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Playing it safe

I am a retiree and have read that an eight per cent return on shares is pretty good and right now there are some great fixed-term deposits at banks around those returns. Why wouldn’t I play safe and take this easy money?

It’s a really good question as eight per cent is a good return from shares and so let me deal with the stuff that could go wrong in locking up your money for five years.

First, make sure you are dealing with a reputable bank. Then think about how long you want to lock your money up for. St George at the moment is paying 6.5 per cent for three years, while only 7.25 per cent for five years! If we believe inflation forecasts and we think about the stimulus around the world then rates could be higher in five years’ time.

On the other hand, if we have another recession after three years then fixed rates of interest will fall. So, with everything in the world of money, you have to gamble that the consensus view is right that inflation will come and this will make 7.25 per cent less valuable in real terms.

Ideally, if you are a nervous type you could put a lot of your money into fixed interest for, say, three-year term deposits and a little in the stock market so if we get a few big kicks in share prices you can maybe pump up your overall returns to close to 10 per cent.

I recommend you trawl through the banks’ websites to see what rates are on offer but remember that banks are also gambling when they set their rates, just like a bookie setting the odds at the races. If interest rates go higher over the next five years then their fixed deposits at 7.25 per cent might look like cheap money. But if rates fall because of another global economic problem then the banks could lose. You don’t think about that happening very often, do you?

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, May 25, 2010

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