Safe as houses?

High Yield Fixed Interest Investments

We've all seen high-profile news stories lately about property investment companies going bust. Claims that these investments were as safe as houses turned out to be too good to be true. Thousands of people who thought their money was safe in high yield fixed interest investments have lost money. If you are thinking about investing, have you been put off by TV images of tearful investors who have lost everything? Does it all look too hard? Too risky?

Don't panic. Three questions will help you protect your money when you are thinking about a fixed interest investment of this type.

Understand the basics and you will be better prepared to ask the experts for advice to help you make good investment choices.

Is this risky? If a fixed interest investment promises returns greater than about 6.5%, it will be riskier than a term deposit account with a bank, credit union or building society. More Return = More Risk.

 

Is my money safe? Be sceptical about promises that a high yield investment is "secure" or "capital guaranteed". Make sure you understand the product and the investment strategy behind it. If you don't understand, don't invest.

 

What's at stake? If things don't work out, you might not get the returns you were hoping for. You might even lose money. Think about whether you could afford this before you invest.

 

The Bottom Line Of course, there's nothing wrong with investment risk if you understand the risk you are taking, and you are only investing some of your funds. Don't let advertising or word of mouth be your only guide to big investment decisions. Don't take a punt and put all your money into high risk investments. Never put all your eggs in one basket. Find out how your money is protected if things go wrong.

 

What can go wrong

A retired teacher with a modest super payout put it in a term deposit account at the bank. She didn't want much for herself but wanted to keep her money safe so she could leave something to her children. She saw a magazine ad for term investments that paid a bit more interest than she was getting. She saw the ad a few more times then heard it on the radio. She decided to find out more.

When she rang the company, she was told her money would be as safe as houses because they invested in property. She decided to take her all money out of the bank and put it in one of the company's term investments. For a few years, she received a regular small income that supplemented her pension. She happily agreed to renew her investment when the term expired. Then the company collapsed and she lost her entire payout.

Risk and Return

It's not too hard to find safe and secure fixed interest investments that will pay between 5.5% and 6.5% interest. Term deposit accounts at banks or building societies are popular choices.

You can get higher returns with other kinds of fixed interest investments. But you must understand what investment risk is all about before you part with your money.

If a low risk investment is predictable and safe, why would anyone choose a riskier investment? Because more risk generally gives more chance of higher returns. But the returns will be less predictable, especially in the short term, and there will be more of a chance that you could lose some or all of your money.

Golden Rule

Any fixed interest investment that promises more than you could earn from a bank, building society or credit union account will be riskier.

Does that mean you should not invest in it? Of course not. Many Australians invest successfully in this kind of product. They are successful because they've done their homework and they understand the risk they are taking on. And they never, ever put all their money into just one investment product.

Stop, Look and Listen

The most dangerous investments are those which make you think they are safe and secure when they aren't. Don't be fooled by glossy advertisements for fixed interest investments claiming to be "safe", "secure" or "capital guaranteed". Beware the claim that property investments are "as safe as houses".

Remember the Golden Rule. If the product offers a higher rate of interest than the 6.5% you could earn at a bank, building society or credit union, it will have more risk.

It's a big mistake to imagine that high yield fixed interest investments are just like fixed interest term deposit accounts. They aren't. They have their place in a carefully developed investment plan. They are not the place to put your life savings.

Different investment products suit different people. If your only funds are a nest egg or super payout that could not be replaced if you lost the lot, you may not want to take too many risks. You may prefer to put most of your money into relatively low risk investments. If you're investing for the medium to long term, and you have a few different sorts of investments, you might be more comfortable putting some of your money into higher yield products.

• Do your homework and have a plan
• Don't let advertisements and word of mouth be your only guide
• Understand the risks
• Ask questions - What's the risk? How is my money protected? - and don't invest if you're not happy with the answers.
• Spread your money around - don't put all your eggs in one basket.

Find out more about investing, the choices you have and the traps to avoid by reading our article Investing.

Find our more about getting financial advice to help you choose investments by reading our article Getting Information and Advice.