Investors with term deposits maturing have a quandary. Do they reinvest their money at all-time low rates or withdraw their funds and invest the money in riskier assets?
We are in a transition to a new investment environment in which interest rates and inflation are historically low. This situation is likely to remain for some time. The immediate response has been that money has flowed out of banks and into shares and property. While these asset classes have shown extraordinary gains in recent years, they are now considered to be over-priced. The question is not if, but when, the gains will cease or indeed whether prices will fall. Is it better to accept a low bank interest rate or invest in assets which are teetering on the brink of an unfavourable change?
Term deposits have a definite role to play in an investment portfolio to provide liquidity and security. While they provide an investment return, this is not their primary purpose. Money in the bank should be treated as money that is being safely held until it is used for another purpose – that is, to be either spent or invested elsewhere. The bank is a place to hold funds in the short term, as an emergency buffer and as a safe haven in uncertain times.
Investing in property and shares comes with the risk of volatility. However, this need not be a concern if the funds are to be invested for the medium to long term. It is with these assets that investment return will be made. The volatile nature of these assets is not something to be afraid of providing the two key principles of investment are followed. These are firstly, the principle of diversification and secondly, the principle of matching your investment strategy to your investment time frame.