The dollar crossed the NIS 4.5 threshold yesterday, and Israeli investors are getting jittery. After seven years of keeping all their money tied up in low risk high yield shekel assets and deposits, they suddenly find themselves in a new financial state of affairs.
On the one hand the interest on shekel deposits is heading towards zero. On the other, the dollar is gaining 0.5% to 1% a day, bringing back memories of other eras. In their despair, these investors rush to the bank clerk to help them protect themselves from recent events.
The bank clerks have a slew of instruments and ideas from their central managements to offer the frenzied investors. Some want to help the customer, some want to help their banks. It is clear to everyone however, that this is a new era of low interest rates, and the public is going to change the structure of its assets. Here are a few important points to remember, even if your bank clerk neglects to mention them.
Number 1: It is not at all certain you need to "protect" yourselves from the recent rise in the dollar. The prices of most services and products in Israel, even the ones marked in dollars, will not necessarily rise with the dollar, and they definitely won't rise to the full extent of the devaluation. What's important is what is happening with inflation. Though the Bank of Israel may have erred in management of its monetary policy in the last 12 months, it did prove it was capable of keeping the price level steady.
Number 2: Though shekel interest are very low, shekel bonds or deposits still promise something most investment channels can't promise: stability. If you get on the share or mutual fund train on time, you can make a handsome profit. If you miss it, you may take quite a hefty loss.
Brokers and investment managers, with that know-all expression on their faces, almost never really know the right time to get in or the right time to get out. That's probably why most funds have in the last year yielded a lot less then their investment instruments, or why investing with their help led to lower yields than the relevant market indices. These managers are above all able marketing people, and excellent collectors of management fees.
Number 3: The biggest hit in bank branches are foreign currency funds. The clerk will be sure to mention they are dollar linked, and show you how in the last few days their yield was even higher than the dollar's.
It's a good idea to ask the clerk what does this fund do with your money. You'll be surprised to see some of the funds invest most of their assets in Gilbo'a type dollar linked government bonds.
The problem with these bonds is that the sharp leap in their price led to their redemption yields hitting almost zero in net terms. Compare them to U.S. T-bills that yield 3% and then some.
The practical implication is that once the dollar rush is over, and the market re-rpices these dollar-linked bonds more logically, the blow to these bonds might hurt more than you thought.
Number 4: Whether you decide to invest in a foreign currency fund, a share-linked fund or a CPI linked one, the bank clerk is highly likely to point you at a bank run fund which in the last days, month or year enjoyed impressive yield rates.
That's all fine and dandy, but now is the time to wonder what are all these other funds in the very same category, that actually yielded a lot less. Then you'll discover the banks have their own little way of keeping a few funds with different risk profiles in the same category, in such a way that there is always one fund in there that looks good. The problem is you are making the decision now. Tomorrow, or next month or next year another fund altogether may be on top.
Number 5: Many investors are in the next few days bound to get offers to invest in "star" funds, funds that had double-digit yields in the last month.
Do pay attention to the scope of this fund's assets. If it's only a few million shekels, do regard this astounding performance with caution. The performance of small funds tends to fluctuate. With some funds, the managers make sure they have high yields when their till is not filled to the brim. The minute the public pads that till, something awful happens to the yields.
Number 6: Note that most funds collect a purchase commission besides the regular management fees. On days the stock market rallies and the dollar is a-leaping, this may seem redundant. But at the end of the day investors may discover these fees constitute quite a chunk of the profits.
Number 7: Investment managers, consultants and bankers often create a hurried sense with their customers: now is the time to make the decision! These opportunities will never return! Tell your broker, bank clerk, or spouse to relax. Decisions made under pressure with the impression that this opportunity will never repeat itself, are usually the most costly.