Term Deposits Not Dead, Just Dormant

17.05.2016 • Investing

From The Gowdie Letter (AUSTRALIA) –

‘The reports of my death have been greatly exaggerated.’ Mark Twain

The RBA’s decision to reduce the cash rate to 1.75% is the death knell for term deposits…apparently. The day after the RBA’s rate cut, Switzer Superannuation Report sent me an email with the heading:

‘The death of the term deposit’ Here’s the opening paragraph:

‘The Budget announcement last night almost managed to overshadow the RBA’s decision to cut rates to another historic low yesterday. With interest rates at these levels, most self-directed investors are looking straight past term-deposits as a genuine source of income, and dividend paying shares are now looking even more attractive than before in comparison.’

There’s no doubt the RBA’s decision puts another nail in the term deposit coffin…as an attractive income paying proposition. However, the previous rate cuts were also nails in that same coffin. Since 2008, conservative investors have suffered an income death of (what seems like) a thousand cuts.

The recent cut of 0.25% may sound like the equivalent of the last rites for term deposits. However, I think the death notice is a little exaggerated.

There’s an old saying in markets, ‘It’s the return OF capital not the return ON capital, that’s important.’

These words of wisdom are usually only dusted off in the midst of a market in meltdown mode.

When the market mayhem is over, investor psychology reverts back to, ‘All that matters is return ON capital.’…

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