Why REAL Term Deposit Returns are Almost Zero…

By Dale Gillham

Term deposit rates are still incredibly low, given historical norms, and as a depositor you may have decided to accept the current low payout rates being offered by your bank, in return for capital security. In these times, accepting such low term deposit returns may have you feeling like the begger, not the chooser. But what’s worse is that you may not be aware how your REAL term deposit return is likely to be almost zero. Let me explain…

Where Your Term Deposit ‘Loan’ Really Goes…

When you hand over your cash to the bank through a term deposit, you’re loaning them your money, and in return you receive interest at around 3.0 to 4.0 per cent per annum, being the typical current return. The bank then uses your cash to create credit for borrowers. These funds are often put into growth assets, likely to return around 7.0% and above, over the long term, which is almost double your term deposit interest. While that may seem fair on the surface, once you take into account inflation your term deposit return is largely eroded.

Inflation is Killing Your Term Deposit Return…

The inflation rate is the rate of increase in the cost of goods and services that we pay for. So when inflation rises, not only do our costs go up, but the effective interest rate the bank pays goes down. For example, if you receive around 3.0 to 4.0% for a term deposit, subtract the inflation rate at close to 3.0 percent, and your real return is actually almost zero. Is this acceptable?

Clearly there are times when bank interest is acceptable and times when it is not. What I believe this clearly highlights is that when the real rate of return of cash is so low, those in the know move money to growth assets like shares, and given this increased demand, risk falls.

So What Do We Expect in The Australian Share Market?

Activity on the market this week was in stark contrast to the prior two weeks, in that the weekly trading range dropped dramatically below typical levels, with one day’s trade still to go. Given that each of the prior two weeks saw the market trade higher, where the weekly range was between 2.0 and 2.5%, I am not surprised to see the market flat for most of this week, while it takes a well-earned breather. However, on Thursday, finally the All Ordinaries Index gave up some of the prior gains. Now we wait for the market to find support.

This is the last week of the Australian company reporting calendar, however, with the US season starting to swing into action, all eyes are on international shores.

all ordinaries index Australian share market monthly chart image 29-08-14

To your profitable trading,

Dale Gillham Chief Analyst Wealth Within

Dale Gillham, ‘one of the country’s most respected analysts’ (Wealth Creator Magazine, Nov/Dec 2004), sought after key note speaker and author of the best selling book ‘How to Beat the Managed Funds by 20%’. Dale has assisted thousands of traders and investors to learn to trade shares and become confident and profitable in their direct share investments. Tired of an industry saturated by quick fix gimmicks and expensive short-courses, Dale co-founded Wealth Within to provide ‘ real education and ongoing personalised support’, as well as independent investment adviceto traders and investors who have become disillusioned by the market for one reason or another. As testament to this, Wealth Within launched Australia’s first and only nationally accredited Diploma of Share Trading and Investment.