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Is the reward worth the risk?

What do you think of XYZ (name deleted for legal reasons), which is offering nine per cent on fixed deposits? I realise this is not a bank but can you give me an idea of the potential risks of giving my money to such a firm. I am retired and afraid of the stock market since the GFC. Nine per cent for a deposit looks a nice alternative and it is for five years.

There are a number of companies that advertise these high rates and recently they have been made to tell savers that they aren’t bank deposits, which means they’re more risky. You know they are because they are offering nine per cent and there is a correlation between risk and reward.

When we work out our expected return for our financial planning clients, we put in a likely return around seven per cent because that’s a conservative return from a growth-oriented portfolio.

In truth, we try to select assets that will get around 10 per cent but we do like to make our plans reflect a more conservative outcome. If they do better, then we’re happy and so is the client. We never use these ‘deposits’ at non-banks as these companies can go broke and you can lose all of your money.

Australian Capital Reserve went broke and so did Westpoint and lots of people kissed goodbye to their savings because they chased high interest rates thinking these investments were safer than the stock market.

If you don’t want to lose your money and you don’t want to go to a reputable financial planner for help, I would stick to fixed deposits at well-known banks. By the way, the CBA’s five-year rate is seven per cent and so your non-bank rate of nine per cent is two per cent higher but possibly 100 per cent more risky! Be careful.

For advice you can trust book a complimentary first appointment with Switzer Financial Services today.

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.

Published on: Tuesday, July 20, 2010

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