Discussion in 'Deposits' started by Raging Bull, Oct 16, 2013.
In last weeks draw there were 8834 €50 prizes, with the new rate that would drop to 5892
From dub_nerd's summary, the average return for an investor of €100k will fall from 0.81% to 0.58% tax free. Grossed up to the equivalent rate on a deposit account incurring DIRT, this is a fall from 1.5% to 1.0%.
Assuming I'm willing to put up with the administrative hassle and that Friday buzz, does this mean that an investor of €200k is statistically capable of earning 1.16% tax free?
Hi Cowpat, no it doesn't work that way. You can't expect better than 0.58% return on any amount of PBs (within reason). Increasing your holding just increases the chances that you will hit the average within a reasonable timeframe, rather than long periods of drought and sporadic wins. At €100k investment your most likely annual number of €50 wins is 11 (12% chance), but you have an 82% chance of getting between 7 and 15 (i.e. within about a third either side of the average). For €200k your most likely number of wins is 22 (i.e. still a 0.58% return), but you have a 92% chance of getting within a third either side. More money just smooths out the potential lumpiness of your return, it doesn't increase it.
Even postman pat with his 3 prize bonds will eventually hit the 0.58% average, but as he will only win once every 480 years on average he will need a much longer time horizon. The same goes for the larger denominations of prizes -- everyone will actually eventually hit the 0.85% official payout that the NTMA say they are paying, but the distribution of larger denomination prizes is just so lumpy that it's not worth factoring into the calculation. For example, a third of the total payout is in €1m prizes. Even with a €100k investment you will only win one of those every 6,000 years on average. That's why I use 0.58% instead of 0.85% -- it only includes prizes you have a reasonable chance of winning within a sensible time horizon.
The only thing that could possibly tempt me about Prize Bonds is that for €100k your prizes would be coming in about once a month on average. That is a steady accumulation of your "interest", whereas for 5 year Savings Certs, even though you have access to your money any time you want you would forfeit most of your interest on early withdrawal. To be honest, none of them really tempt me at all ... I can still get about 0.4% after tax from the bank and would prefer to keep my money where it can be redeployed quickly if needed.
Is there a problem with the prizebonds website ? I got some new ones last week and wanted to register them on the site. I keep getting an "application error" message when I try to log in to my list of bonds.
I did try their online contact form but that keeps telling me that the number of characters in the message seem to be too long and they are not and it will not send the query !
I have €300k+ in PB's the last few years, sporadic ' wins ', after the recent changes I think it is time it started working harder, accessing the website every Friday is no longer fun as frequently there is a nil return for me and a whopper of a return for the Govt.
As at April 2016 the value of Prize Bonds shows as €2.6 billion.
Stupid question I know but is this billion one thousand million or a million million ?
Since August 2017, the official return on Prize Bonds is 0.5%. In practice, you have to look at the return in €50 prizes only which is 0.27% (or 0.28% if you include €100 prizes). These are the only ones you have any realistic chance of winning.
With DIRT rates set to fall to 37%, the grossed up equivalent interest rate in a bank account incurring DIRT is 0.43%. If you look at the Savings Best Buys thread, there are still some accounts paying better than this. Prize Bonds are therefore a poor investment at present.
As usual, the lumpiness of Prize bonds returns means that they will never be a good investment for amounts less than several tens of thousands of euro.
Do you have to be a rocket scientist to invest in Prize Bonds? No, but it helps. This graphic is taken from a graduate level course in astrophysics. It's about the noise levels associated with taking photographs of objects in deep space (which is why the axis is labelled "photons received").
But what's this got to do with Prize Bonds? The probabilities of winning on Prize Bonds also follow a Poisson distribution (as do the probabilities of any set of rare events that each have an independent chance of happening). Think of μ (Greek letter mu, signifying mean or average) as the number of events that will occur if the odds work out exactly "normally".
In our case μ is not "photons received", but "prizes won". The height of the graph is the odds of winning different numbers of prizes. The peak of the graph is always at μ because that's the most likely number you will win. But look at the top graph where μ is small. There is also a significant chance that you will win zero prizes. This is a so-called "noisy distribution". For large μ (bottom graph) the graph is smoother and you are more likely to achieve the expected return or close to it.
Bottom line: when buying Prize Bonds you have to invest a large enough amount to make it likely that you will achieve the average return. (And as I've mentioned before, the average return these days isn't very good).
Any idea what that magical "amount" would be given the size of the fund and the prizes awarded ??
Prize Bonds distribute currently .5% p.a. tax free. But only about .35% is given in the €50 prizes. Still that’s about double typical after tax deposit rates. I think if you can expect about 2 standard deviations clear of that then you are getting well compensated for the uncertainty.
The standard deviation is the square root of mu, so you want the square root of mu to be less than mu/4. That gives the critical value of mu to be 16 (€50 prizes). At current payout ratios of .35% that implies a Prize Bond exposure of c. 230,000 €-years. The max joint holding is €500k so you would need a c. 6 month horizon to reach the “magical” exposure. If your horizon is say 5 years then you only need c. €50k to make the mark.
Of course if you put a much lesser price on uncertainty the magical exposure is much less. Indeed at these low rates you might place no price on uncertainty, you might even welcome it, in that case any amount will suffice.
Thanks Duke. As usual, you are way out of my league!
I am currently grappling with exposure lengths to get a desired signal-to-noise ratio in astronomical imaging ... it's kinda weird (although also kinda obvious ... but weird) that the "exposure length" to prize bonds works precisely the same way.
So PB interest rates are twice as crap as bank interest rates.
But bank interest rates are still so tiny that you might as well have a (slim) chance of a big prize that PBs offer.
I take the view that they're all crap. It's effectively money-under-the-mattress time. It comes down to choosing the safest mattress -- for me that's Rabo at present.
I find that I am upping my spend rather than stick it under the mattress. Better hotel rooms, better and therefore more expensive flight times, better quality food, (more fillet steaks), not being so mean with the central heating etc. I broke in to a sweat recently when I put some money in a parking meter instead of walking the extra half mile
I have €200k in Prize Bonds. I have not had a win in a few weeks now. I find my attitude is changing in how I spend my money. It might be just an age thing though.
But at least with PBs, you'd have a (slim) chance of winning a large sum of money. No chance of that with Rabo or under mattress.
I would also see PBs as a relatively safe place to keep money.
There is also the "thrill" between taking the letter from Kerry from the postbox, and walking into the house. In that moment, you know you have won something, but you don't know how much. Even if (as has always been the case), you get a cheque for €50, that is a great boost, in comparison to the invisibility of bank interest.
I get the same thrill when getting the email from the Lotto, saying that I have won a prize, and to check my on-line lotto account.
It's the little things
And, I also agree with SoylentGreen (must also be an age thing), enhancing the experiences, and living life is a great way of spending some of the savings.
The chance is depressingly small. I don't find it influences my decision to (not) buy PBs. But I can see the psychology of it, which probably explains why the large prizes have been increased on some occasions when the total payout has been reduced.
I agree with that -- probably one of the safest. But again, not so much safer that I could be persuaded to forego having the money in a bank account where it can be withdrawn or transferred without the administrative hassle associated with PBs.
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