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Your term deposits are living on borrowed time

Down, down… interest rates going down.

A week today, it’s increasingly looking like Glenn Stevens and his merry band of bankers will slash the cash rate to just 2.5%.

The mortgage belt, tabloid press and KRudd alike will cheer from the hills… while diligent savers, investors and retirees will once more cry into their term deposits.

Cry if you like, but as the old saying goes, it’s no use crying over spilt milk. If you can’t stand the heat, get out of the kitchen — in this case, get out of term deposits and into something that will pay you a decent income. More on that a little further down…

Bubble alert… in your purse and wallet

There’s always a bubble somewhere.

According to Charlie Aitken at Bell Potter, in a note to clients this morning, the bubble today is in cash, specifically term deposits.

According to Aitken, Australian bank term deposits are at a record high of $546 billion, up 5 times since 2003.

Yes, you read that correctly…

At a time when interest rates are crashing, Australians have record amounts of money sitting in cash, earning lower, lower, lower, lower rates of interest.

Are we collectively off our rockers?

Absolutely.

But, as certain as night follows day, the next bubble is already forming, and you can be ahead of the game.

You don’t get rich doing this…

No-one ever got rich leaving their money in term deposits. Historically, if ordinary folks like you and me wanted to get rich, we invested in property and the share market.
Australians are already reverting back to their roots.

Sydney market hits 10-year high” screams The Australian Financial Review, saying…

“Investors confidence, buoyed by rising house prices, has pushed activity in Sydney’s residential housing market to its highest level in more than 10 years.”

The clearance rates for weekend auctions in Sydney was over 80%.

Australian house prices, based on a multiple of salary, are already expensive, with the most recent Demographia International Housing Affordability Survey classifying the Sydney and Melbourne property markets as “severely or seriously unaffordable“.

Buying property today, for investment purposes, no matter how low interest rates go, is unlikely to make you an investing fortune.

House prices

On the contrary, given first home buyers simply can’t afford to get on the property ladder, the odds favour falling house prices, not rising. The best years for property are well and truly in the past.

If property ‘aint going to do it for you…

The same can’t be said of the share market.

In his 2010 annual letter to Berkshire Hathaway shareholders, Warren Buffett wrote…

“Now as in 1776, 1861, 1932 and 1942, America’s best days lie ahead.”

The same is true of Australia — her best days lie ahead.

In this world of instant news, with journalists and politicians alike fighting over who can get the biggest and best headline, it’s easy to think the future is bleak.

Take your pick of the doom and gloom headlines…
— China bust.
— Commodity crash.
— Unemployment soaring.
— Debt spiral.
— Boat epidemic.

But as Warren Buffett also said in that 2010 letter…

“The prophets of doom have overlooked the all-important factor that is certain: Human potential is far from exhausted.”

Down, down, interest rates going down… but don’t blow your cash on an overpriced investment property

Financial markets are currently pricing in a 75-80% chance of the RBA cutting interest rates a week from today.

Will this be the straw that breaks the camel’s back, driving term deposit holders out of the safety of bank accounts and into risk assets?

I fully admit I’m a property bear.

Firstly, the buying and selling costs, including real estate fees and stamp duty, can be huge.

Secondly, houses are an illiquid asset. It’s easy to buy a house. But it can take a devilishly long time to sell, especially in a poor market.

Thirdly, in terms of affordability, the odds of further substantial gains in house prices are stacked against you.

It’s so obvious to me… and it will soon also be to the small SMSF army

Which leaves the share market as the logical home for the wall of term deposit money that will slowly but surely soon be looking for a more productive home.

And, ahead of the interest rate decision, there’s evidence the Big Switch is already happening — how else can you explain Commonwealth Bank of Australia (ASX: CBA) shares hitting an all-time high in the face of economic headwinds?

To my mind, it’s only a matter of time before we see more headlines like these…

Yield hunters
Source: The Age
This is one party you’re never too early to arrive, and never too late to leave.

The Australian Financial Review says “good quality Australian shares that have a long history of paying dividends are a real alternative to a term deposit.” Get 3 Stocks for the Great Dividend Boom in our special FREE report. Click here now to find out the names, stock symbols, and full research for our three favourite income ideas, all completely free!

More reading

Of the companies mentioned above, Bruce Jackson has an interest in Commonwealth Bank.

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