Bank and Lose

Monday, May 2nd, 2011

BankĀ and Lose

Investors who retreated to bank deposits after the Global Financial Crisis now find themselves caught between a rock and a hard place. Do they stay in bank deposits for peace of mind but poor returns or do they venture back into investment markets? It is sensible to batten down the hatches when a storm blows over, but at some point, life has to return to normal. So how do you know when it is time to come out of your safe place?

People generally only change the way they do things to avoid an unpleasant situation or because they are attracted by something which is better. Over the last year, the consumer price index rose by 4.5%, thanks to GST and commodity price increases. Bank interest rates for 12 months are currently around 4.5%. However, after paying income tax of 17.5%, the net interest rate is around 3.7%. Invest $100,000 for a year at 3.7% after tax and at the end of the year, even after receiving interest, with 4.5% inflation your money will buy you the equivalent of only just over $99,000 worth of goods. This is not a pleasant situation! Rates, power, and petrol prices continue to rise and with low interest rates, bank investors will continue to lose wealth.

So what are the alternatives? In a nutshell, bonds, property and shares. That is not to say, however, that investors should move entirely out of bank deposits and invest elsewhere. Diversification is still the best investment strategy, but having at least a small part of a portfolio invested in shares will help protect against inflation. Over the last year, US, Australian and New Zealand share market indices have risen by around 13%, 14% and 7% respectively. These returns will surely entice bank investors out of their safe place.

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