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Term deposits: safe or risky for SMSF investors?


Bank term deposit rates are set to remain lower for longer so it makes sense to continue to look elsewhere for income.

 

If you’re a long term investor, ironically term deposits are one of your riskier assets. In this video, Shane Oliver, Chief Economist and Head of Investment Strategy, AMP Capital and Paul Clitheroe, Executive Director, ipac discuss the ramifications of holding bank term deposits in a low-yield world. They conclude that investors have the potential to receive a higher cashflow from other growth assets such as Australian property and shares.

Lower for longer

In times like the present a focus on the income an investment provides is important. First, with interest rates set to remain low or fall further, bank deposit rates – already at their lowest in Australia since the 1950s – are likely to remain low or go lower.

For investors relying on bank interest, the decision by the Reserve Bank of Australia (RBA) to cut the official cash rate by 0.25% taking it to 1.75%, its lowest on record will push deposit rates even further.

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. In this, there are several alternative investments to cash.

Alternatives to term deposits for income return (yield)

The chart below shows the yield on a range of Australian investments. Yields on global investments tend to be lower.

Source: Bloomberg, AMP Capital

All of these yields have fallen over the last few years as interest rates have fallen, but as can be seen several of the alternatives do offer much more attractive yields than term deposits.

Key issues for investors to consider

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.

More broadly, in searching for a higher yield investors need to keep their eyes open. It’s critical to focus on opportunities that have a track record of delivering reliable earnings and distribution growth and are not based on significant leverage. In other words make sure the yields are sustainable. On this front it might be reasonable to avoid relying on some Australian resources stocks where current dividends look unsustainable unless there is a rapid recovery in commodity prices.

About the author
Shane Oliver, Head of Investment Strategy and Economics and Chief Economist at AMP Capital is responsible for AMP Capital's diversified investment funds. He also provides economic forecasts and analysis of key variables and issues affecting, or likely to affect, all asset markets.
Paul Clitheroe, Executive Director at ipac, is an Australian financial analyst, financial advisor, publisher and television presenter.
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