Investors who retreated to bank deposits after the global financial crisis now find themselves caught between a rock and a hard place. Do they stay put with these deposits, and their peace of mind and poor returns, or do they venture back into investment markets?
It is sensible to batten down
the hatches when a storm blows over, but at some point life has to return to normal.
So how do you know when it is time to come out of your safe place?
People generally only change the way they do things to avoid an unpleasant situation or because they are attracted by something better.
During the last year, the consumer price index rose by 4.5 per cent, thanks to GST and commodity price increases. Bank interest rates for 12 months are currently around 4.5 per cent. However, after paying income tax of 17.5 per cent, the net interest rate is around 3.7 per cent.
Invest $100,000 for a year at 3.7 per cent after tax and at the end of the year, even after receiving interest, with 4.5 per cent inflation your money will buy you the equivalent of about $99,000 worth of goods. This is not a pleasant situation.
Rates, power and petrol prices continue to rise and with low interest rates, bank investors will continue to lose wealth.
So what are the alternatives? In a nutshell, bonds, property and shares.
However, investors should not move entirely out of bank deposits to invest elsewhere. Diversification is still the best investment strategy, and having at least a small part of your portfolio invested in shares will help protect you against inflation.
Over the last year, US, Australian and New Zealand share market indices have risen by around 13 per cent, 14 per cent and 7 per cent respectively. These returns will surely entice bank investors out of their safe place.
Liz Koh is an Authorised Financial Adviser. The advice given here is general and does not constitute specific advice to any person. A disclosure statement can be obtained free of charge by calling 0800 273 847.
www.moneymaxcoach.com
