Taking the Plunge

Term Deposits pay such very low interest. How can I get my money to work better for me? I know Shares can offer more return, but I’m just not sure about taking all that much risk.

These are questions many are asking at the moment, particularly those in retirement. We understand the anxiety around Shares - wanting to balance the low returns from seemingly safe investments, with the higher returns achieved by taking on more risk.

Bank Term Deposits may feel “safe” but, as a longer-term option, they’re really not. If you intend to spend that capital within the next year or two, then leaving it in Term Deposit is likely the right thing to do. OK, it won’t earn much after tax, but it’s not going to fall in value at precisely the wrong time and in that, these defensive positions still have a role to play.

But – it is the spending value of Term Deposits that is less safe in the medium to longer-term, due simply to escalating inflation. Inflation doesn’t just arrive, it builds. So, to a great extent, there is time to adjust a portfolio strategy. Right now, it feels as though we’re approaching a time of escalating inflation, and so those with all of their capital tied up in bank deposits, maybe need to consider the options.

Investing in share markets carries some risk but, not investing in share markets can also carry risk.

Interest rates (Term Deposit rates) have been steadily falling since the year 2000, while Property and Share Markets have been steadily rising. Inflation has apparently been relatively benign (really?)! Given we have perfect hindsight, let’s examine where we should have been investing…

In 2000, an average four-bedroom house in Christchurch cost $200,000. Today (at the end of 2020), Christchurch's median house price was $500,000 (source REINZ). Over those twenty years, homeowners paid rates & insurances, there were likely repairs and upgrades. Some properties would have enjoyed some income through rents being paid and mortgage interest was likely a cost. To sell incurs costs.

Ignoring all of this, the simple return ($200,000 to $500,000) was 4.49%pa.

So, how did Share Markets fare? Looking at just the NZ & US markets (all converted to NZ dollars); over the last twenty years, average annual returns were:

NZ Shares US Shares (S&P500)

That looks pretty good… but, we know it was by no means plain sailing so, let’s look at the bad years. We know that on average, five years in twenty will be a bit wobbly. How do you feel about these moments? And importantly, what do you do when faced with these kinds of results?

Period NZ Shares US Shares (S&P500)
March 2000 – October 2002-12.0%-46.5%
October 2007 – March 2009-43.8%-34.2%
February 2020 – March 2020-29.8%-26.4%

This is volatility at its extreme and we cannot avoid the risk of capital values rising or falling. But, providing we invest wisely (if we pick quality and we diversify), it’s likely the biggest risk and despite that troubling volatility, had our $200,000 been invested in the above share markets, we’d have seen the value of our capital increase to something between $714,388 (NZX) & $886,852 (USX).

Term Deposit rates slowly diminished over the twenty years in question, and we’d estimate 5%pa as a probable weighted average. So, running with that: $200,000 earning 5%pa compounds to $530,000 over twenty years. But, as interest is 100% taxable in NZ (capital gains are not), the actual outcomes would likely have been much more in favour of Property and Share Markets.

Always seek professional advice before investing – and don’t fear a little volatility.

Tony Munro | CFPCM, Post Grad Dip. Bus.Studies (PFP), FSP 5501

The views and opinions expressed in this article are intended to be of a general nature and do not constitute personalised advice for an individual client. A disclosure statement is available on request and free of charge.

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