The Term Deposit Trap

This week FoxPlan founder and director John Killick shares his thoughts on the fear that Kiwi investors often allow themselves to be guided by when making investment decisions.

If investing in NZ’s top stocks is generating a 5.3% dividend yield and a 6% non-taxable capital gain, why would you leave money in a term deposit? You can currently select term deposit time frames and ‘enjoy’ the fruits of the yield (i.e. interest rates), so too can you receive interest payments from ‘the NZ dividend fund’ every July and December – and your capital is not constrained by a term, it is liquid.

At a recent investment workshop, I was questioned about the likelihood of ongoing dividends from this source – in other words, the security of capital and/or the security of income.

Kiwis are fixated by fear of market volatility. NZ’s leading companies trade in the same market as NZ/Australasian banks. Their objectives are not dissimilar. Profit for shareholders, growth of revenue, service to their various customers and their governance at least if not better, managed. But understanding how capital markets work and why shares markedly outperform bonds and cash is beyond comprehension for many – and where there is doubt, driven by bias or disbelief, investors flock to what they perceive is safety (i.e. fixed interest investments in banks or conservative asset allocations in their KiwiSaver funds). It is costing investors big time and while the media and talking heads focus to fees and ‘responsible investing’, investors sit in naive optimism hoping their money is ‘safe’ and growing nicely in fixed interest oblivion.

My belief is that as a nation we haven’t grown up ‘financially speaking’ – we remain stalled in the headlights of a social democracy flip flopping between the ‘capitalism’ of Key/English and the ‘social conscience’ of Arden/Robertson. As a nation we make up less than half of 1% of the world’s capital markets (the total shareholding of international companies) and Australia only 2%. The banks and financial institutions we hold as our security blankets are a mere blip in a thriving international economy.

Like Greece or Spain in the European Union, Australasia does not compete or compare with the likes of the US (48%), UK (6%) or Japan (8%).

Shares in the great companies of the world have always outperformed fixed interest by a margin of 300% - in all eras, for the last two hundred years (real return after inflation and taxes). There is no time in history when investors have lost money in a well-diversified equity investment over a twenty-year time frame. The percentage of rolling periods with positive return are 99.76% over 15 years and 83.25% over three years. These stats are a testament to the phenomenally curative aspect of the free market, free enterprise system. Left to its own devices, the marketplace ultimately heals itself. In bad times, great companies have the resources to stay the course (even through the depression, companies paid dividends). When a free market goes down – and this is critical – it has never stayed down. The advance is permanent, the declines are temporary.

Harking back to the money in term deposits and declining interest rates driven by Central Bank protocol (the OCR), I make a couple of points;

• As my clients will attest, I promote cash reserves, whether in a bank or unit trust. But a cash reserve is not an investment – it is a cash reserve for emergencies and opportunities – a back stop. Just like a spare tyre or a parachute – we hope not to have to call on it, but are grateful when needed. A component of risk management. Without cash reserves, I would not propose investors be fully invested in equities.
• Secondly, as a short-term measure for accumulation, cash (whether bank savings accounts or term deposits) is the ideal.
• Thirdly, where investors have missed the boat and there are minimal retirement savings, there is no point in paying fees to ‘planners’ or fund managers – whatever the investment return it isn’t going to improve their lifestyle.

But where investors are using term deposits because they ‘fear’ capital market Armageddon and are thus adjusting lifestyle downwards to match a declining income - it is disappointing, and it needn’t be so.

The first rule of investing is to make a first-class plan – with a first-class adviser.

If you would like to have a conversation about investing with a first-class adviser, please email to arrange a meeting with one of our investment advisors.

The views and opinions expressed in this newsletter are not intended to be a personalised service for an individual retail client. The views and opinions are general in nature, may not be relevant to an individual's circumstances, and constitute class service only. Before making any investment, insurance or other financial decisions, you should consult a professional financial adviser of FoxPlan Limited.
A disclosure statement is available on request, and free of charge.

Our Advisors

View All