We've all heard it before: "Term deposits are traditionally a reliable low-risk option for savers, paying guaranteed fixed income".
And with yields on most certificates of deposit and term deposits currently yielding 4% to 5%, safety never looked as good. Not in recent times, anyway.
However, recent analysis suggests that 'money in the bank' may not be as appealing as it once was for Australian savers.
Especially when benchmarked against comparable avenues to park one's hard-earned, precious, and valuable capital.
To put it bluntly, the limited returns of 4% to 5% from term deposits may not offer enough upside compared to investment options like ASX shares or growth-focused exchange-traded funds (ETFs).
Here's what the experts say.
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What makes term deposits less appealing?
With interest rates stable but inflation still present, returns on term deposits may not be enough to preserve purchasing power over time.
Term deposits offer guaranteed returns, sure. But life's about trade-offs.
At the same time, your upside remains capped, and savers are 'locked in' until the deposit matures, unable to adjust as market conditions change.
In a world where most diversified portfolios consisting of international shares have delivered double-digit returns this year, the numbers show that returns from term deposits don't fully justify the lack of flexibility and growth potential they offer.
In saying that, intelligent investors don't want to overpay for their assets either, knowing how much this impacts future returns. Why put money at risk when it's destined for doom?
Alas, there's an enormous gulf between when investors want (growth) and what they need (low risk) to get there. And it's a gulf that remains forever wide
The solution? According to Morgan Stanley, an investment strategy known as growth at a reasonable price (GARP) could be the framework that bridges this gulf.
GARP combines elements of growth and value investing, selecting companies with strong growth prospects but reasonable valuations.
As a strategy, it has seen renewed interest from investors looking to outperform in a stretched market. This could offer more balanced returns with less risk than a full-growth portfolio.
In its report posted to clients this week, Morgan Stanley suggests looking for GARP stocks for the long term, as they offer a balance of "offensive and defensive qualities".
How GARP investments stack up
Growth-oriented investments can offer potential returns well above what term deposits provide. The trade-off is the higher level of risk involved.
And we're talking risk in its Macquarie dictionary definition: "exposure to the chance of injury or loss; a hazad or dangerous chance".
But Morgan Stanley argues investors have been more than compensated for this additional risk over the long term.
In a previous note, it says that "investors seeking growth at a reasonable price should look at features of both growth- and value-oriented investing".
Purely growth-oriented investing favors companies that offer strong potential for earnings growth. Investors are often willing to pay higher valuation multiples for those stocks, given the expectation of high growth. Meanwhile, value investing focuses on companies that have stable cash flows and appear to be undervalued in the marketplace, based on financial metrics such as price/earnings, price/book and debt/equity ratios.
By combining elements from both investing styles, GARP investing has the potential to reward investors with capital growth while reducing their exposure to overvalued, profitless companies.
The report identifies REA Group Ltd (ASX: REA) as an Aussie stock that fits the bill. The stock is up 58% in the past year and pays trailing dividends of $1.89 per share.
According to CommSec, consensus expects REA to earn $3.63 per share in FY25, giving a forward earnings yield of 1.6% at the time of writing.
The stock has outperformed the ASX real estate sector, and its performance over the past 3 years has outpaced returns generated by term deposits.
Meanwhile, the Global X S&P World EX Australia Garp ETF (ASX: GARP) was listed recently and gives investors exposure to this theme.
Through the ETF, investors can buy an already diversified portfolio, albeit in one single investment. Global X's portfolio managers have sound logic for the fund's formation. According to The Australian Financial Review:
With valuations so high, investors are asking, should I continue investing at such high prices? This strategy is about finding high-growth companies with solid financial strength that are trading at reasonable valuation.
Conclusion: Term deposits vs. GARP investing
In today's investment landscape, term deposits yielding 4% to 5% may feel secure, but they might not offer enough to keep pace with inflation and market opportunities.
They certainly won't generate long-term wealth.
For investors looking to grow their portfolio, the appeal of ASX shares or ETFs that track growth sectors could offer a better balance of return and risk. But to avoid overpaying is hard.
This is where GARP investing as a strategy comes into play. It allows investors to employ all the tenets of sound risk management to manage the downside– diversification, liquidity, and so forth – but there's no cap on the upside.
For those seeking to compound capital over a long period of time, this might be worth a look.
