Author Topic: Equities or high interest bank deposits?  (Read 1579 times)

alwaysonit

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Equities or high interest bank deposits?
« on: August 04, 2014, 12:06:48 PM »
Most people estimate that an index will rise 10% per year on average, going by past performance. Does this apply to all indexes?

The history of the S+P 500 is long enough to average out, but can we assume a long term 10% growth in European and emerging market equities also?

Being a cautious risk taker, Iíve looked at bank accounts that pay high interest on hard currencies and also have a deposit insurance scheme in place. On the USD, Azerbaijan pays 9.8% on a 1 year deposit and has a $40k ish usd cap to the insurance scheme per bank. Mongolia pays 7% and has a $10k cap per bank for the insurance scheme. The negative point here is that the insurance scheme pays out in local currency which will likely be devalued at that point. Which investment is safer?

matchewed

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Re: Equities or high interest bank deposits?
« Reply #1 on: August 04, 2014, 12:24:34 PM »
Okay so you have lots of questions.

First you need to define an index. Not all index funds will return the same amount because an index fund is a set of investments predefined by the index. So a bond fund won't return the same as a S&P 500 fund. They have inherently different investments in them.

No you can't assume long term 10% growth in European equities. See this paper (pg. 14 of the pdf).

Investing in either Mongolia or Azerbaijan banks sounds like a pretty terrible idea. You will have a high chance of losing your money and not getting the returns advertised. Which is "safer" between the two? Neither. They have the same risks except for the stability and particularities of the individual economies of each country.

brewer12345

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Re: Equities or high interest bank deposits?
« Reply #2 on: August 04, 2014, 05:56:15 PM »
I think you would have to be smoking crack to put money in a bank account in hellholes like Azerbaijan or Mongolia.

RyeWhiskey

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Re: Equities or high interest bank deposits?
« Reply #3 on: August 04, 2014, 06:44:43 PM »
Most people estimate that an index will rise 10% per year on average, going by past performance. Does this apply to all indexes?

No. All indexes are different and have different expected rates of return (as well as expected risks). Furthermore, "most people" don't estimate a 10% return for equities, especially not after inflation is factored in. Think 5% as a real return, and that would be great.

The history of the S+P 500 is long enough to average out, but can we assume a long term 10% growth in European and emerging market equities also?

No. We can't assume anything.

Being a cautious risk taker, Iíve looked at bank accounts that pay high interest on hard currencies and also have a deposit insurance scheme in place. On the USD, Azerbaijan pays 9.8% on a 1 year deposit and has a $40k ish usd cap to the insurance scheme per bank. Mongolia pays 7% and has a $10k cap per bank for the insurance scheme. The negative point here is that the insurance scheme pays out in local currency which will likely be devalued at that point. Which investment is safer?

Neither of those investments are "safe" and neither of them are going to return that amount after currency fluctuations, exchange rates, and fees and commissions. "Being a cautious risk taker" means assessing your risk tolerance for your portfolio as a whole and allocating your assets accordingly.