Shares vs Term Deposits, What Should I Invest In?

Term deposits have been making waves lately with their enticing interest rates, sparking conversations about whether locking in a quick 6% return might trump the historically higher gains of the share market. Today, let's embark on an exploration of this common dilemma, uncovering the nuances that should guide our investment decisions.

Picture this: You're pondering your financial strategy, and the question arises – "Why not go for term deposits this year, snagging a solid 6% return, and save the shares for later?" It's a question many are asking as they compare the recent allure of term deposits against the fluctuating returns of the share market.

The conversation typically centers around the immediate perks of term deposits, especially when it comes to long-term financial planning like retirement. Yet, it's vital to anchor this discussion in the fundamental purpose of any investment – what are your goals? Whether it's securing your retirement or achieving other milestones, knowing your WHY can illuminate the path to smarter investment choices.

Sure, the advertised interest rates on term deposits might seem like a windfall, but let's not forget about the stealthy thief known as inflation. Over the years, term deposits have averaged around 4%, often falling short of keeping pace with inflation. The real challenge for investors lies in ensuring that their money's purchasing power remains intact over time.

NZ Inflation rate from June 1990-September 2023

With inflation currently at 4.7% and term deposits hovering around 6%, that's less than a 0.4% gain annually. Still tempted?

A quick glance at short-term returns might sway you, but the real story unfolds over the long haul. While the share market might have a slow year or two, historical data reveals an average return of 9.69% over the last two decades, leaving term deposit returns in the dust.

One common objection revolves around the perceived risk of diving into shares. The fear of potential losses often leads people to opt for the seemingly safer returns of term deposits. However, it's crucial to factor in tax implications and the actual return after taxes, particularly for those in higher tax brackets.

In this intricate dance between term deposits and shares, success hinges on aligning investment choices with long-term financial objectives. While term deposits certainly have their place in financial planning, relying solely on them might mean missing out on the wealth-building opportunities offered by the share market. Ultimately, the decision rests on individual goals, risk appetite, and the ability to navigate the dynamic world of finance.