3 Common Questions Investors Are Asking About Their Investments Today

Given the highly uncertain times investors currently face I thought it may be of interest to jot down some of the most common questions that are been discussed at present, along with some attempted answers.

Where now for the New Zealand dollar? We believe our currency has a fair value of around US$0.55. Given our dollar is currently trading at US$0.63, we would expect it to soften from here. That, at least, is the theory.

In reality, currencies can stay under or overvalued for a long time, sometimes years. There are good reasons why our dollar has been strong; New Zealand’s interest rates are higher than overseas which attracts investors, and our banking system looks in better shape than the American system.

Not only are overseas investors buying our currency to access high interest rates, many are speculating that our currency will be pushed higher by rising commodity prices and a weaker US dollar.

Eventually, overseas investors might lose some of their enthusiasm for our dollar if the economy slows down further. We are a debtor country in that we spend more than we earn. This leads to our large current account deficit, and means our currency is always vulnerable to the exit of overseas investors.

Some easing in the dollar would be good news for our exporters, but we should be careful what we wish for. A sharp decline in our currency would ultimately be unhelpful as import prices would rise sharply.

Investors should remember that just because our currency has been strong lately, we should still invest some of our portfolios overseas to protect against any possible large weakening in our currency. It is worth noting that in the early 1970s our dollar was worth US$1.40, more than twice the current level.

Deposit rates are too low, what are alternative investments that offer better returns? Yes, deposit rates are low, in fact they haven’t been this low since 1967, but investors must recognize that chasing investments that offer higher returns than bank deposits involves risk.

Government stock is the lowest risk investment there is. These bonds will currently give you a return of between 3.0% and 5.5% depending on the term. Bank term deposits and senior corporate bonds with high credit ratings are probably next off the rank in terms of security. These may give you an extra 0.5% to 1.0% a year over and above government stock rates.

If you are considering an investment that is offering a return of 8% or 10% then it will involve a much higher level of risk. There is no free lunch in investment, any return above the risk-free rate means you are taking risk.

There are many alternatives to bank deposits that offer the potential for higher returns, including shares, property and corporate bonds, but understand that all involve a higher level of risk.

How do you protect your income against falling interest rates? Having all of your savings in 90-day bank deposits may have felt safe for years but when interest rates fall so sharply you are left with much lower income from your investments.

Having a mix of terms in your portfolio is important – some short term and some long term, so you have some interest rates locked in – is your first line of defence against falling interest rates. Including other assets in your portfolio such as property and shares, which can do better when interest rates fall, is also very important.

About the Author

ABN AMRO Craigs is an NZX Firm that was established in 1984. Services offered include: Sharebroking, Portfolio Strategy and Management, Retirement Planning and Superannuation, Investment Advisory, Custodial Services, such other services.

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