The case for (or against) Cash, Term Deposits or Bonds
This week senior financial adviser and head of investment at FoxPlan, Warwick Walker delves in to whether investing in to cash/term deposits or bonds is really a sound strategy for growing your wealth.
Both Australia & New Zealand's economies have got kicked around in the last 2 months resulting in the Reserve Bank of Australia (RBA), followed by the Reserve Bank of New Zealand's (RBNZ) moving to historic low interest rates. Both banks are looking to stimulate growth in their respective economies and support the outlook for employment and inflation. In addition, Adrian Orr, New Zealand’s Reserve Bank Governor has attempted to talk up the benefits for businesses and home owners that now is a good time to borrow and invest, while the cost of capital is at historic lows.
The reverse though is true for those with only savings in bank deposits, such as those saving up for a house or retirees. Often these people have not taken advice on what alternatives are available. Record low interest rates mean that after taking into account tax and inflation, purchasing power is rapidly eroding. This can be seen in the chart below, which compares how cash has performed against other asset classes:
Source: Morningstar (returns) and RBNZ (inflation)
While past returns are not an indication of what various assets might do in the future, those who have held cash for short term needs, and invested a portion of their funds into growth assets such as shares, have fared much better than those invested in bank deposits. The key is using low cost, widely diversified index style funds, rather than holding just 5/10 or 50 individual shares.
At FoxPlan, our Advisers can help you work out how much return you need to receive in order to maintain or grow the purchasing power of your money. How long you need your money to last, or when you need to access your capital, combined with your capacity and capability to withstand volatility, helps determine the appropriate mix of cash, bonds and shares you need.
If you or someone you know could benefit from a review, please feel free to email info@foxplan.nz for an obligation free review.