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Money makeover, day nine – the safer option

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by Peter Switzer

In the previous two instalments of my money makeover, I looked at getting your hard earned money into property and shares. Now comes the boring wealth spinner — bonds, fixed interest and cash.

The professionals will look at these three asset classes as being different investment alternatives, but to normal people, they do have common links their returns are dependent on interest rates and they are pretty damn safe!

And it is because of their relative safety that their returns seem less than exciting.

History tells the story

Let’s look at recent history to support this unfair criticism of boring bonds and bank fixed interest deposits.

Before the crash of 2008-09, the stock market peeled off five years of double-digit growth and, for four of them, the overall index rose over 20 per cent.

Now generally when it comes to fixed interest, you work off getting around four to five per cent but when the “you know what” was hitting the fan in 2008, banks were offering seven to eight per cent for fixed deposit money.

The trade off always happens

This was a perfect time for cashed up and job-secure investors to slam money into fixed deposits for as long a time as possible.

Of course, if you put too much into such a deposit, you would have missed the 50 per cent or so rise in the stock market from March 2009, and that’s another good case for never putting all your eggs in one basket.

Imagine you were a regular saver/investor and you decided to put:

60 per cent of your savings into shares
20 per cent into property
15 per cent into fixed deposits; and
Five per cent into cash.

If you did this, you’d now be earning seven to eight per cent on your fixed deposits when most Aussies would be lucky to get six per cent. Others might have locked up their money at five per cent three years ago.

Always a gamble

The time when you actually fix is always a gamble but when rates climbs over five or six per cent, especially after inflation is taken out, then stock markets often wobble and returns fall.

Investors are always thinking: “What will I get in the risky stock market compared to the safe fixed interest/bond market?” And if the returns get close, then there’s a rush to safety pushing stock prices down.

Safe but …

Government bonds are the safest but they don’t return great yields, and small players can’t access them in Australia. Our corporate bond market is not like America’s, where you can buy less safe bonds in companies, but there are some products now emerging in our markets, which means you can lend money to well-known companies such as Telstra.

Investment groups such as Vanguard have bond funds and these can do really well over the long run. These guys mainly invest in safe bonds but they do speculate in the corporate bond market and this can bump up their returns.

Shares versus bonds

Depending on what time period you look at, shares often beat bonds for returns but sometimes it can be the reverse — even for a pretty long time.

These bond plays can be called boring but this might be an unfair tag given that shares can sometimes have complete shockers like we saw over 2008 and early 2009.

In fact, in the USA, the Dow Jones at its 10,520-level near the end of 2009 was no higher than it was in 1999! It actually is lower if you adjust this for inflation, which means bonds would have been a better play for most Americans over the past 10 years!

For advice you can trust, contact Switzer Financial Services.

Important information:This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. For this reason, any individual should, before acting, consider the appropriateness of the information, having regard to the individual’s objectives, financial situation and needs and, if necessary, seek appropriate professional advice.

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Published on: Tuesday, January 05, 2010