Are bank deposits risk-free in the long term?

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?
 
Brendan Burgess said:
Hi Duke

Where are you getting this figure from?

Brendan
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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.
 
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Brendan Burgess said:
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.





So let's be clear. Do you agree that bank deposits are not risk-free?
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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.
 
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?
 
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Andrew365 said:
This post should be titled 'Is Cash Risk Free'.
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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
 
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.
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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
 
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
 
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.
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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.
 
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.
 
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?
 
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
 
RedOnion said:
Ah, you missed all the fun!
That's exactly the context of the discussion.
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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.
 
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