Hi, everyone! We’re back with insights from our recent CommonCents Money Matters webinar, where we explored investment risks the media and Google often overlook.
Today, let’s unpack credit risk—a key factor when lending your money through investments—so you can make smarter choices for your family’s finances.
What is Credit Risk?
When you invest in fixed interest options, like term deposits or bonds, you’re essentially lending money.
Credit risk is about the chance that you won’t get it back.
A Commonwealth Bank term deposit, backed by the bank and government guarantees, is low risk, paying maybe 4.5%. But fixed interest investments exist on a spectrum—some are far riskier, promising higher returns but with less certainty.
Real life example
Consider Virgin Australia before COVID.
Investors bought their bonds, lured by 8-9% returns— which were way above the 2-3% from term deposits that existed at the time.
It sounded great!
Then, the pandemic grounded flights, and Virgin went into administration. Bondholders, expecting a “guaranteed” return, got back in the vicinity of just 9-13 cents per dollar.
Unlike banks, these investors had no solid security, and their money vanished alongside shareholders’ losses.
Stay smart
It’s important to ignore flashy labels like “guaranteed” or “fixed interest.”
Ask two key questions: ‘Who am I lending to?’ and ‘What security do they offer?’
Take one of the latest offers from a company that calls themselves an ‘alternative asset manager’ which advertises 6.5% for a 12-month investment. They lend to the borrowers that banks reject and charge 8.5% for mortgages which is a lot higher than a bank lends at and hints at the poor quality of the borrower. These ‘term accounts’ are not a term deposit substitute— the risk is higher.
Make sure to research the borrower’s reliability, check their security (like property backing), and weigh the trade-off between return and safety.
There could be a reason why it seems too good to be true!
Credit risk doesn’t grab headlines, but it can wipe out your savings if you’re not careful.
You’re the gatekeeper of your family’s future!
Dig deeper, avoid chasing high returns blindly, and talk to a financial planner to ensure your investments are secure.
Let’s keep your money safe and growing!
