Is Now a Good Time to Lock Savings?

L

Lightning

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Term deposit rates are currently up to 4.25% for a 1 year term with Raisin.

Some Irish banks pay 3.00% for various terms.

Not that long ago term deposit rates from Irish banks were near zero and Raisin offered low returns too.

Many commentators expect the ECB to start cutting rates next year. Some don't.

Maybe I'm stating the obvious but it would seem to me that now might be a good time to consider locking in rates before potential ECB cuts and banks start cutting too. But could be wrong.
 
How long would you lock in for?

If you are thinking of locking in for three years for example...

1) Your plans may change and you might need the money before that.
2) If your horizon is 3 years, you should be in the stock market and not deposits.

Brendan
 
Brendan Burgess said:
If your horizon is 3 years, you should be in the stock market and not deposits.
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I strongly disagree.

If you have an identified expense (house deposit, wedding, education, whatever) that you expect to fall due in three years, you really shouldn’t be in equities.

IMO equities are only suitable where you have an investment horizon of at least 10 years.

Bear in mind that global equity returns for the first 10 years of this century were negative. And that’s not the first time that’s happened.
 
Brendan Burgess said:
How long would you lock in for?

If you are thinking of locking in for three years for example...

1) Your plans may change and you might need the money before that.
2) If your horizon is 3 years, you should be in the stock market and not deposits.

Brendan
Click to expand...

Regarding the right term, it depends on personal circumstances. If someone is purchasing a house in 1+ years time then obviously perhaps locking some of their deposits in a 1 year term deposit could be considered.

With term deposits one always needs to consider the risk of needing the money during the term. The risk can obviously be reduced by only locking some but not all savings. Locking 100% of deposits is rarely wise.

Deposits can play a part of a portfolio. With equities/ETF's etc playing another part if appropriate for personal circumstances.
 
Interest rates this time next year will be higher or lower than now - or maybe even the same

The truth is no one knows - not even the "experts"

You should base your actions on what is available now and what your requirements/needs are - trying to second the guess the future is futile and a waste of time
 
You could invest in the stock market with companies that pay good dividends. Many companies are paying dividends above what the banks are offering in interest. Not all companies that pay high dividends are well run companies but you could educate yourself on those that are.

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@Lightning
Your question is timely. I have moved money around over recent months to avail of the increased rates, both variable and fixed term. I was pondering the question you posed over the last couple of days in relation to (1) some further cash that is currently available and (2) whether it makes sense to leave money in variable rate deposits (e.g. BUNQ at 1.56%). I totally agree with @jpd that there is no point second guessing the future. We need to make our decisions based on what is available and what we expect, and not beat ourselves up if circumstances change. We would all like to think that deposit rates will increase further and hold something in reserve to avail of opportunities that may arise, but a fixed AER of 3% to 4% over three years is also very tempting. The missing link for me is the rubbish rates that State Savings are offering. Historically, State Savings offered the same gross rates as other deposit takers, and the absence of DIRT was the icing on the cake. Now, State Savings are discounting their rates to eliminate the DIRT advantage which makes the decision alot more difficult. On balance, I’m tempted to lock in for 3-4-5 years, or look at Gov Bonds.
 
I have had the same thoughts in the past two weeks. I currently have locked in for 3 year deposit with PTSB which is compounding at just over 9% ( 3% AER ) and others funds spread across ECB variable returning platforms like TR.

I believe a second 3 year PTSB deposit is the best option for ease of setting up/DIRT deduction and offers decent guaranteed secure returns and could avoid any future drop in ECB rates which could potentially start to happen from March/April onwards of course this is an educated guess I’m making tbh based off ECB recent commentary around EC inflation.

And TR or Raisin still offer ECB or better rates if you diversified your saving deposits out.
 
jpd said:
Interest rates this time next year will be higher or lower than now - or maybe even the same

The truth is no one knows - not even the "experts"

You should base your actions on what is available now and what your requirements/needs are - trying to second the guess the future is futile and a waste
Click to expand...
 
Lightning said:
Term deposit rates are currently up to 4.25% for a 1 year term with Raisin.

Some Irish banks pay 3.00% for various terms.

Not that long ago term deposit rates from Irish banks were near zero and Raisin offered low returns too.

Many commentators expect the ECB to start cutting rates next year. Some don't.

Maybe I'm stating the obvious but it would seem to me that now might be a good time to consider locking in rates before potential ECB cuts and banks start cutting too. But could be wrong.
Click to expand...
It's a good point. I have my mortgage locked at 1.95% for another 5.5 years so why not lock in savings, rather than pay down mortgage? Currently with Trade Republic at 4%, but that is variable.
 
