Any thoughts on Term Deposit strategy?

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Forums › Finance and wealth management › Any thoughts on Term Deposit strategy?

eracode

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#298762 14-Jul-2022 09:48

We have a significant bank TD that matures today and I need to roll it over. There are many ways to approach this but, given that rates are likely to increase over the next year or so, I am trying to decide between:

(a) rolling five years at 4.40%.

(b) rolling one year at 3.7% in the hope that in 12 months time the five-year rate will be higher than the current five year rate

Obviously there are all sorts of other variations on this.

Would appreciate thoughts or alternative suggestions.

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#2941765 14-Jul-2022 10:53

Got this on the Stuff app this morning:

"rolling one year at 3.7%" looks like a sub-optimal strategy

I think I'd shop around
Old people like me remember when main bank TD rates of 4% - 5% and mortgage rates around 6% - 7% were 'normal'. The ultra-low rates of the last five or so years are an anomaly and I hope unlikely to return.

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#2942113 15-Jul-2022 10:41

I had a read about laddering strategies for term deposits (can Google that) and they sound sensible.

frankv

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#2942130 15-Jul-2022 11:27

I think that banks have teams of economists to figure likely interest rates over the future, and therefore what interest rates to offer today. They have better information and skills than any lay-person, and I daresay better than the crowd-wisdom of all GZ users. So I don't think you can win at betting against a bank on changes in interest rates.

So my advice (I am not an economist, financial adviser, or anything else) is to focus on whether you think you'll want the cash next year or not.

My other advice would be to spend it now, before it devalues by 5-7% (Treasury projects inflation will slow from 6.9% today to 5.2% by June 2023), i.e. before it loses .6-2.6% real value. But even a 2.6% loss is only a $260 loss on $10K, so it's not worth going overboard on this though. Only spend on something that you would have spent on in the next few years anyway. e.g. perhaps you're planning to upgrade your car next year, or go on an overseas trip.

BTW, what does "rolling five years" mean? Sounds to me like it will roll over each year, at the going rate (plus 0.4% or 0.7% ?) at that time.

eracode

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#2942209 15-Jul-2022 13:16

frankv:

I think that banks have teams of economists to figure likely interest rates over the future, and therefore what interest rates to offer today. They have better information and skills than any lay-person, and I daresay better than the crowd-wisdom of all GZ users. So I don't think you can win at betting against a bank on changes in interest rates.

So my advice (I am not an economist, financial adviser, or anything else) is to focus on whether you think you'll want the cash next year or not.

My other advice would be to spend it now, before it devalues by 5-7% (Treasury projects inflation will slow from 6.9% today to 5.2% by June 2023), i.e. before it loses .6-2.6% real value. But even a 2.6% loss is only a $260 loss on $10K, so it's not worth going overboard on this though. Only spend on something that you would have spent on in the next few years anyway. e.g. perhaps you're planning to upgrade your car next year, or go on an overseas trip.

BTW, what does "rolling five years" mean? Sounds to me like it will roll over each year, at the going rate (plus 0.4% or 0.7% ?) at that time.

Thanks for this. Not trying to be cute but before I retired nine years ago I was a long-serving banker and investment adviser. In my OP I was more looking for a consensus on thoughts about future TD rates in NZ. I have a view on what rates might do but was keen to see what others think - and that could influence my strategy. Sorry I didn't make the OP more clear.

The media talk a lot about what home loan rates will/might do as the Official Cash Rate increases but there's almost no commentary on what TD rates might do. I have analysed the historical relationship between the OCR and five-year TD rates. In the past the TD rate has averaged 2 to 2.5 times the OCR but there's no way of knowing whether this relationship will hold good into the future. Then there's the question of what the OCR will be.

Don't really need the cash next year. TDs are our part of our 'capital' - we take the interest monthly and that forms part of our income - so investing for five years is an option. The trick is to maximise the return and the timing and period of TDs play a big part in that.

When I said I had an option of "rolling five years", what I meant was "rolling over/reinvesting the maturing TD for a new five-year term". Sorry a bit ambiguous.

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#2942286 15-Jul-2022 16:30

Could you just ladder and hedge your bets? Get the average rate across the period. You'll never be the biggest winner you could be, but equally wont be the biggest loser either.

