KEY POINTS:
I have long been bemused by media coverage celebrating a decline in interest rates.
A fall in interest rates certainly benefits some groups - mortgaged home owners and businesses especially - but a very large group is hurt when interest rates fall.
This group largely
comprises older New Zealanders who have no debt and use the investment capital they have to derive income on which to live.
Falling interest rates are a body blow to those who are savers and investors, a blow which for some comes on top of the hit they took from failing finance companies.
In the past decade, investors have been on a worldwide search for yield. This has led to all sorts of poor investment behaviour, from
investing in collateralised debt obligations to local finance companies.
Yield is no more available now than it was, and with falling interest rates, income investors are even worse off. This may lead again to the temptation to get better yield by taking on more risk - a serious mistake, in my view. So what is an income investor to do? There are
four things to consider.
First, most people should not invest solely in interest-bearing deposits - they should also have some shares and units in property trusts. I know that these things are volatile (and therefore scary), but the right shares and property trust units give good dividends and some
growth.
Older investors are risk-averse and should therefore be selective
about the shares they own. Generally, mature industrial companies and
utility companies are the least risky and pay the best dividends.
Second, shop around for the best bank or deposit-taking institution. All banks and companies that have the government guarantee have the same amount of risk, yet even the most cursory glance at deposit rates shows a great variance in the interest rate paid.
Interest rate comparison website www.interest.co.nz shows that for a deposit of $5000 for 12 months, the interest rate on offer varied from 4 to 6.5 per
cent. There is no logic to this - all the institutions I compared were
government-guaranteed and therefore carried the same risk. If you invested with the one who offered 4 per cent, you were being duped.
Third, negotiate. If you have a larger deposit to make, you should not
simply accept the advertised rate. Certainly, if you have more than $50,000 (and even if you have a bit less), ring around and see what the different banks and deposit-takers will do.
Finally, cut your tax costs. You can do this easily by investing in a
PIE fund. These are offered by nearly all deposit-takers and still
have the institution's government guarantee (if the institution has one).
PIE funds offered by banks and others are managed funds that
invest in the deposit-taker's term deposits. To all intents and purposes, they are the same as deposit accounts and term deposits except they are extremely tax-efficient.
It is likely that you can increase your net returns simply by transferring your savings from a term deposit to a PIE fund.
Each week best-selling financial author Martin Hawes will share his strategies to help you grow your wealth. You can email your personal finance questions to info@wealthcoaches.net or andrea.milner@heraldon sunday.co.nz
On the web: www.wealthcoaches.net
