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March 05 newsletter
It is not uncommon for New Zealanders to have hundreds of thousands of dollars invested in bank term deposits.
This newsletter aims to highlight the risks associated with having your wealth tied up in term deposits.
Of course, it is important to realise that term deposits are an effective investment for the right objective. Term deposits are useful when the investment goal demands security and low risk of default. For example, if you're saving towards a house deposit which you intend to use over the next year or so, term deposits provide a short-term, decent return, with little risk of default by your bank (customers of the Bank of New Zealand in the 80s may beg to disagree).
If your term deposits are for the longer term, then you may be exposing your investments to some of the following risks.
There are a number of very good reasons why investors prefer term deposits. the Shape of Money regularly comes across clients who have substantial sums invested in term deposits. It's easy. One call to your bank and it's all done. There are no fees and little chance that you'll lose your capital. There are two more reasons that sometimes apply: investors have a lack of knowledge about alternative investment options and/or there is a lack of trust in the financial advisory industry.
the Shape of Money recommends that if you have a substantial portion of your investments in term deposits, then please consider assessing those investments against your investment goals.
the Shape of Money website is comprehensive and contains information and resources that may help you.
An alternate, independent publication that may be useful is Mary Holm's Snakes & Ladders A guide to risk for savers and investors. This can be obtained free from the Reserve Bank.