Banking on asset safety
Often in my practice as a financial adviser I see people with large amounts of cash in the bank.
Sometimes, along with a house, bank deposits are pretty much all the family owns: perhaps they have just sold the farm, business or rental property, received an inheritance or had a marriage settlement. Whatever the source, they are holding a significant amount of cash.
Most people know it is not really an option to sit long-term on these bank deposits. They think they are safe, but have obvious concerns about the low returns they receive. At most times bank deposits give a positive real return (i.e. after tax and inflation), but not much more.
It is useful to examine the safety aspect of bank deposits – are they really as safe as many people think?
Richard Meadows looked at this question on Stuff last week. He concluded, quite correctly in my view, that the main New Zealand banks are as safe as most in the world.
Although there is no government guarantee for deposits in New Zealand, stress-testing by the Reserve Bank shows they could survive most economic events and remain solvent.
That does not make them perfectly safe. There is always a chance of economic difficulty and bank default. It is for that reason that I usually suggest to those who have a great deal in bank deposits that they diversify and put their cash with two or three different banks.
Over the years, New Zealand has seen banks get into trouble and, in spite of their good credit ratings, if all your life savings are in bank deposits, it pays to spread them around a bit.
Investors also need to think of the other things that might happen to the economy and have investments that will perform well in those events.
We may at some time have high inflation – holding some property trusts would get you through that event well. We could have a recession with falling interest rates – fixed rate bonds do well in such times. Or maybe we continue to have a buoyant economy – shares perform when the economy is strong. Perhaps we have an adverse New Zealand specific event – international investment would be your safeguard.
No one truly knows what might happen and so we have to match an investment type that will perform with each possible eventuality.
As a safe and liquid investment you cannot beat bank deposits.
However, they are not suitable as a long-term strategy and you have to have other investments to cover other risks. Remember, to thrive you must survive everything the economy throws at you – and to survive, diversification is the key.
Martin Hawes is an Authorised Financial Adviser and a disclosure statement is available on request and free of charge, or can be found at www.martinhawes.com.