*Equities Versus Cash*

Hi Damacles,

You're missing an important point in this debate, I think. You said:


> I have no recollection of saying, nor implying, that the return on cash over the next 3 or 4 years will “exceed” the return on equities. It may do, it may not. What I certainly feel is that the return on a Deposit Based SSIA will exceed that of an Equity Based SSIA over it’s remaining term.



First of all, these two are obviously linked. If the return on equities *does exceed* the return on cash over the next 3 to 4 years, then equity-based SSIAs *will* do better than deposit-based SSIAs over the remaining term, provided the excess return is more than the higher charges on the equity products.

Secondly, whether equities will do better than cash over the remaining term is *the only* question which is relevant to a debate on whether an investor should switch to cash now, which is your contention. An equity SSIA investor has lost money so far, a deposit SSIA investor has made a small amount of money. But the equity investor's losses to date are the equivalent of a sunk cost - there's nothing he/she can do about them. So the decision on whether to switch to cash now is purely a judgement on whether you think cash will do better than equities over the remaining life of the investment, or perhaps more accurately, whether you think the excess returns possible from equities will justify the extra risk of holding equities.

So "recovering losses" has *nothing to do with it*. You invited US to crunch some more numbers to calculate the extra return needed from the equity SSIA over the remainder of its term to beat a conversion to the deposit SSIA. Surely you can see, without reference to a calculator, that all that is needed is for the equities to recover the extra charges on the equity accounts - for example, if the deposit account is paying 3% p.a. and the charges on the equity account are 1% p.a., then anything greater than 4% p.a. from equities will give the equity account a higher maturity value.

Obviously, no-one can *know* whether equities will do better than cash over the remaining 3 to 4 years of your SSIA. But a judgement on that issue is the only one that's relevant for your suggested decision to switch.


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## ClubMan (5 Feb 2003)

*Cash v Equities*

Hi Damacles

_“The subject is about SSIAs. These products have an absolute term of 60 months – nothing more and nothing less.”_

I disagree.  The tax treatment will change after 60 months, but that does not affect the attractiveness or otherwise of the underlying investments.  In particular it would be absolutely no reason for the investor to realise his investment after 60 months if his investment objectives actually suggested a term of, say, 120 months was appropriate.  Nor is it a reason for reviewing allocation as between asset classes after 60 months – the tax treatment will change in the same way for all asset classes.

I would concede that, if the investor has invested in an SSIA solely and exclusively to obtain the tax advantage and he has no other interest or objective, 60 months is the natural term of his investment.  He should, I think, have been in cash from the outset, so the issue of switching to cash now should not arise for him.

_“I have no recollection of saying, nor implying, that the return on cash over the next 3 or 4 years will “exceed” the return on equities. It may do, it may not. What I certainly feel is that the return on a Deposit Based SSIA will exceed that of an Equity Based SSIA over it’s remaining term.”_

Point taken.  I think what you’re saying here – and please correct me if I am wrong – is this.  The expected return on a cash SSIA is, basically, the same as the expected return on any cash fund, which is expected wholesale interest rates less a very modest amount in respect of charges.  The expected return on an equity SSIA is same as the expected return on any equity fund, which is the expected market return less a somewhat larger amount in respect of charges.  Thus your prediction that the cash SSIA will outperform is not a prediction that the expected market returns for equities will exceed the expected market returns for cash, but that the expected market return for equities, _reduced by charges,_ will exceed the expected market return for cash _reduced by (lower) charges_.

How does this affect the figures I quoted earlier?

Well, if we assume a total expense ratio of 2% p.a. (which I think is generous) then the fall in our equity unit value over the last twelve months was not 18.1%, but 20.1%.  In order to recover these losses over the remaining four years, we need to achieve an annual increase in unit prices of 0.75% which, allowing for the expenses, means a market return on equities of 2.75%.  Of course, if we can find an equity fund with an expense ratio of less than 2% - and I think we can – this figure improves.

If the obective is not to recover our losses over the next four years, but simply to beat cash, (and I think this _should_ be our objective) we need to make an assumption about the charges in a cash fund.  Let’s assume that the charge is 0.25% p.a.  In order for investment in an equity SSIA to beat investment in a cash SSIA over the next four years, market returns on equities have to beat market returns on cash by (2% - 0.25%) which is 1.75%.  Again, with an equity fund with an expense ratio of less than 2%, this figure improves.

_“I am not sure if, in your example, you are indicating that €1,105 is the net surrender value of the units àfter one year’s contribution (incl. Of Gov. Bonus) amounting to €1,500. If that is the case then I would state the investment to be at a ‘loss’ of €395 or ‘down’ by 26.33%.”_

No.  I am assuming a contribution of €100 per month, or €1,200 per year, _inclusive_ of the government contribution.