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#2942338 15-Jul-2022 16:54

Like you we are retired and use our multiple TDs as income while retaining as much capital as we can. We have laddered our TDs from 1 to 4 years. In the current situation I would look at that 50/50 split, half for 12 - 18 months and the rest at 4 or 5 years. Exact lengths depends on the variation of rates so skip 5 years if it is only 0.1% higher than 4 years. Check out interest.co.nz for all the latest rates as they do vary between banks. I have managed to spread my TDs over four different banks 😀

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#2942345 15-Jul-2022 17:11

Also remember that banks in NZ are not currently government guaranteed and their credit ratings vary.

SATTV

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#2942356 15-Jul-2022 17:53

The old addage of not putting your eggs in one basket rings true.

Look at someone like Milford in a managed fund, you will get better returns. Look for the top kiwisaver providers as they often have managed funds, the benefit of these is they are not locked, in the case of Milford I think it is less than 30 days.

Slit your fund into four and place in four different providers, you can have some in high risk, some in medium risk and some in lower risk. The rate of return will vary.

As above contrary to popular belief, NZ Banks are not government guaranteed.

Cheers

John

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#2942359 15-Jul-2022 18:07

The market is volatile and IMO this will continue for a while. Given you are in the spending phase I'd be looking to use dollar cost averaging to smooth out the return over a medium term.

Split it into 5 chunks and take 1-5 years terms.

Handle9

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#2942360 15-Jul-2022 18:10

SATTV:

The old addage of not putting your eggs in one basket rings true.

Look at someone like Milford in a managed fund, you will get better returns. Look for the top kiwisaver providers as they often have managed funds, the benefit of these is they are not locked, in the case of Milford I think it is less than 30 days.

Slit your fund into four and place in four different providers, you can have some in high risk, some in medium risk and some in lower risk. The rate of return will vary.

As above contrary to popular belief, NZ Banks are not government guaranteed.

Cheers

John

Milford is significantly higher risk than a term deposit.

Milfords best performing fund has a 1.54% return over the last 12 months. Over the long term you'll likely get a better yield but it's much more volatile than a term deposit. If OP retired at 65 they are in their 70s so long term growth likely isn't a goal.

Edit: Missed one fund

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#2942374 15-Jul-2022 19:14

I put 10k away for 4yrs last month after the OCR went up. 2 weeks past cooldown it went up again by another .20

Considering asking them if I should cancel it, take the 2months 0% hit and redo it.
It's not like where it was was anything more than .02% anyway with the rubbish 'savings' incentives now.

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#2942385 15-Jul-2022 19:32

Term deposits tend to protect you against inflation, not much more. Managed funds are better if you want a return, and can handle the risk / timeframe.

eracode

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#2942391 15-Jul-2022 20:28

Handle9:

The market is volatile and IMO this will continue for a while. Given you are in the spending phase I'd be looking to use dollar cost averaging to smooth out the return over a medium term.

Split it into 5 chunks and take 1-5 years terms.

If this was a comment for me, thanks but I’m not sure why you say this. As mentioned, we are retired and the TDs are regarded as income-generating capital - we’re not in a spending phase.

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eracode

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#2942392 15-Jul-2022 20:38

SATTV:

The old addage of not putting your eggs in one basket rings true.

Look at someone like Milford in a managed fund, you will get better returns. Look for the top kiwisaver providers as they often have managed funds, the benefit of these is they are not locked, in the case of Milford I think it is less than 30 days.

Slit your fund into four and place in four different providers, you can have some in high risk, some in medium risk and some in lower risk. The rate of return will vary.

As above contrary to popular belief, NZ Banks are not government guaranteed.

Cheers

John

Thanks and also to others who have responded in this vein - but I’m not looking for overall investment advice per se. Our asset allocation is well-settled and, in line with our ages and risk-profile, it includes a decent weighting to TDs. We are not looking to change weightings into other asset classes - we do have a chunk in direct equities and ETFs.

As mentioned, all I was hoping for was other GZers’ views on what Term Deposit rates might do over the next few years as the RBNZ continues increasing the OCR.

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Handle9

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#2942393 15-Jul-2022 20:44

eracode:

Handle9:

The market is volatile and IMO this will continue for a while. Given you are in the spending phase I'd be looking to use dollar cost averaging to smooth out the return over a medium term.

Split it into 5 chunks and take 1-5 years terms.

If this was a comment for me, thanks but I’m not sure why you say this. As mentioned, we are retired and the TDs are regarded as income-generating capital - we’re not in a spending phase.

You are not looking for long term compound growth as someone who would have 20 years until retirement would be. Unless I misunderstood your post you are looking for income to spend from the term deposit, not capital growth.

This reduces your wealth relative to inflation which means you are spending your wealth.

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