That flight to safety is in the form of term deposits – a comfortable seat for anyone frustrated with ongoing equity volatility and the now declining property market.
Term deposits look to be a good spot for money, but it’s worthwhile taking some history and other options into account.
Retail deposit rates are currently higher than the RBA cash rate; for this to happen over any extended period is a rarity.
Over the past 22 years, there’s only been two occasions where one-year deposit rates have broken above the RBA rate and stayed there for any significant period of time.
We’re currently in one of those periods; how long it can continue for is unclear, but the premium of one-year deposits against the RBA rate has been reducing in recent months.
The other issue with term deposits is the tendency to set and forget, something the banks are happy to exploit.
In 2010 ASIC released a review of term deposits, finding a weighted average of 47% of the $16.63 billion in term deposits rolling over for the first time, automatically defaulted to a lower rate.
While term deposits are meeting the objectives of conservative investors, they’ve been forgoing the higher returns, liquidity and diversity offered by fixed interest.
While fixed interest funds offer slightly higher risk than term deposits, they’ve still long been regarded as a safe haven for conservative investors.
It’s not hard to find fixed interest funds that have outperformed term deposits over one and five year periods.
Similarly, some longer term fixed interest funds have yielded almost a 2% premium over term deposits, measured from 2001 to the end of 2011.
Importantly, many fixed interest funds aren’t wholly dependent on what is happening in Australia.
While term deposits are currently attractive, they are at relative highs, and against fixed interest funds, they haven’t historically offered the same liquidity, diversification and returns.
Peter Mancell is a director of Mancell Financial Group and FYG Planners AFSL/ACL 224543. This information is general in nature and readers should seek professional advice specific to their circumstances. If you want help with your financial future, we’re arguably the best financial advisor in Australia.