“I don’t understand why you bring up the “ ISEQ total return index” and I fail to see how it adds to your argument.”

Because I think it’s the appropriate index.  Do you disagree?  Why?

_“For some reason you have chosen SSIA products effected in the past year.”_

Well, I have to pick some period.  

What if we assume that the SSIA started 21 months ago, in May 2001, and therefore has 39 months to run?  I’ll spare you the workings, but, in that scenario, to recover our losses we need to achieve a rise in unit prices over the remaining 39 months of 2.47% p.a., implying a market return of 4.47% p.a. (or less, if we can find a fund with an expense ratio of less than 2% p.a.)

The main flaw in my model is that it assumes a steady decline in the index over the period to date, whereas this was not, in fact, the case.  The only way to correct for this is to do a much, much more detailed model which, quite frankly, I haven’t the patience for.  The purpose of the model is simply to show that recovering losses incurred to date does not necessarily require stellar performance over the balance of the period.  As it happens, I don’t think this is a terribly important point, which is why I’m not prepared to spend a lot of time refining the model.  The object of an investor should not be to recover the losses he has incurred to date, but to maximise his return over the balance of his investment period.  This simply requires him to form a view as to expected returns for cash and for equities over his timescale, adjust for charges and make his asset allocation decision accordingly.  My model, however refined, will not help him to do that.

_“My view on SSIAs is that the certainty of the return on the Deposit Product wins hands down over the “ifs”, “buts” and “maybes” of a (to date) poorly performing Equity Product.”_

Fair enough.  But you’re expressing a preference here for stability of returns over volatility, which is not the same thing as expressing a preference for higher returns over lower, and which, obviously, not every investor will share.

_Edited by ClubMan to fix ezCode formatting._


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## raul (6 Feb 2003)

*cash v.equities*

A few thoughts on this debate:

-what has happenned up to now is irrelevant

-with inflation in Ireland @ c.5% ,deposit returns are  actually negative

-the level of dividend on European Equity markets,including Ire/UK, is well ahead of deposit rates

All bets are off if you believe economic conditions going forward are likely to deteriorate significantly( with a resultant fall in earnings and,in time,dividends). 

Otherwise,the case for Equities is made by the level of dividend alone.


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## Paco (6 Feb 2003)

*ssias - deposit or investment*

As pointed out by Damocles the subject here is not deposits in general where Raul's point regarding inflation is true.The subject concerns SSIA deposits, a horse of a very different colour. Those who joined the deposit scheme at the outset and contributed the max. each month since have personally contributed €5,588. However, their deposit is now worth in excess of €7,000. The difference between those two figures is a gain of >€1,400 which even if discounted by Raul's inflation rate of 5% (let's even up the inflation  a little to say 10% cumulative  since inception 22 months ago) shows a return that is seriously positiveand way ahead of inflation.


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## Damacles (6 Feb 2003)

Hi US,

Thank you for your comprehensive response to the issues raised in my last posting. It makes interesting reading but with all due respect I feel an attempt is being made to re-define the question. I am sure that this is accidental on your part but if we are to grapple honestly with the problem we must stick to question. 

The topic under discussion is SSIAs and SSIAs alone. What you, Dynamo or any one of us chooses to do with our investment on the extinction of the SSIA Scheme is outside the scope of this argument and it is there it should stay. 

Talk of changed “tax treatment” and “tax advantage” has me baffled (maybe I should be worried ).  So too does 120 months or 120 years. Let me again stress that we are talking about a finite term governed by the provisions of the SSIA Scheme. Furthermore, the clock is already running on the products under examination.

I believe we share a common objective: how to make an informed decision with a view to maximising the return on an SSIA investment.

US, thank you for conceding at para. 3 of your posting today. Forgive me if I lacked clarity regarding the likely outcome of the competing products over the residual term of an extant SSIA product. It is my contention that past performance, current conditions and future outlook squarely indicate that a switch to a Deposit Based product is the wise thing to do NOW.

Let me take your example and my calculations for a moment. I offer your punter the certainty of €7,500 in 4 years time provided s/he switches now. In your calculations on your example you are pre-occupied in getting her/him ‘out’ with €6,000. What you should by showing the punter is the rate of increase required to match (or better) the Deposit SSIA return.

I did say that I would desist from disputing your figure work, for the moment, and that is still my position. I admire your frankness in stating that you do not have the patience to refine your model; for my part, I would not have the ability. However, if I agree to debate an issue, where your conclusion(s) and my assumptions are based on data chosen by you. I must insist on consistency in your data set. And this is where I do have a problem.

