The safest investment

BY MARY HOLM

Q: On danger of eliciting a loud laugh and/or groan, here is my question: A group of friends are discussing saving et al in these uncertain times. One individual is adamant that a basic savings account or, at the most, term deposits, are the safest options, even if long-term (up to five years) and even for larger amounts ($200,000 to $300,000).

His argument is that "this way I sleep at night, and don't get any surprises".

He accepts he will get low returns. Is he right?

The others are all struggling with this, but cannot find arguments to convince him otherwise.

No laughs, no groans, and no arguments with your friend. Basically he's right.

I could get pedantic and say that the safest investment is in Government stock. But bank accounts and term deposits come a close second.

There are, however, still some risks involved with even these investments:

* Interest rates might fall.

On a savings account, that can happen at any time. On a term deposit, your friend won't get any surprises while the term is running. He might, though, be in for a shock when he reinvests, if rates have fallen in the meantime.

* Inflation might wipe out his returns.

These days, banks pay interest a few percentage points higher than inflation. That means you come out with more purchasing power than when you went in.

That wasn't always the case. Through the 1970s and early 1980s, inflation was higher than bank deposit rates. Savers' purchasing power was declining. It could happen again.

Your friend says he'll settle for low returns. But he should make sure that his after-tax returns are at least as high as inflation.

Having said all that, I note that you regard periods of up to five years as long-term. There are no rules about it, but I would call that medium term.

Only investors with a fairly high tolerance for risk should put five-year money into volatile investments like shares and property - let alone money that will be needed in less than five years.

If your friend invested in a broadly diversified share fund, there is around a 10 per cent chance that he would lose money over five years. And there is a bigger chance that he would make less than if he had been in term deposits.

If he does not want to take those risks, fair enough.

If we were talking about investments for ten years or more, the story would be different.

There is very little chance he would lose money, or even do worse than in term deposits. And there is a good chance he would do much better.

I would be encouraging him to look at long-term graphs of share performance, and to learn not to lose sleep over short-term dips.


* Mary Holm is a freelance journalist and author of "Investing Made Simple". Send questions for her to Money Matters, Business Herald, PO Box 32, Auckland; or e-mail: maryh@pl.net. Letters should not exceed 200 words. We won't publish your name, but please provide it and a (preferably daytime) phone number. Sorry, but Mary cannot answer all questions, correspond directly with readers, or give financial advice outside the column.