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Question

‘I’m interested in getting a high return on $250 000 with a low risk option for approximately six to nine months (expected time frame before I buy a new property). Can you please advise which banking or other options that would suit my situation?

Answer:

You are asking about a high return and low risk and you also mention your time frame being not longer than a year. The role of a good financial adviser is to create realistic expectations. In that spirit I have to inform you that you will not be able to achieve high returns given your risk aversion and the time frame.

 Historically, the big swings in returns come from growth assets like shares. In order to master investing in these assets successfully two main requirements need to be met:

 – willingness to sit through temporary volatility (mostly an emotional issue), and

– appropriate amount of time (10 years +).

Given the fact that your situation doesn’t allow for any of these, it’s not recommended that you invest your deposit. What we can talk about, however, is ‘parking your money’ for a short period of time. This will mean that you are not going to make any amazing gains during the next six to 12 months, but you can have your money working for you in the meantime.

 You have three options to execute your short term strategy:

  1.  High interest savings accounts – don’t get fooled by the name, again, there is nothing high in the sense of a possible interest you can gain on these accounts, however these accounts generally earn higher interest rates than an everyday bank account, they are flexible – money can be accessed anytime, the interest is often calculated on a daily basis. They are often available online with no requirement to visit a branch.
  2. Term deposits – basically represent a less flexible alternative to the previous option. The interest is guaranteed for the term selected, although you cannot access the funds until the end of the term. The interest is calculated at the end of the term. Also, unless instructed otherwise, the bank will renew your term automatically at the end of each term, so you want to be quick here.
  3. Offset accounts – applicable after you purchase your property (assuming you will be borrowing more from the bank), you will be able to take advantage of the system banks use to make money – borrow for less and lend for more…this way you essentially ‘earn’ the same interest the bank charges you on your loan (which is generally higher than the interest offered in TDs or high interest saving accounts). Additionally, the amount in the offset account reduces the interest you pay on your mortgage.

 Remember, the most important thing regarding your future is to have a plan in place. Neither investment nor a portfolio (on their own) represents a plan. They are only tools we use to implement our plan.

 People with plans make it, people chasing performance as a substitute to planning never make it.

photo credit: opensourceway via photopin cc

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