Break all Term Deposits and Invest in Cheap Shares

[ENP]

I have around 23k in term deposits.

I'm thinking of breaking them and investing in shares since they have all gone on sale. The fundamentals of the businesses I would buy won't change during this "crisis" the markets are currently having.

So why not?

Thoughts please?

[ENP]

And don't give me this "don't catch a falling knife" rubbish

If it was good value at $1 a week ago, it's even better value at 80 cents today.

[CJ]

But last week they were valued based on global growth forecasts, now that growth has been cut so future profits will be lower which results in a lower share price

Could be some good buys still. I am leveraged already so have no capacity to look.

[ENP]

For example.

RYM- Ryman Health Care

People will still want somewhere to retire. People still need a place to call home with their facilities. Older people with money have most of their money in term deposits etc, so won't be largely affected.

SKT- Sky TV

People will still watch Sky Sports, support the All Blacks, etc. If people lose their jobs due to the economic climate, they will spend more time at home anyway and will want to watch TV.

How are these two companies affected by the USA downgrade and the fact that Greece and others can't pay bills? Not much if you ask me.

POT- Port of Tauranga

Now I see your point on this one. Lots of agriculture/horticulture/other exports is the main business. If people in Europe/USA don't want to buy our milk/lamb/cows, etc then this could be a big problem for a company like POT. Hence, if gone off them as of late.

Plenty of other companies in NZ and OZ that aren't affected greatly. CCL, WOW, DMP. All food based. Someone is not going to say, no sorry due to Greece not being able to pay their bills, I'm not going to buy a coke, pizza, do my grocery shop today.

[Lizard]

Hi ENP,

• How long does it take to break the term deposits and then get the money into the market?
• How much will it cost you in forgone interest and break fees to hold the money in a cash account vs the term deposits if this downturn lasts another 21 months?
• How sure are you that you will be able to invest near the bottom rather than on a dead cat bounce?
• Remember that if the market falls 50%, but you think it is safe to invest after it has fallen 25%, you will still watch a third of your money seemingly evaporate - how will you feel if that happens?

Since we're not supposed to give financial advice, I'm hoping that answering those questions will tell you what is right for you!

And just to pontificate further about where this market might go:

At this stage, it is pretty difficult to guess when this downturn will finish. It depends a lot on whether we end up with an austerity-poverty downward spiral or whether consumer and business spending holds up enough for businesses to maintain divs.

We don't have the same balance sheet challenges (and potential dilution) that we were facing last time, so there is a better chance that shares bought before the bottom will eventually recover if you happen to mis-time purchases.

For now, I'm reasonably optimistic that dividends will hold this season and underpin the market. NZ in particular has enough earthquake-response stimulus already budgeted for, that some pullback in consumer and business spend can be absorbed without triggering the death spiral. The path to reforms that produce manageable borrowings in the west is going to take time to go down, but with enough political will, the path should keep getting clearer. At some point, the markets will start to believe that there is a path. Although, a major banking crises is the precipice to the right of the path and the possible injury from sliding down it, unpredictable.

All-in-all, I remain cautiously optimistic, but recognise that there is a lot more to be gained by investing near the bottom than holding through. Don't rush. Rushing is for day-traders and those who have to make a daily living finding the next trade!

[voltage]

Okay great buying opportunity but what do I buy everything on sale. Topped up RYM, looking at Mainfreight and BHP. What about global companies coke etc

[Snoopy]

I have around 23k in term deposits.

I'm thinking of breaking them and investing in shares since they have all gone on sale. The fundamentals of the businesses I would buy won't change during this "crisis" the markets are currently having.

So why not?

Thoughts please?

Hi ENP,

Some good advice dished out by others on this thread so far. I would say at times like this it is time to reaffirm your investment objectives, and see how the market opportunities stack up relative to those.

It would certainly tempting to break all of your term deposits. But sometimes I think it is worth the extra discipline of just waiting for those term deposits to mature. That will give you more time to evaluate those competing investment opportunities. Of course another factor is how far out those term deposit maturity dates are. But I can't see a great fix for, in particular, the Eurpean debt crisis for years. So there may be other opportinities for the patient coming in the market similar to what it has dished up in the last couple of days.

IIRC you are saving towards a decent house deposit, in perhaps a couple of years time. There is no guarantee that in a couple of years you will able to sell out of any investments made this week at a profit. But I would say this opportunity is too good to pass up and do absolutely nothing. If I was in your situation I might just break enough of that term deposit portfolio to make one purchase (say $6k or so) now, just to satisfy that investment itch. Then I could wait for the rest to mature on a rolling basis, and make the decision on what to do with those funds later.

Saving for a property, I would tend to look for a sharemarket listing that had a property component to it. That way if the property market goes up in the next two years, then so should the underlying investment. If the property market tanks then your investment may go down. But since you then wouldn't need as much money as a deposit to buy your own property, this would not matter.

Of the shares you have considered, the obvious one that meets this criteria is RYM. Has the market gifted you the opportunity of correcting your mistake of 'selling out' a few months ago?

SNOOPY

[lou]

And don't give me this "don't catch a falling knife" rubbish

If it was good value at $1 a week ago, it's even better value at 80 cents today.

Don't catch a falling knife unless you are a talented circus performer.
Wait for it to hit the floor and then pick it up.

[Sauce]

Saving for a property, I would tend to look for a sharemarket listing that had a property component to it. That way if the property market goes up in the next two years, then so should the underlying investment. If the property market tanks then your investment may go down. But since you then wouldn't need as much money as a deposit to buy your own property, this would not matter.

Hi Snoopy,

Your posts are usually littered with good sense and rationality, but I simply do not follow this logic at all.

The way I see it, the only rational decision for ENP, were he to cancel his term deposits, would be to invest in what he believes has the greatest odds of beating his cost of capital - i.e. his term deposit rate rate + break fees - regardless of other considerations. If the choice of vehicle is equities this would usually mean the best quality business at the best available price. And this may, or may not, have anything to do with residential real estate.

In regards to any risk to his future property buying power - that's simply a 'go there' or 'don't go there' decision. Once he decides to 'go there' then he needs the best odds of success, which means making the best choice. Limiting yourself to the property sector to link your potential loss or gain to residential property prices, is simply madness. Especially so at a time when property has more fundamental downside risk than upside potential, during your assumed 2 year time frame. And when there are seriously undervalued but fundamentally excellent businesses to choose from.

Even if it was a sound strategy, it would be big stretch of the imagination to assume that any 'business' could provide this speculative volatility 'marriage' to residential property 'prices' - the extreme amount of variables in businesses returns, not even to mention the market forces of both shares and property, are just too complex. No business returns or share price returns are likely to follow residential property prices with any predictability at all.

I believe that idea is long on emotional comfort and short on rationality. I look forward to being corrected Snoopy

Regards,

Sauce

P.s. For the record I am all for ENP using the funds to buy RYM. Wise choice in my opinion. But for very different reasons than Snoopy!

[ENP]

I agree Sauce.

I don't understand these people that buy investments as a "hedge"

Hedge against bank fees by buying WBC, ANZ, etc. Hedge against electricity prices by investing in CEN. I think this is silly thinking.

It reminds me of this Martin Hawes article... http://www.martinhawes.com/recent-articles.shtml

He is hedging against oil buy investing in NZ Oil and Gas.

If you want to hedge against something, buy the best performing asset you think rather than simply investing because of what industry it is in and the expense you are trying to hedge against.

Also, on a side note, who else has the same thinking as me if they are in cash (savings accounts, term deposits, etc)