Here's why Australia's love affair with term deposits could be risky

Photo: Scott Barbour/Getty Images.

An uncertain world, stock markets that appear to have fully priced in the economic outlook, and the global experiment central bankers are running with super-low or negative interest rates, are all combining to unsettle savers.

Uber-low rates mean savers need to save more, and worry more about protecting their capital so they have enough for retirement.

That fear appears to have manifested itself in Australia by an increased appetite for term deposits (TD’s).

But Shane Oliver, AMP Capital’s chief economist, and Paul Clitheroe, executive director at ipac, warn this is not a good strategy for Australian savers.

They say bank TD’s look set to stay “lower for longer”. That means savers should be broadening their horizon on their investment universe.

The pair say that in a low-yield world, “if you’re a long term investor, term deposits are, ironically, one of your riskier assets”.

It’s a broader focus on need and expectations savers must have Oliver and Clitheroe say (our emphasis):

Beyond day-to-day cash requirements, the key for investors currently in cash or term deposits is to work out what is most important to them: absolute certainty regarding the capital value of their investment or obtaining access to a higher, more stable income flow at the cost of volatility in the value of their investment.

It’s understandable that savers want the certainty of income – even if it’s shrinking – TD’s deliver. But Oliver and Clitheroe are arguing that if an investor can take a longer view, and deal with a little extra volatility in the week-to-week capital value of a savers investment portfolio, then there are better alternatives, which pay a higher return.

Even though the returns on other investment choices have also fallen in recent years Oliver and Clitheroe say “several of the alternatives do offer much more attractive yields than term deposits”.

In the end, it’s a trade off between volatility, certainty and return.

“All of the alternatives come with a risk of volatility in the value of the underlying investment. In the case of shares, the key for an investor is to work out whether they want a stable value for their investment, in which case bank deposits win hands down, or a higher, more stable income flow, in which case Australian shares win hands down” the pair say.

It’s also a classic example of why all an investor’s eggs in one basket is rarely the best idea.

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