For people that have been relying on term deposit interest for their income, the recent move by the Reserve Bank of New Zealand to reduce the Cash rate by 0.5% has meant a sharp decline in term deposit rates. The chart below illustrates an average of 1 year term deposit rate from NZ banks.
Investors have been living with lower returns for some years now, but many are finding it hard to manage the latest reduction and are looking for alternative investments. We are starting to see media advertising pointing to higher returns being achievable from other asset classes. Higher returns may be possible, but nothing comes for free and there are risks involved that prudent investors will consider before jumping in. There is an old adage – if it sounds too good to be true it often is!
Investment funds such as those offered by Milford have experienced portfolio managers who manage risks that include; investment return risk, market risk, interest rate risk, credit risk, equity risk, liquidity risk and currency risk.
For DIY investors, you can help yourself determine what alternative investments may be suitable for your needs by asking some practical questions;
What is your investment timeframe? Lower risk investments such as cash or term deposits with banks don’t tend to move up and down in value day to day. Investment timeframes are often directly linked to a term deposit fixed maturity date e.g. 1 year. Investments funds and directly held bonds and shares are priced daily and move up and down in value. For these types of investments and depending on the mix of assets involved, we encourage 3, 5 year and even longer periods that investors should consider as a minimum recommended investment timeframe.
What is your risk tolerance? I call this the sleep-at-night question. It is important to understand your tolerance for risk and ability to accept volatility. What would be your reaction to your investment going down in value by 10%, or 20%. What does this mean in dollar terms? 20% of $100,000 is $20,000. That’s a real number and whilst a reduction in value may only be temporary, people who react badly to this may make a knee jerk decision to exit their investment. This will crystallise the loss and make it very difficult to achieve the returns that would otherwise be expected by “staying the course”. Therefore, it is important to select investments that line-up with your own tolerance for risk.
What is your need for liquidity? How easily can you access money if needed, take regular withdrawals or wind-up the investment. Term deposits are usually locked in for the designated term or penalties apply for early withdrawal. Property investments can take considerable time to realise. It is important to check on any notice periods that exist in order to make withdrawals from an investment.
Milford offers a range of funds that address the questions of investment timeframe, risk tolerance and liquidity:
We also offer personalised wealth management advice for clients who have over $500,000 to invest that involves a detailed needs analysis and risk tolerance testing.
The Milford team are always available to answer questions or respond to concerns so always feel free to contact us.