Equities v Cash (SSIAs)

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.
 
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.
 
"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."
 
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.
 
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
 
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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