I too was thinking about locking a certain amount of money away into a fixed savings account before interest rates potential start to drop off. At the moment I have all of my savings split across variable deposit accounts with instant access such as Trade Republic, LightYear and Advanzia. I had been reluctant to lock money away as I may want to purchase my first home in the next 12-18 months if the right opportunity comes along. I am wondering, should I just leave enough for a 10% deposit in a variable savings account and put the rest of my savings towards a fixed savings account to potentially take advantage of higher rates? I currently have enough savings for a 20-30% house deposit but I'm wondering if it would be unwise to miss out on my only ever opportunity to leverage first time buyer status of only needing 10%. For example, is it better to put down a 30% deposit on one single property, or buy two with 10% down on my first and 20% down on the second one that could potentially be rented out to generate additional income.
 
Brendan Burgess said:
2) If your horizon is 3 years, you should be in the stock market and not deposits.
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That advice goes against almost anything I have ever read on the matter. 3 years is nowhere near the length of many a financial crisis. Typically, investment horizons of around 15 years are mentioned, for "safe" investing in stocks, to make sure you have the time to ride out any crisis before you need to sell. If there is any possibility that the cash will be needed in 3, 5 or even 10 years then the stock market is really not the place to have it. 3 years - no way Jose.
 
murphaph1 said:
That advice goes against almost anything I have ever read on the matter.
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Yes it is. Conventional wisdom is often wrong.

There are a few reasons why people recommended a long horizon - very high transaction costs especially with life insurance products.

This is no longer a consideration as transaction costs are much lower.

And the fact that the longer your horizon, the less likely you are to lose money.

But the total aversion to loss does not make any rational sense in most cases

Case 1
Take someone who expects to trade up in 3 years.

They have a house worth €400k and no mortgage.
They have €100k in cash.
They want to trade up in three years to an €800k house.

Option 1 - Conventional wisdom - Hold onto the cash and borrow €300k in three years.

Option 2 - Invest the €100k in the stockmarket.
Outcome 2A - the stockmarket falls 50% over the next three years - he will have to borrow €350k
Outcome 2B - the stockmarket increases by 50% over the next three years - he will have to borrow €250k

He can comfortably handle Outcome 2A.
Outcome 2B is more likely than outcome 2A , so he should invest in the stockmarket.

There is a psychological loss aversion where we place more weight on losses than gains, but it's not rational.

Case study 2.
Renter with €50k deposit who intends to buy a house in 3 years.
If he loses half his deposit , he won't be able to buy a house.
So he should stay in cash as he can't handle the risk.

Brendan
 
Brendan Burgess said:
Case study 2.
Renter with €50k deposit who intends to buy a house in 3 years.
If he loses half his deposit , he won't be able to buy a house.
So he should stay in cash as he can't handle the risk.
Click to expand...
But how do you know the OP or somebody else reading this advice isn't in exactly this position (or needs the cash for something else that he can't borrow for)? This is a very common scenario (saving deposit for a house), not some edge case.
 
Hi murph

I was answering Lightning's question where there was no indication that he had to avoid losses at all costs. He sounds like the type of person who has their long term savings in cash and that is very risky - much riskier than investing in shares long term.

He was putting cash away for a fixed term. "locking it away"

But your point is valid. The problem is that you can't write an essay in response to every post. Maybe I will write a Key Post on the topic and link to it.

Brendan
 
Hi Duke

I would be happy to bet one of my houses but not all of them. :)

Of course I would not bet all my assets but if I got 2/1 I would make a substantial bet.

And it would be even better if I got repeated goes at it.

Brendan
 
Brendan Burgess said:
Hi Duke

I would be happy to bet one of my houses but not all of them. :)

Of course I would not bet all my assets but if I got 2/1 I would make a substantial bet.

And it would be even better if I got repeated goes at it.

Brendan
Click to expand...
Fair enough. But the Equity Risk Premium is "rational". It is what the market thinks is a fair price for risking loss - i.e. there is an implied risk aversion. Whether this is a good trade off for you depends on your risk aversion versus the market's risk aversion. I buy all the theory, but I myself am very risk averse. I invest substantially in "risk free assets" knowing the odds are stacked against them. You describe my approach as the risky one, I don't think I buy that.
Back on topic, I invested in a 4 year Irish govie yielding 2.5% p.a. after tax. That is less than is available for shorter horizons but is the market price, as folk have said who am I to second guess the market?
 
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