Is it time to move beyond term deposits?

For years, term deposits have been the go-to recipe for many Kiwi investors, providing a reliable and steady income generating investment option. With interest rates reaching their highest levels in over a decade, term deposits have offered impressive returns over the last two years. However, the economic winds are shifting. The Reserve Bank of New Zealand (RBNZ) has been steadily reducing the Official Cash Rate (OCR), and with more anticipated cuts on the horizon, relying solely on term deposits may no longer be the most fruitful investment strategy.

The economic winds are shifting

In 2024, many banks offered yields of up to 6% on six-month term deposits, providing savers with a reliable way to earn a consistent income.

For example, a $250,000 term deposit at a 6% rate could generate a pre-tax monthly income of $1,250. However, the landscape is changing. Shorter dated term deposits rates tend to closely follow the OCR, and with the OCR now sitting at 3.50% (down from a high of 5.50% and forecast to drop further), it is only a matter of time before term deposits rates head downward. Continuing with our example, if term deposit rates head down to say 4.00%, that same $250,000 will only produce a monthly income of $833, which is a reduction of 23%.

So, what does this mean for investors? While term deposits have recently served their purpose, relying solely on them in a falling interest rate environment could result in missed opportunities elsewhere. To avoid a potential decline in income, now may be the perfect time to reassess your investment strategy.

Your personal investment adviser

Enter a trusted investment adviser – professionals who specialise in crafting bespoke investment plans tailored to your unique financial needs. An expert investment adviser, like those at Craigs, can help you develop a well-rounded portfolio that aligns with your financial goals.

Working with an investment adviser can make all the difference, offering advantages, such as;

• Expertise: Access to in-depth market knowledge, expertise, and new issues in the market.
• Personalisation: Tailored investment strategies that align with your unique situation.
• Ongoing support: Regular reviews and adjustments to keep your portfolio on track.

Rather than watching your income dwindle, consider sitting down with an investment adviser to build a well-rounded, personalised investment portfolio. A skilled adviser can help you diversify your portfolio and guide you toward investments that align with your risk profile, goals, and lifestyle.

Understanding your personal risk profile is a crucial part of this process. It involves not just your willingness to take on risk, but also your ability to handle it – known as your risk capacity. Your adviser can assess your risk capacity to create a strategy that balances your needs, such as maintaining your current lifestyle while also working towards your long-term financial goals. Whether you’re risk-averse or willing to take on more risk with the aim to achieve higher returns, a tailored investment strategy can be developed to fit your specific situation.

This strategy could consider other asset classes that may present attractive investment opportunities in an environment of declining interest rates. Fixed income securities can lock in higher yields at a fixed rate for several years. Alternatively, there may be opportunities to purchase shares with companies that pay consistent dividends or where there is value in the current share prices of companies that have been out of favour.

Make your capital work harder for you

With expert guidance from an investment adviser, you can diversify your portfolio to include these investment options and make your capital work harder for you.

While term deposits have offered reliable returns in recent years, it may be time to rethink your investment strategy. By partnering with an experienced adviser, like those at Craigs, you can create a comprehensive, diversified investment portfolio that caters to both your current and future needs, helping you secure your financial well-being in a changing economic landscape.

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