I can’t handle the volatility of my term deposit!

Monday, 22 February 2016

Worried Old People

What makes a volatile investment?

The answer to that seems pretty simple, doesn’t it? If you invest money today, then you could expect to get less back than your initially invested if you sell at the wrong time.Volatility can cause a lot of stress

So what kind of investments have this kind of volatility? Shares & property of course – we’ve all heard stories of those that have been forced to sell their home, rental property or shares because of tightening financial needs but have suffered a capital loss due to the sale. It’s rarely a good story and one that should be a cautionary tale to anyone looking to embark upon an investment journey.

An investor’s greatest asset is patience, give any (quality) investment enough time and the price will eventually rise to the point that matches your expectations. There are some exceptions to this and diversification can help to mitigate this risk but in a general sense if you give something enough time then you will be happy with it. The risk that we all get nervous about is the capital volatility in the meantime.

But what if getting back less than you invested was not the only form of instability?. What if there was another kind of uncertainty that threatened your very lifestyle? What if it disguised as something secure, protective and safe? What if I told you that term deposits are the most volatile investment that you can opt for and as an investment vehicle to give you comfort and protection in retirement (over the long term) then one of the worst options you can choose is a term deposit.

Term Deposit Rates Historical

While waiting and being very patient you’re going to need some income. If you invest in shares, then you’ll receive dividends (your share of the companies profits), rent (what the tenant pays for the right to stay on your property) or interest (what the bank pays you to borrow your money).

The problem is that banks tend to pay you interest based upon if they have to or not and if they can get funds from other sources at a cheaper rate then they’re not going to pay you more just to keep your business.

So, term deposit interest rates (your income) rise and fall based on prevailing economic winds. As you need this income to live, then your lifestyle can be severely hampered as interest rates fall.

To illustrate using the graph below on historical term deposit rates of 1 year term for $100,000, retiring 20 years ago (january 1996) would have started you with an income of $6,900, by 2001 – $5,050, 2006 – $4,500, 2011 – $6,150 and in 2016 you’d have $2,450.

Stressed Out Eggs

If this were your only source of income, you would have had an incredibly stressful time trying to control your income but even if it had remained at the original amount of $6,900 per annum you can now only buy half the things that you had in 1996 thanks to inflation.

Term deposits have their place in your portfolio specifically for shorter terms where you have specific items for purchase or they are part of your overall financial plan.

If you rely on a term deposit to fund your long term income goals, you could be facing a level of financial stress that you’ve never seen before.

Keep your eggs calm and in more than one basket

Keep your investments diverse and avoid putting all of your ‘eggs’ in the one basket, that includes the term deposit basket.

Planning your investments to take care of you takes attention from you as soon as possible, contact us to discuss your situation or continue perusing our website. Our Financial Knowledge Centre provides complimentary access for 90 days and is a great resource for anyone looking for some options.


About The Author

Nick Girle

Nick Girle

Senior Financial Planner & Director


Nick Girle is a leading expert in personal finance who has been providing families with financial advice for 20 years.

He works with the types of families that aspire to use their financial and intellectual resources and are willing to put in the effort to rid themselves of all of their money worries.

Since embarking upon his Financial Planning journey Nick Girle has brought comfort, security and peace of mind to thousands of client’s financial lives through a process that ensures complete understanding of a family’s financial hopes and dreams.

He became involved in the Financial Services industry initially with the Suncorp group before taking on a Senior Planning role with NAB Financial Planning and then established Common Cents Wealth in 2011 to better help him spend more time focussing on what’s important – a client’s ultimate financial success.

Together with business partner Richard Brannelly he runs CommonCents Financial Planning.

Email or call 1300 376781 today for an appointment and CommonCents Financial Planning will give you the answers you need to worry less about money and achieve the lifestyle you’ve always dreamed of.

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