Security is something keenly sought by investors, and is particularly important to people at or near retirement.
However, our whole approach to security is being challenged by the current climate of low interest rates, where there are trillions of dollars invested in bonds world-wide, that are earning negative returns.
Closer to home, term deposits attract around 3%pa, while a diversified portfolio of shares can show around 6% to 8% after allowing for tax credits. Investments can be made directly, or via managed funds deliberately managed to harvest a stream of dividends.
But, back to the question of security.
In Australia, we have come to define “security”, as being the return of invested funds. In this regard, bank term deposits come up trumps. They offer a return that is known up-front, and return of capital at the end of the term.
Sharemarket investments, however are different. The value fluctuates regularly, and sometimes by a big amount.
But, when we turn to income, the story is different. Term deposit rates fluctuate lots. I am not talking about the rate you get when you invest – that is fixed. However, when your investment matures and you come to reinvest, the rate can be very different.
For example, if you invested in 2000 until now, 12 month term deposits started at 4.1%, rose to 6.1% in 2007, and have now fallen to 3%.
Dividends, however, started at 4.3%, and have risen to 10%, with a fall in only one year – 2008, when they fell from 9.7% to 7.8%.
As the saying goes, one size does not fit all, but some relaxation of the desire for capital security can provide higher (and potentially more secure), income.
