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THREE KEY FACTS
New Zealanders hold about $455 billion in term deposits, significantly outpacing the $165b NZX market capitalisation.
Playing it safe is not inherently a bad thing, but fear of diversification leads to missed opportunities.
In times of high inflation, term deposits consistently fail when it comes to retaining wealth.
Nick Stewart (Ngāi Tahu, Ngāti Huirapa, Ngāti Māmoe, Ngāti Waitaha) is a financial adviser and CEO at Stewart Group, a Hawke’s Bay-based CEFEX & BCorp-certified financial planning and advisory firm. Stewart Group provides personal fiduciary services, wealth management, risk insurance and KiwiSaver scheme solutions.
OPINION
In littleold NZ, term deposits have traditionally been a cornerstone investment choice. Particularly among retirees and conservative investors seeking perceived safety and regular income, they’re often seen as “safer” investment options.
The scale of this preference is staggering: New Zealanders collectively hold about $455 billion in term deposits, dwarfing the entire market capitalisation of the New Zealand Stock Exchange at $165 billion.
Even more telling, household term deposits stand at $250b. There’s a deeply ingrained cultural preference for this investment vehicle.
Moreover, our overwhelming national dedication to term deposits raises serious questions about NZ’s investment efficiency and risk exposure. The stark contrast between term deposit holdings and stock market capitalisation reveals a significant structural imbalance in New Zealand’s investment landscape.
When a nation’s term deposits are triple the size of its entire stock market, it suggests a potentially problematic overreliance on a single investment type. We’ve got too many eggs in one basket, guided only by fear of other avenues.
This reflects NZ’s conservative investment preferences. For a country known for adventure tourism and giving things a go, we’re not so daring when it comes to investments.
Playing it safe is not inherently a bad thing (hot-headedness is also not an ideal trait for investors), but blanket fear of diversification leads to missed opportunities for both individuals and the broader economy.
Speaking of our economy ...
Financial planning is a continuous process, not a one-time event, writes Nick Stewart.
GDP growth has moderated to about 1.5% annually and inflation is finally back within the Reserve Bank’s target band.
Within this context, the Official Cash Rate (OCR) reached a peak of 5.5% in 2023, but economists now forecast about 300 basis points of cuts over 2024-25. The first reductions have started and further significant cuts are coming.
With a negative yield curve, return from term deposits and cash instruments will drop. So that nice, tidy number you’re expecting back from your term deposit … may not be as much as you think.
Then there’s the role of inflation itself to consider when it comes to term-deposit returns.
During periods of above-average inflation, short-dated fixed-income investments, including term deposits, have consistently failed to preserve real wealth after accounting for tax and inflation effects.
This pattern has repeated itself across multiple economic cycles, most notably during the high-inflation periods of the 1970s-80s. During these times, investors who relied on term deposits experienced significant erosion of their purchasing power despite seemingly attractive interest rates.
If I had a dollar for every time I am told by someone how their (or their relative’s) term deposit in the 1980s was a fiscal recipe for success, I’d have a sizeable money jar – even allowing for inflation and tax.
For example:
A 5% term deposit rate, after applying a 33% tax rate, yields a net return of just 3.35%. In an environment where inflation runs at 5%, this translates to a real return of -1.65% (essentially, you’ve gone backwards by that amount). Should inflation surge to 7%, as in recent times, the real return plummets to -3.65%. Ouch.
This gets even more alarming when examining historical episodes of high inflation. During the 1970s and 1980s, despite term-deposit rates reaching as high as 17%, investors often experienced negative real returns after accounting for inflation and tax.
This period serves as a crucial lesson for today’s investors: high nominal rates don’t always translate to high real returns.
Now, let’s look at the organisations holding the term deposits – the banks. Our banking sector’s structure takes on new significance when considered alongside the enormous term-deposit holdings.
The concentration of almost half a trillion dollars in term deposits (mostly within the “Big Four” Australian-owned banks) creates a significant systemic exposure; this is particularly noteworthy as term deposits to the tune of $250b represent a massive part of NZ’s household wealth. While recent regulatory changes have created some protection, including a proposed but not-yet-implemented deposit guarantee, this will cover only a fraction of these holdings.
Finally, there’s the tax factor of term deposits to contend with. Term deposits face straightforward but potentially punitive tax treatment, especially during high inflation. By comparison, other options like PIE funds offer more favourable tax treatment. That means you get to keep more of your returns.
Our overwhelming national dedication to term deposits raises serious questions about NZ’s investment efficiency and risk exposure.
The huge cumulative value of term deposits in NZ shows a need for change in traditional portfolio construction, to encourage more diversified allocation strategies. This doesn’t have to be dramatic – even a modest shift of term-deposit holdings towards other investments could give an economic boost where it’s needed while providing returns for individual investors.
Navigating investment decisions isn’t only about understanding numbers. Our disproportionate reliance on term deposits ($455b in total, with $250b from households, vastly outstripping NZX’s $165b in stock market value) shows that many investors don’t see the value in diversification yet.
That’s where professional financial advice can be a boon. Experienced counsel (not your mates or relatives who swear by term deposits alone) can help to balance emotional and financial considerations while crafting a strategy aligned with personal goals.
A skilled adviser serves as both technical expert and behavioural coach, helping investors avoid common pitfalls like excessive conservatism or panic selling during market volatility.
This balanced perspective and personalised guidance can be particularly valuable when considering how to optimise returns while maintaining appropriate security – a delicate balance that raw numbers alone can’t determine.
If you have been thinking about getting your investment portfolio sorted, consider contacting a trusted financial adviser rather than making judgment calls based on nominal rates – so you can get a plan that accounts for market volatility and inflation, not one works only under the right conditions.
Disclaimer: The information provided, or any opinions expressed in this article, are of a general nature only and should not be construed or relied on as a recommendation to invest in a financial product or class of financial products. You should seek financial advice specific to your circumstances from a financial adviser before making any financial decisions. A disclosure statement can be obtained free of charge by calling 0800 878 961 or going to our website, www.stewartgroup.co.nz
