TERM DEPOSITS

From Switzer

I’M STILL IN TERM DEPOSITS. HAVE I MISSED THE BOAT WITH SHARES?

With the Great Financial Crisis (GFC) of 2008/09 seeming not that long ago and given all the scary stories that the mainstream media has reported over the last decade – from debt and deficit crises through to the China bubble and fake cities and a local housing market implosion – it’s not surprising that some investors have been reluctant to be share investors. They have preferred the safety of term deposits and other fixed income investments but as interest rates head down to a big figure beginning with a ‘1’ or a ‘0’, share market yields of 4% to 5% or even higher are looking pretty attractive. And with the Aussie share market moving close to all-time highs, they are asking themselves ”have I missed the boat”?

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So how do you invest without taking too much risk (or at least to cut out most of the specific company risk)? There are two ways to do this – invest on the ASX in a fund with a professional investment manager, or establish a diversified portfolio of shares, at least 5 stocks and preferably 10 to 15.

The easiest way to invest is to buy an exchange traded fund (ETF). These are passively managed funds listed on the ASX that track broad market indices such as the S&P/ASX 200 (an index comprising the top 200 companies). They aim to replicate the performance of the underlying index by investing exactly in accordance with construct of that index. If the underlying index goes up by 2%, the ETF should go up by 2%, and if the index falls by 2%, the ETF should also go down by 2%. Because they are almost on “auto-pilot”, ETFs of this nature charge very low management fees, sometimes as low as 0.10% pa. Vanguard’s VAS (ASX :VAS), iShares IOZ (ASX:IOZ) and State Street’s STW (ASX:STW) are some of the leading ETFs.

An alternative to an index tracking ETF is one of the broad-based listed investment companies (LICs), such as Australian Foundation Investment Company (ASX:AFI), Argo Investments (ASX:ARG) or Milton Corporation (ASX:MLT). Actively managed, these LICs invest in a broad portfolio of stocks and aim to provide reliable returns with a bias towards higher dividends. Some have been in operation for almost 50 years and because of their size, also charge low management fees. Over the long term, their performance has been very strong, but in the last couple of years, they have underperformed the market a touch. The good news is that they are now trading at a small discount to their underlying net tangible asset (NTA) value.

 

My parents have most of their savings in term deposits, shopping regularly for the best rate, times are getting tougher

 

With the Great Financial Crisis (GFC) of 2008/09 seeming not that long ago and given all the scary stories that the mainstream media has reported over the last decade – from debt and deficit crises through to the China bubble and fake cities and a local housing market implosion – it’s not surprising that some investors have been reluctant to be share investors. They have preferred the safety of term deposits and other fixed income investments but as interest rates head down to a big figure beginning with a ‘1’ or a ‘0’, share market yields of 4% to 5% or even higher are looking pretty attractive. And with the Aussie share market moving close to all-time highs, they are asking themselves ”have I missed the boat”?

Probably yes. Especially if time is factored in.

 

Did some numbers based on my personal tax returns over the last four years (including an estimate for 2018-2019.)

Year on year increase in dividend income based on 2015-2016 was 10%, 16%, 10%. Term deposits just don't cut it for me from that perspective.

Plus I really have to get a life instead of fooling around with numbers.

 

Gees, I screwed those numbers up somehow. Should have been 13%, 14%, 17%. Praise the Lord I have an accountant do the tax returns otherwise I could end up in deep do do's.

 

Term Deposit rates are so low that with the risk of a correction it's better to keep money accessible, which is not advice.

I'm building a piggy bank in an offset account and buying equities irregularly awaiting a change in sentiment.

 

From the paper

 

Part-pensioners are being slugged by a wealth tax government is loath to change

The last time the deeming rate was cut was in March 2015, when then-Treasurer Scott Morrison cut it back on amounts under $51,800 to 1.75 per cent (for singles) and for larger amounts to 3.25 per cent.



But since then the cash rate has fallen to 1 per cent and term deposit rates have gone from 3.35 per cent to 2.1 per cent.

The reality of that is that the government assumes part-pensioners are earning 1.25 per cent more on balances of over $51,800 than they are, and so their pensions are being reduced by more than they should be.

As a result “hundreds of thousands of Australians are being crippled,” Mr Henschke said. More than 1.1 million people are on a part pension.

 

Unfair ‘tax’ on seniors

 

Not great for retirees with cash. Deeming rate should probably float with the cash rate, plus maybe 50 bps or so.

 

The N A B,has a offer 2--15% for shareholders fixed term for 4 months that ends at the end of the month..
Not great but people on passive self funded incomes the extra 1--15% is better then most of the 1%'s..imho..

 

The deeming rate is averaged across returns from different sectors of investment - term deposits, shares etc. to give a rate someone can expect on their overall investment.

A person with mainly term deposits, but some share exposure, should be tracking around the deeming rate.

It is not meant to reflect term deposit rates only.
Marg