Let me quote from your posting today

“…I calculate (or, rather, Excel calculates for me) that an SSIA investor contributing €100 per month would at the end of the year…”

Now, quoting from your previous posting, (where you carried out the calculations 
“No. I am assuming a contribution of €100 per month, or €1200 per year, inclusive of the Government contribution”

At first I believed this was a mis-reading on my part. another look at the earlier posting shows clearly by your reference to him “continuing to contribute €100 per month” and “his contribution for the remaining 48 months being €4800”. No mention of gov. bonus here.

I am now beginning to see why you honestly believe that an up turn of a mere 0.68% is all that is required to keep your punter happy.

Perhaps you might clarify the apparent discrepancy so that we can develop the argument further. Otherwise, we’ll be comparing the proverbial apples and oranges..

My reason for querying your choice of “The ISEQ total return index” is more to do with curiosity than any strongly held conviction. Personally I would rather base the argument on actual performance data across a range of indices commonly used by the main product providers – but, whatever!

Finally US, of course I am expressing a preference for higher returns . That is why I nail my colours to the mast and recommend an immediate switch to a Deposit Based SSIA.


Kind regards,

D. O’C.


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## Alex (6 Feb 2003)

"It is my contention that past performance, current conditions and future outlook squarely indicate that a switch to a Deposit Based product is the wise thing to do NOW."

Can you tell us exactly what it is about past performance, current conditions and future outlook that brings you to this conclusion?  If it's just gut instinct and/or a natural aversion to risk, could you let us know.

Do you accept that there is a possibility that equity based SSIAs could out-perform deposit based ones?

"I am now beginning to see why you honestly believe that an up turn of a mere 0.68% is all that is required to keep your punter happy."

With apologies to US if I'm cutting across any potential reply, this isn't what this calculation was about.  US calculated this percentage to show you (Damacles/Tammy) how low a return was needed to recoup losses, thus demolishing your argument that the possibility of recouping losses was nil.  It was nothing to do with whether or not this return would keep an investor happy.

"with all due respect I feel an attempt is being made to re-define the question"

What is the question?  You started this topic by asserting that there was no chance of recouping losses with an equity SSIA so everybody should switch to a deposit SSIA (NOW!).

As I see it, the question is - are you better sticking with your equity SSIA for the remaining term or should you switch?  You have given NO evidence to back up your recommendation that people should switch.  Can we have some please?

By the way, I don't count the following as evidence - they are just more un-backed assertions:

"Ignore the obvious at your (financial) peril."

"The 'bear' market will continue for a number of years to come."

"if you insist in applying probability theory to the issue in question you will arrive at the same basic conclusion"

"the probability (likelihood) of an equity based product out-performing a deposit based product over the term of an SSIA will (now) tend towards nil"

"My central contention is the Likelihood that those coming from a Deposit Based SSIA will have a materially larger 'pot' to re-invest than those who fail to read the signals."
(What signals? - posts from Damacles on AAM?)

"nothing I have seen to date changes my mind that a wiser (and more prudent) course is to crystallise losses now and switch to a Deposit Based SSIA"

"What I certainly feel is that the return on a Deposit Based SSIA will exceed that of an Equity Based SSIA over it’s remaining term. Equally I believe, that for cyclical and structural reasons, virtually all cash based SSIAs will outperform their equity equivalents*. This is my strongest reason for recommending a switch to the deposit SSIA – it is, I believe, clearly indicated. All investments are about timing and I believe the time is now."
(I love this one - what are the cyclical and structural reasons?  What makes a switch 'clearly indicated'?)

"Yes, the market may boom over the coming 3 or 4 years. There again they might languish or fall further. It is our prerogative (sic) to form a view. My view on SSIAs is that the certainty of the return on the Deposit Product wins hands down over the “ifs”, “buts” and “maybes” of a (to date) poorly performing Equity Product*. "
(So is this just about risk aversion?)


Damacles/Tammy, can I summarise what I think your stance is - do correct me if I'm wrong.

"My personal opinion is that deposit based SSIAs will outperform equity based SSIAs over the remaining term.  This is a gut feeling I have, I have no evidence to back this up or I would have shared it with my AAM buddies.  Switching to a deposit SSIA is the safer course of action - you will be guaranteed a positive return.  However, you will give up the chance of higher returns in the equity markets should these markets boom (or even do moderately well - say a couple of percentage points over a deposit SSIA return) over the next 3/4 years - which in my opinion is unlikely."


