Fixed-Term Assets As A Means For Generating Wealth

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 due to the fact that 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
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 year, 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 principle 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 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.