Alan Clarke: Bank interest safer than gold

About two years ago, someone told me that they had saved $90,000 for a house deposit and a friend had told them to invest it in gold, but they asked me what I thought.

I asked how soon they were planning to buy a house and they said within a year.

I said leave it in a bank and keep it there until you are ready to buy.

Well, I don't claim to be always right, but in this case gold was $1700 an ounce then, and dropped to $1200 an ounce a year later.

Their $90,000 would have turned into $63,500.

Short term money comes in many forms

-A sinking fund put aside to repair or replace equipment - business

-Money put aside to buy a car, boat, camper van or caravan

-Saving for a first home

-Emergency money that you foresee you will need soon e.g. probable redundancy

-Money saved for a big trip

-An inheritance that you are not sure what to do with

-Money put aside to buy livestock or new fences or fertiliser - farming

-Money when you are between houses but not yet ready to buy

-Mum's money that you are looking after because she is in a rest home*

*The life expectancy of someone in a rest home in New Zealand is about 18 months.

But banks pay so little

That is true and their rates will go lower, but what is the alternative?

I am aware of some mortgage funds that are paying 5 per cent or even 6 per cent. Over a year on $100,000 you might make a miserable $1500 more, but there must be more risk (no free ride remember).

They are paying more because they are charging the borrower more (than a bank). But if a borrower has to go to them, it will be because a bank won't lend to them. Why? Because they are higher risk.

If something goes wrong, you might only get $90,000 back. Hardly worth it for a hoped extra $1500.

What about a hot share? I heard Xero is flying high

Yes, they shot up from nowhere to $44 a shares, but last I heard they were down to $18.

Investing in a "hot pick" share short term is gambling, not investing.

What about A rated bonds?

They are low risk, paying a tad more than a bank, and you can sell them anytime.

That's true, but bond prices can sag if interest rates rise unexpectedly, so you could lose 2 per cent or 3 per cent if you need your money out and cannot wait.

What a boring adviser you are!

Yes, that's true, but the people who nearly bought gold at the beginning of this article think I'm great.

When you will want the money?

The first question I ask people with money to invest is "how long are you investing for?" And many say they don't know.

Morningstar research says a balanced portfolio of bonds and shares needs five to seven years for best results.

Why? Because we never quite know where markets will go, even if we think we might think we are pretty clued up, which is why we often invest 50 per cent now and 50 per cent in six months' time - known as averaging in.

So I ask them "what is the likelihood you will need the money within say three years?" This question usually get things in perspective.

If it is 50 per cent or more likely that they will need it with three years, I will recommend they leave it in the bank.

If it is less than 50 per cent likely they will need it within three years (but still might) I will recommend that they invest 50 per cent of it, and leave the balance in the bank.*

*After asking a lot of other questions too.

Over to you

Seeking that little bit more interest from a diversified portfolio when you have time usually works out.

Seeking that little bit more when you will need your money out sooner rather than later is a bad idea. If you want to gamble, take $100 to the races or the casino - only gamble with money you can afford to lose (that's kind of silly, isn't it?).

Treat your serious money seriously and make haste slowly.