Generating Wealth With Fixed Term Assets

Investors are increasingly turning to fixed term assets including government bonds, savings accounts, and property trusts to fulfill their wealth-accumulation requirements. The growing popularity of this asset class is because they provide tax-effective investment outcomes and accessibility. They also provide a buffer against fluctuations in the stock market or property market that can result in a substantial deterioration in your total wealth over a short period of time. It is for this reason that fixed-term investments have earned a reputation for being safe as opposed to sexy.

Bonds

According to financial planner David Loughnan, government bonds are one the safest asset classes for wealth generation in Australia. Building wealth via bonds can be a slow road and should be looked upon as a longer-term investment. In Australia, both State and Federal Governments offer bond securities. Australian Treasury Bonds demand a significant initial investment, placing them out of reach for typical investors. State and Territory-backed Bonds, however, offer lower hurdles for entry. NSW Waratah Bonds offer three and ten years, fixed rate investments. The minimum investment is $20,000 and Waratah Bonds provide six-monthly interest repayments. Northern Territory Bonds, by comparison, impose a $2000 minimum investment with a minimum one-year investment horizon. Currently, NT Bonds are returning 4.10% based on a five-year investment (see table below).

Interest paid
Maturity Date	Quarterly	Half-Yearly	Yearly
15 December 2015	2.95%	3.00%	3.10%
15 December 2016	3.15 %	3.20%	3.30%
15 December 2017	3.35%	3.40%	3.50%
15 December 2018	3.65%	3.70%	3.80%
15 December 2019	3.95%	4.00%	4.10%

Table Source: Northern Territory Government

Government bonds provide balance to a wealth-focused investment portfolio by guaranteeing periodic income (interest) and the return of your principal investment at maturity. However, the difficulty with bonds as a wealth-generating instrument relates to interest rate fluctuations. Should interest rates rise during the period of a bond holding it may return less capital than your original investment. They also provide less liquidity in comparison with shares.

Term deposits

The onset of the Global Financial Crisis signaled an important turning point that saw term deposits grow as a favoured strategy for wealth generation. Previously the domain of wealthy investors, term deposits are now being utilised as a ‘safe-harbour’ to cushion unexpected fluctuations across other markets. Traditionally investors may have allocated 20-30% of their wealth in term deposits while

investing the remaining 60-70% in more aggressive asset classes such as property and shares. As risk appetites deplete, now the tables have turned.

Some risk-averse investors are now opting to maintain around 90% of their portfolio in a term deposit and channel the remaining 10% into high risk investment options such as gold, derivatives, futures, CFDs and Forex. The profits from these short-term, high-yielding investments are in-turn redirected back into a term deposit.

Generally speaking, term deposits will not provide the capital growth or income available from other asset classes, however when used in concert with other strategies they have the potential to seriously grow your wealth.

Property Trusts

Property trusts were one of the most popular investments among risk-averse Australians in the lead-up to the Global Financial Crisis. However the onset of liquidity constraints and a massive spike in redemptions led to many property trusts being frozen in the wake of the GFC. Gun-shy investors had chosen listed and unlisted property trusts for their ‘safe as houses’ reputation, expecting regular dividends to provide solid income and grow their wealth in the lead-up to retirement. Instead they inherited a nightmare with many funds still closed to redemptions or returning far less than their initial investment.

However, the negative sentiment towards fixed-income property trusts is now starting to subside with listed entities such as CFS Retail Trust offering some of the best pound-for-pound returns on your investment. If previous instances are anything to go by, then property trusts should form a component rather than the cornerstone of your investment portfolio.

In conclusion

With retirement looming for many Australian Baby Boomers, these types of fixed-term investments may provide the security and assurance needed in the latter stages of retirement planning. However, rather than represent the only asset class in your wealth-generating investment portfolio, fixed-term investments can provide an important means for diversification away from more risky alternatives such as property or shares.