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With banks throwing around eight per cent plus bank deposits and the stock market hovering at 15 per cent this year, it is time to become an expert on interest paying investments. I know it’s a boring kind of investment, but these are exciting times for boring moneymaking plays.

Mix and match

Once you work out how much money you have to invest out of saving, the choice is about where you invest it. A mixture of assets to invest makes great sense so you don’t see all your eggs smashed when the stock market basket is tipped up, as it is now.

Even flow

Depending on who you are, your portfolio mix of assets differs, but if I was forced to talk about a good average asset allocation I would come up with something like this:

  • 60 per cent in shares
  • 20 per cent in fixed interest deposits
  • 30 per cent in property
  • 10 per cent in cash.
Who do you think you are?

You could play around with the property and fixed interest assets depending on your age and risk profile, as well as your preference for property.

Some people don’t keep cash on hand to get the highest rate possible.

Having a 30 per cent exposure to an interest-bearing deposit is generally good for safety if it is with a bank, but it does not bring down your overall returns on say a three, five and 10-year basis.

However, the current eight per cent rates are really good and people should be looking long and hard at them.
A safe bet

In most financial plans done by professionals, when they do their calculations of where their clients’ money is growing, they use average returns such as 7.75 or eight per cent. If their clients are older and more safety conscious, they could use five to six per cent as an average return. These people have less or no exposure to the stock market.

Playing the field

On the subject of returns, the S&P/ASX Top 20 was showing an average return around 12 to 14 per cent until the market dived in November.

If all your money was in Aussie shares, you would have been quite happy with yourself. Your money would have doubled in five and a half years, but it would have been a risky play for lots of investors.

Pros and cons

The more you put to cash at the average rate of say five per cent – and that could be a bit high – the more it brings down the average return on your entire portfolio of investments.

Safety brings your returns down, but it gives you security. Regrettably, it does not give tax breaks as does borrowing to buy shares. It is a crazy world, isn’t it?

A worthy cause

So to get eight per cent on safe deposits at a big bank should not be ignored and some smarties would be loading up their cash investments now and then in coming years, put more into a stock market that will inevitably improve.

Don’t get caught!

No one is offering eight per cent for five years, but there is seven per cent on offer. But don’t get hooked on interest rates as it explains why such a lot of Aussies did their savings when companies such as Westpoint and Australian Capital Reserve struck trouble last year.

In chasing high interest rates, many savers thought all interest-bearing deposits were the same when it comes to risk – they are not!

Read between the lines
Let’s have a quick look at these products.

Cash investments might lock up your money for up to 180 days, but is more likely to be an ‘at call’ account. Often these internet-type ‘direct’ products offer great rates of interest.

With all accounts, watch the fees and how they kick in when you use the account. If your interest rate is low you don’t want fees to eat into the ultimate return.

The wider picture

In contrast, a fixed interest deposit locks you into a term or period of time and an interest rate. They can be low risk or high risk and just because they come from a bank does not mean they are 100% safe. For example, a term deposit at a big, local bank is very safe but an unsecured note is more risky if the bank collapsed, which is unlikely but possible.

Because you tie up your money, the interest rate should be higher; you can get at your money in a emergency with many of these accounts but it will cost you.

The loan ranger

Debentures are like fixed deposits and effectively are loans from you to a company. Even banks or finance companies can use debentures too to raise money. I would prefer a debenture with a bank than say a well-known company. Stock market collapses can hurt big names such as Centro.

Trade off

Unsecured notes are like debentures but offer higher interest rates and at the back of the queue but ahead of shareholders when a company goes broke.

Corporate bonds are like debentures but can be traded on the Australian Stock Exchange.
A word of warning

The big lesson is if most bank accounts are paying around seven per cent and another offers eight or nine per cent or even higher, remember this: “The higher the reward, the higher the risk.”

Published on: Monday, March 24, 2008

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