Mark Lister

Interest rates continue to test record lows. As well as supporting economic activity and asset prices, this has been great for borrowers. However, it has made life increasingly difficult for savers. What does this mean for New Zealanders who are reliant on investment income, and what are their options?

Borrowers have benefitted as interest rates have declined, with the cost of servicing debt now dramatically lower than in the past. However, what’s been great for borrowers has been terrible for savers. In 2007, one required less than $500,000 in term deposits to generate a pre-tax annual income of $40,000. Today, more than $1.4m is needed!

Having taken more than a 60% pay cut over these years, many savers will have been hoping to ride it out until the cycle turns and interest rates go up again. With this backdrop looking unlikely to change anytime soon, if you’re a saver you’re left with limited options.

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You can adjust your lifestyle and spending habits to match these lower levels of income, you can start eating into your capital to make up the shortfall, or you can adjust your investment strategy and seek out higher yielding options, such as shares or property.

Many have opted for the third option, adding more shares and listed property securities to portfolios. This is understandable, with the dividend yields of between five and six per cent approximately double the term deposit rate.

However, this is far from a fool proof strategy. Shares and listed property have a dramatically different risk profile to term deposits, bonds or fixed income. Shares provide higher long-term returns and higher levels of income at present, but they are volatile and more sensitive to economic conditions.

As with many things in life, moderation is recommended and we believe a balanced approach is better for many investors. This means maintaining a healthy weighting of low risk assets, but adding a selection of high quality shares and other growth assets that offer more attractive levels of income, and some inflation protection.

If an investor had left $10,000 invested in term deposits over the past 20 years, reinvesting their money every six months, they would today have almost $27,000, which equates to a return of 5.0% per annum.

What would $10,000 invested 20 years ago be worth today?


In comparison, the NZX Government bond index has returned 6.3%, while NZ shares have been stronger still with a 10.5% gain. Those asset classes would’ve turned the initial sum into almost $34,000 and a little over $73,000 respectively.

Inflation (the enemy of the long-term investor) has been 2.1% over that 20-year period. Should the term deposit investor have spent all of the interest, they would still have their original $10,000.

However, even that very modest level of inflation would have seen the spending power of that $10,000 decline by more than a third, leaving one much less wealthy.

With the world facing muted growth and low inflation, returns over the coming period won’t necessarily be as attractive as they have been in recent years, although these longstanding principles of investment remain as relevant as ever.

We believe a prudently constructed and well-diversified portfolio remains the best defence against low interest rates, rising uncertainty and the scourge of inflation that is always in the background eroding our wealth.

What a balanced portfolio might look like


Five tips for surviving a low interest rate environment

1. Consider a diversified portfolio of assets, rather than sitting solely in cash. However, don’t overdo it. Shifting too much money around in search of yield changes a portfolio’s risk profile.

2. Avoid concentrating on only higher yield securities (shares or bonds). Some sectors might look more attractive under current conditions, although we must be mindful of remaining diversified.

3. Avoid taking undue credit risk in fixed income. Quality is of utmost importance when it comes to the fixed income part of an investment portfolio. A low quality fixed income security is often riskier than a high quality share.

4. Be more willing to eat into your capital. Become more agnostic as to where your returns come from, and think of your capital gains as there for the taking, just like the income your portfolio has generated.

5. Ask a qualified investment adviser to review your asset allocation. They will be able to structure a tailored portfolio that can help you meet your income and growth objectives, and is aligned to your risk profile.