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## US (6 Feb 2003)

*Equities v Cash*

Hi Damacles

_“The topic under discussion is SSIAs and SSIAs alone. What you, Dynamo or any one of us chooses to do with our investment on the extinction of the SSIA Scheme is outside the scope of this argument and it is there it should stay . . . Talk of changed “tax treatment” and “tax advantage” has me baffled (maybe I should be worried ). So too does 120 months or 120 years. Let me again stress that we are talking about a finite term governed by the provisions of the SSIA Scheme. Furthermore, the clock is already running on the products under examination.”_

As I understand the Special Savings Investment Account, (a) contributions paid over the five-year period attract the government subsidy, and (b) this stops at the end of the five year period, and the growth to date is taxed.   The account will not be closed at this point, unless the accountholder chooses to close it.  The investments will not be liquidated, unless the accountholder chooses to liquidate them.  Nothing changes, except the tax treatment.  Hence there is no “finite term” for the investment, except whatever term the individual investor chooses to set.  And, apart from the case mentioned in my previous post, there is no reason why that term should be five years.

_“I believe we share a common objective: how to make an informed decision with a view to maximising the return on an SSIA investment.”_

I would change this slightly; how to make an informed decsion with a view to maximising the return on an investment which happens to be held in a Special Savings Investment Account.  The basic principles of investment are unchanged; the only relevance of the fact that the investment in held in an SSIA is that the asset allocation choice is confined to deposits and equity funds.

_“I did say that I would desist from disputing your figure work, for the moment, and that is still my position. I admire your frankness in stating that you do not have the patience to refine your model; for my part, I would not have the ability. However, if I agree to debate an issue, where your conclusion(s) and my assumptions are based on data chosen by you. I must insist on consistency in your data set.”_

You’re quite right; my two posts are inconsistent in what they say.  I apologise.

*To be absolutely clear, my model assumes total monthly contributions of €100, and this  includes both what the individual pays and what the government pays.*  I was wrong to describe the €100 per month as a contribution coming solely from the investor.  Hence my calculations do not depend in any way on using the government contribution to recoup investment losses.

_“Let me take your example and my calculations for a moment. I offer your punter the certainty of €7,500 in 4 years time provided s/he switches now. In your calculations on your example you are pre-occupied in getting her/him ‘out’ with €6,000. What you should by showing the punter is the rate of increase required to match (or better) the Deposit SSIA return.”_

Couple of points here:  

I’m not “preoccupied” with getting the punter out with €6,000.  It was you who introduced the notion of recovering losses to date in your very first post. I have already stated explicitly that I don’t think that it’s a relevant consideration at all.

Now that I’ve clarified that €100 per week is the gross contribution, inclusive of the government element, you don’t offer the punter the “certainty” of €7,500 in four years time.  You offer €6,000, provided the return on the cash fund is at least 0.68% per year (which, I concede, is highly likely).

As for showing the punter is the rate of increase required to match (or better) the Deposit SSIA return, that’s easy (as I have already pointed out).  It’s a rate of return equal to or greater than the Deposit SSIA return.  This is a truism.  

_“Finally US, of course I am expressing a preference for higher returns . That is why I nail my colours to the mast and recommend an immediate switch to a Deposit Based SSIA.”_

This statement from your earlier post:

_“My view on SSIAs is that the certainty of the return on the Deposit Product wins hands down over the “ifs”, “buts” and “maybes” of a (to date) poorly performing Equity Product.”_

which I quoted in my earlier post, is as clear an expression as I have seen of a preference for certain returns over uncertain returns, not for higher returns over lower.

The key issue here is simply this; which is expected to perform better over the residue of the investors intended term; a deposit account or an equity fund?  Assuming a term to the expiry of the five-yeat tax break, you clearly believe that the deposit account will perform better, but apart from a reference to past performance, which I believe is irrelevant, and a rather vague allusion to “current conditions and future outlook”, you haven’t said why.


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## 0235 (19 Feb 2003)

*cash v equity*

Is it really true to say that the prospects of equities yielding a return which will enable the SSIA investor of one year’s standing to recover his losses over the next four years is very low?

Between 4 February 2002 and 3 February 2003, the ISEQ total return index fell from 7490.95 to 6134.14, a fall of 18.1%. That fall obviously did not occur evenly over the year but if, for the sake of simplicity, we assume that it did, then I calculate (or, rather, Excel calculates for me) that an SSIA investor contributing €100 per month would, at the end of the year, have €1,105...............

US,
If charges are included what are the figures then. My understanding of equity products is the charges are on going?
It may be interesting for people to post their returns/losses todate to do a true comparision between equity and cash.
Regards
0235


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## US (20 Feb 2003)

*Equities v Cash*

Hi, 0235

_"If charges are included what are the figures then. My understanding of equity products is the charges are on going?"_

Keep reading through the thread.  My post at 10:58 on 5 February contains a worked example with an allowance for charges.


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