TOP MONEY TIPS Issue: August 2011
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By subscription only! Welcome to the August 2011 issue of TOP MONEY TIPS.
If you wish to unsubscribe, send a return email with unsubscribe in the subject line.
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IN THIS ISSUE
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=> World Markets
=> China Thought
=> Ladder Your Bank Deposits
=> KiwiSaver & Market Volatility
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WORLD MARKETS
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World Markets have been affected by the crisis in Greece and the incredible display of the USA Debt level reset negotiations.
If you would like to see why debt levels in the USA are of such concern have a look at the US Debt Clock site. It is frightening stuff.
There are two charts worth study. You can see them by CLICKING HERE.
The first one compares the progress of the current bear market with the market performance of the markets during the 1930,s depression and the performance of the Japanese markets since 1989.
The second chart shows a more detailed view from the last high in Oct 2007 to present.
Put this information together with the trends listed following makes me cautious about investing in shares at the moment. These trends are:-
1. Baby Boomer consumers are shifting from a 25-year borrowing-and-spending binge to a saving mindset. This will affect the developed and exporting nations as consumers curtail the imports of the goods and services many foreign nations depend on for economic growth.
2. Financial deleveraging will reverse the trend that financed much global growth in recent years.
3. Increased government regulation and involvement in major economies will stifle innovation and reduce efficiency.
4. Developed countries are moving toward fiscal restraint.
5. Rising protectionism will slow—even eliminate—global growth.
6. Deflation will curtail spending as buyers anticipate lower prices.
7. Local governments will contract.
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CHINA THOUGHT
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I read an article in the Economist that describes how the One Child policy has skewed China’s gender ratio.
Far more baby boys are born than girls.
In 2010, for example, 118 boys were born for every 100 girls. This guarantees that roughly one fifth of China’s young men will have no possibility of marriage or normal family life.
Given that this will mean tens of millions of young men without the civilizing influence of marital life, the implications for China’s future social stability are not good.
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LADDER YOUR BANK DEPOSITS
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A number of people I talk with are uncomfortable with the comparatively low deposit rates we are getting on Bank Term deposits at the moment. They are also reluctant to lock their money up for the 5 years or so needed to get a higher deposit rate.
One approach to improving this situation is to Ladder your term deposits.
For example, at the date of writing this, a well known bank offers these term deposit rates for amounts $10,000 and over.
Term Deposit time Interest Rate % pa
12 Months | 4.50 |
| 24 Months | 4.80 |
| 36 Months | 5.50 |
| 48 Months | 5.75 |
| 60 Months | 6.00 |
We had $50K to invest as part of a very conservative diversified portfolio.
The first step was to invest $10K for 1 year, $10K for 2 years etc up to $10K for 5 years.
This had the following immediate effect.
The smart part of this strategy happens when the funds on the shorter time deposits mature. You then have the option to either do something else with the money OR reinvest.
If you choose to reinvest I suggest that you reinvest the maturing (say) 1 year funds for 5 years. Do this a few times as each year matures then you will have all your term deposit funds on the top 5 year rate, with a proportion of them becoming available each year.
This also allows you to take advantage of any increases in long term deposit rates. Of course the opposite may also happen and you may be looking at reinvesting for 5 years at a lower rate than the initial deposit.
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KIWISAVER & Market Volatility
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The market volatility in early August was caused by two events. One was the European sovereign debt instability while the world waited for yet another Greek debt bailout.
The second was caused by the USA politics of agreement to increase the USA Federal borrowing limit and the subsequent downgrade by Standard & Poors of USA credit rating. to AA+.
This affect all markets and by extension all KiwiSaver funds with shares as part of their portfolio.
More particularly it affected the valuation of my holding of the Fidelity Options KiwiSaver.
This KiwiSaver fund earns value (or not) by writing put and call options on primarily US government bonds. At the end of July the Fund valuation was $4.88 per unit. The latest figures I can see, as at the 18 August, show a Fund valuation of $3.54. This is a decrease of 27%.
This fund is identified as being volatile and risky, and this is not the first time it has seen this level of changes in value. Have a look at this chart by CLICKING HERE, which shows how the fund coped with the extreme market volatility we saw in 2008. Here the chart shows the Options fund took a big dip in value, but within 1 year it had recovered in value and for the last two years has been the leading KiwiSaver Fund.
The underlying mechanism is that when you write options and you get extreme volatility the premium you get escalates the income you earn from writing the options – Fidelity estimate that it's probably three or four times what they would have got prior to the volatility occurring. So when the market stabilizes the rate of recovery is quite rapid.
I do not yet have the month end August figures but if you would like to see the Month end July 3 year KiwiSaver performance data, CLICK HERE TO EMAIL ME.
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Happy Investing
Stuart Scott, AFA
SavingWorks NZ Ltd
5 Rupi Court, Mt Wellington, Auckland.
Ph: (09)527 8449 0274 901 884
email: stuart@savingworks.co.nz
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