Beating Term Deposits to the End
Stocks or Term Deposits?
The Global Financial Crisis, which started in October 2007, was the worst financial crisis since the Great Depression of the 1930s.
The Australian All Ordinaries Index dropped from 6,873 points in October 2007 to 3,090 points in March 2009.
On average, Australian shares lost 55% of their value.
Ten years on, in October 2017, the All Ordinaries was still struggling to break through 6,000 points. The October 2017 average share price was still 13% lower than the October 2007 one.
Surely, without a shadow of doubt, those who were investing in term deposits back in October 2007 did better than those who were invested in shares?
The twelve-months term deposit rate in October 2007 was 6.1 per cent. In October 2016 it was 2.35 per cent. The average annual term deposit rate over ten years was 4.35 per cent.
In other words, had you put your money into an annual term deposit in October 2007, just before the Global Financial Crisis and rolled your savings over annually, your average annual interest rate would have been 4.35 per cent.
Not bad, given that this average rate was achieved while the entire world was in extraordinary economic turmoil.
But now consider this.
Say you had put your money in the stock market in October 2017, buying at the highest share prices before the Global Financial Crisis hit.
How would you have fared then?
It all depends on which shares you would have bought.
But let’s say you are a very careful, risk-averse person, so you would have only chosen stock in Australia’s fifty biggest companies listed on the Australian Stock Exchange (ASX), because these are companies least likely to fail.
In fact you are a very, very careful person and you would only have bought so-called defensive stocks among those fifty stocks.
A defensive stock is the stock of a company with stable earnings. Because of the constant demand for their products and services, these stocks are likely to recover when they drop while paying constant dividends.
Back in October 2017, when share prices peaked and the Global Financial Crisis was about to hit, there were fourteen ultra-defensive stocks in the ASX50.
All of these fourteen stocks, dropped significantly when the GFC hit. Some have yet to recover completely, while others have recovered and some have recovered and then some.
If you compare investing in these defensive ASX50 stocks with investing the same amount in term deposits from the start of the Global Financial Crisis until ten years later, you might get a surprise.
The defensive ASX50 stocks would have made you more money than term deposits during one of the deepest economic crises the world has ever faced.
The stocks would have given you an average annual return of 6 per cent, while the term deposits would have given you 4.3 per cent. And that’s when times were bad. Food for thought!