Mary Holm: Term deposit ladder keeps funds accessible

Splitting term deposits into several lots, or laddering, allows you to spend when each deposit matures or reinvest at the best rate available. Picture / iStock

Investing in instalments can have advantages over making a one-off deposit

I was reading your recent advice for term deposits and rolling these deposits over. You recommended five term deposits. I was confused about how you structure the deposits to roll over. Could you explain this?

Also, I was looking at depositing in different banks for maximum interest, or were you suggesting in one bank, as managing this can be tricky.

A: What we're talking about here is sometimes called laddering.

Let's say you have $10,000 to invest in bank term deposits, and you've noticed that usually you receive higher interest if you tie up the money for longer. But you're reluctant to invest the lot for, say, five years for two reasons.

One is that you might want access to some of the money earlier than that. The other is that nobody knows which way interest rates will move.

These days you might get 3 per cent for a one-year deposit or 3.8 per cent for five years. If you go with five years, and interest rates stay the same or fall over the next few years, you'll be happy. But what if they rise? You'll be stuck with what has become a low rate.

With laddering, you split the money into several lots -- three, four, five or whatever suits you. Let's choose five to keep the maths easy.

You invest $2000 for one year, $2000 for two years, and so on, with the last $2000 tied up for five years.

When each deposit matures, spend some if you need to, but otherwise reinvest it for five years. And keep doing that, year after year.

After four years, you will have:

• Access to money every year.

• All your money in five-year deposits, so you benefit from the usually higher rates for longer-term deposits.

• Your money spread out over the interest rate cycle, so some earns higher rates and some lower rates. That beats having it all at lower rates.

If you prefer to have money available monthly, ladder over a shorter period. For example, invest one-sixth of your money for two months, one-sixth for four months and so on, so the last sixth is invested for a year. Then, as each deposit matures, reinvest it for a year.

Every now and then -- because of market conditions -- interest rates will be higher on shorter-term deposits. But stick with your strategy. Over the years it will work more often than not. Banks prefer you to tie up your money for longer, so they usually pay extra for that.

On whether you should use different banks, the advantage is that you can go for the highest rate each time. Check the rates on www.interest.co.nz. The disadvantage is that, as you say, it's harder to manage. Your call.

Managed fund performance

Q: In October 1997, having attended several investment road shows, we invested $200,000 in Spicers' high risk, "entrepreneurial portfolio". We were in our mid-40s, with time on our side, and the advice was that long-term returns should be greater than moderate or conservative portfolios.

Eighteen years later, the value today is $275,000, a gain after tax and fees of $75,000, hardly 2 per cent a year. The portfolio has returned an additional $42,600 deducted as management fees, a drain many people do not calculate. Annual fees quoted around 1.3 per cent of the portfolio value sound little to the unwary. Translating into more than one third of our return is unreasonable.

What evidence is there that high-risk managed funds give greater returns over the long term? In a "managed" situation where the same fees are deducted in times of loss, this would seem incorrect.

For those selecting KiwiSaver funds, I ask, "Is there value in a high-risk volatile managed fund?" By investing in one-year compounding bank deposits we might have achieved a better outcome.

I have requested the actual returns from a conservative fund over the same period, but that information is not forthcoming.

A:</