Have term deposits done their dash?
Traditionally, term deposits have been a popular strategy for many retirees and Kiwis who weren’t quite sure about how to choose or access other investments or needed to access the money in the near future.
What has happened with term deposits?
Before the Global Financial Crisis (GFC), New Zealand’s Official Cash Rate was sitting at 8.25%. The official cash rate tends to influence the rates which banks offer on, amongst other things, Term Deposits. According to data from interest.co.nz, in November 2007 the average 1-year bank term deposit rate was 8.6%.
Fast forward to now, and in the intervening years the Reserve Bank of New Zealand (RBNZ) has cut the Official Cash Rate – it now sits at the lowest level on record, 1%. The average bank term deposit rate was down to 3.3% by November 2017, and on 1 November 2019 was down to 2.6%. What’s more, the RBNZ have indicated that interest rates are more likely to head further downward rather than upward.
The Official Cash Rate also impacts on other things like mortgage rates – borrowers may be pretty happy with the rates they are paying, relative to the past. But investors who once may have relied mostly on term deposits to earn some extra income are facing a challenge.
The attraction to term deposits is understandable, as they deliver a stable return and, in the past, have generated pretty good income to investors.
What other options are there?
There are a number of different places where investors are turning to earn some income from their investments.
One option is investing in riskier assets like shares. Many New Zealanders would be surprised to know that the New Zealand share market has returned over double what the NZ property market has over the past ten years. Yes, shares can go up and down, but throughout time they have delivered strong returns to investors.
According to a study by Credit Suisse, the New Zealand stock market has returned an average of 10% per year since 1900 – a time period which includes many ups and downs such as the Great Depression of the 1930s, the 1987 market crash and the GFC.
Diversified income funds have become increasingly popular as investors have started to consider their options in a world of low interest rates. These funds typically hold a combination of corporate bonds, dividend yielding equities, listed property and infrastructure stocks.
KiwiSaver has not only been a fantastic tool in helping New Zealanders save for their retirement, but also in showing New Zealanders the benefits of sticking the course with investing in managed funds. After launching around the time of the GFC, KiwiSaver has shown investors that if you stay the course with a mixed portfolio of shares and more defensive assets, while there will be some ups and downs, over the longer term you could beat the return you’ll get with term deposits.
The increasing complexity of investment options available means now is a great time to seek financial advice. Advisers are able to listen to your goals and concerns and design an investment solution which suits your situation.
This article is reproduced with permission of the authors, Chris Di Leva & Shannon Murphy of Harbour Asset Management, one of the fund managers that Milestone Direct work with on a regular basis. www.harbourasset.co.nz/disclaimer