By Nick Stewart, CEO & Authorised Financial Adviser
Recently I read a cool article 'Guaranteed to lose money'. The writer cleverly linked the current bond market situation with the 1960s DC Comics "Bizarro planet", also known as Htrae, which is "Earth" spelt backwards.
It is a cube-shaped fictional planet, home to all imperfect duplicates of Superman, Lois Lane and their friends. In a nutshell, Bizarro as a society is ruled by the code: "Us do opposite of all Earthly things! Us hate beauty! Us love ugliness! Is big crime to make anything perfect on Bizarro World!”
In one episode, for example, a salesman is doing a brisk trade selling Bizarro bonds: "Guaranteed to lose money for you". And people flock to buy them saying what a bargain.
Fast forward to 2020, Bizarro bond is no longer a comic-book fantasy; it is just renamed and sold in God's Own as Term Deposit.
One can't help but wonder, does being popular make term deposits a worthwhile investment in the present financial climate?
TERM DEPOSITS ARE SO 2008
The popularity of term deposits skyrocketed following the start of the global financial crisis in mid-2007 when kiwi investors fled equities for the safety of term deposits and as some may recall the six-month deposit rate was 8.4% in April 2008. But the rates have fallen substantially from those levels, and today the average return on a 12-month term deposit is only around 1%. However, after-tax and inflation are taken into account; a term deposit can make you a real loss.
Reserve bank numbers suggest resident households (individuals, family trusts and estates) alone have $184.5 billion of deposits in New Zealand-registered banks, as of April 2020.
It was $181.8 billion in November 2019. If you notice, the number actually went up in 2020 despite falling term deposit rates.
One of the main reasons people invest in term deposits over other investment assets is for safety. But not many realise the risky fact that New Zealand does not currently have a deposit insurance scheme. A long-standing Reserve Bank’s policy is aimed at allowing a distressed bank to be kept open for business while placing the cost of a bank failure primarily on the bank's shareholders and creditors, rather than the taxpayer.
This means that in the event of your bank goes belly-up, as a depositor you would be dependent upon a liquidation or receivership process to try and recover your money, which could take years and not guaranteed.
The Labour-led New Zealand government committed to introducing a deposit protection regime in June 2019, and full implementation of a deposit insurance scheme is not scheduled until 2023.
Finance Minister Grant Robertson said the proposed $50,000 limit would cover 40% of deposits by value and 90% of individual deposit accounts in New Zealand.
In other words, if they had a $50,000 deposit with Bank A and a $50,000 deposit with Bank B, and both banks went under, they would get $50,000 back from each bank, so $100,000 in total. But if they had $100,000 with Bank A, they would only get $50,000 back.
On the other hand, in Australia since the Banking Act 1945, deposits with authorised institutions have benefited from high levels of regulatory protection that minimise the risk of losses. This protection was significantly strengthened with the introduction of the government deposit guarantee in 2008, which made term deposits virtually risk-free (up to $250,000).
So if you're a long-term investor, ironically term deposits in New Zealand are not one of your risk-free assets. With interest rates set to remain low or fall further, term deposit rates – already at their lowest in New Zealand since the 1960s – are likely to stay low or go lower.
In times like the present, investors seek to embrace alternative assets in search of cashflow and yield. Over the years, we've seen investors chasing "hot" sectors/industries and getting fingers burnt and knuckles grazed.
Historical experiences in Gods Own with alternatives assets haven’t always ended well. Goats, Ostriches, property syndicates, Cryptocurrency, Cannabis, tech stocks, finance companies, nominee mortgages, collateralised debt obligations to name but a few.
It is critical to focus on opportunities that have a track record of delivering reliable earnings and are not based on significant leverage. In other words, make sure the yields are sustainable.
You don't have to go on this journey alone. It can be immensely valuable for an investor to have a financial adviser by their side who relies on academic research and follows a disciplined investing approach. With a financial plan, you can make smarter financial choices over time and if you know where you want to be, a plan can make it easier getting there.
Nick Stewart is an Authorised Financial Advisers and CEO at Stewart Group, a Hawke's Bay-based CEFEX certified financial planning and advisory firm. Stewart Group provides personal fiduciary services, Wealth Management, Risk Insurance & KiwiSaver solutions.
The information provided, or any opinions expressed in this article, are of a general nature only and should not be construed or relied on as a recommendation to invest in a financial product or class of financial products. You should seek financial advice specific to your circumstances from an Authorised Financial Adviser before making any financial decisions. A disclosure statement can be obtained free of charge by calling 0800 878 961 or visit our website, www.stewartgroup.co.nz
