What can you do with bank savings when interest rates are low?

With much focus on the benefits of lower interest rates for those with debt, savers who rely on the returns from bank term deposits are feeling the pinch – which is evidenced by the fact that the best deposit rate on offer from the well-known banks sits around a mere 3.4% and comes with a hefty lock in term of five years.

If you do rely heavily on the return from bank deposits as part of your investment or retirement plan, is there an alternative in this low interest rate environment?

We know that people tend to like holding their money in the bank because they feel that it is a safe option. However, the number one principle of investment is diversification aka not holding all your eggs in one basket. Diversification is important because seasoned different types of investments fluctuate at different times. Therefore, having an investment portfolio with exposure to a range of asset classes is generally the sensible thing to do.

What are the different asset classes?
  • Cash
  • Fixed Interest (bonds and term deposits with a term of greater than one year fit into this class)
  • Property
  • Shares (also known as equities)
Within the asset classes you can achieve further diversification through national and international exposure, as well as through holding shares of companies within different sectors.

Why is diversification so important?
In certain economic environments, different asset classes will be the stand out performers. By diversifying, you are essentially hedging your bets and aiming for more consistent returns over time. For example, while one asset class is performing poorly, another may be generating an income and stabilising your overall returns.

How do I achieve diversification?
Before embarking on creating a diversified investment portfolio, it is important to understand your investment goals, investment time frame and most importantly, your tolerance to risk. All of these factors determine your risk profile and can help you and your adviser decide on what mix of assets is most suitable. For example, if you are in retirement and needing a regular income from your portfolio, heavy exposure to shares may not be suitable as investment in this class typically requires a longer investment time frame due to the associated fluctuations. In this instance, a greater exposure to fixed interest, such as income generating bonds and fixed rate deposits may be more suitable.

If you are looking to achieve more diversification with the opportunity for greater returns, you need to discuss your options with an Authorised Financial Adviser to understand how you need to invest to get the returns you want.

If you want to know if you are on the correct investment strategy and on track to achieve your goals, click here.
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