Salutary lesson for investors banking on safety

By Mark Fryer

Between the Lines

Danger lurks in the unlikeliest places, as many of us discovered to our cost this year.

Places like bank term deposits, which recent experience had taught us were safe as, well, safe as money in the bank.

Not when interest rates plunge sharply. Your money may still be there, but the income it produces suddenly looks a lot less appealing.

Or how about fixed-rate mortgages? As safe as houses we all thought.

Tell that to anyone who believed they were playing it safe by taking out a three-year fixed-rate loan in the middle of last year. Now they are facing another 18 months of paying 9.95 per cent, or a hefty penalty if they switch to one of the sub-6 per cent loans being offered by some lenders.

If there's a lesson in both cases it's that any financial decision means taking a risk, and you can't escape that fact by choosing what appears to be the most conservative course of action.

That issue of risk and return is one that more of us are going to have to weigh up in 1999, as the disappearance of bank deposits as a safe and rewarding option leaves investors looking for something else.

The search for another source of income has already been credited with boosting the local sharemarket in the later part of this year, but the quest for dividend yields can only lift shares so far.

The question for 1999 will be whether the market can produce some sustained gains. The only way that will happen is if investors believe prospects of an economic recovery are real, and are going to rub off on the fortunes of listed companies.

One of the big questions for sharemarket investors will be whether the sale of Contact Energy will be a repeat, on a grander scale, of this year's float of Auckland Airport - and whether the locals will have more chance to buy a reasonable number of shares than they did with the airport company.

Customers of the Tower insurance group will be looking forward to its sharemarket listing plans finally getting through the courts, so they can enjoy some of the windfall gains that AMP's new shareholders received this year.

Property investors will be wondering whether lower interest rates will spark a revival in the market, while home-buyers will be trying to pick the moment when interest rates start rising, making fixed-rate loans more appealing.

And, just to prove some things don't change with the passing of the years, 1999 will see the superannuation question debated by the latest taskforce to tackle the issue. Don't hold your breath; the early political opposition to this inquiry and an election next year won't help the quest for the magic answer.