Bollard tells people to seek advice

Leaving real estate aside now, what other investments are available, and how does low inflation affect the equation? After bank deposits, probably the most commonly understood financial security is equities. History shows that equities can deliver a superior long-term rate of return, but also that equity returns over short periods of time can fluctuate quite a bit. New Zealand investors tend to know this, having suffered in the 1987 crash, and have been rather cautious ever since. This caution and the small size of the domestic market, which limits local options, have contributed to New Zealand households not building up financial assets to the same extent as has happened in the US. However, it has also meant that New Zealand household balance sheets did not take such a hit from the tech-wreck and post-9/11 downturns in the markets.

Investors in equities should be in for the long haul, to allow time to smooth out the inevitable fluctuations in share prices that occur from year to year. Also, because you can never be sure about any particular company, industry or region, if you are buying shares you should spread your investments across a diversified range of equities.

What about interest-bearing securities? One of the consequences of reducing inflation to low and stable levels is that nominal interest rates on all types of these instruments have fallen substantially. As an example, the average 90 day interest rate in the 1970s was just over 10%, and in the 1980s was around 17%. In the 1990s, the rate fell to 8%, and today stands at a little over 5% - the lowest in many years. Interest rates on other instruments have fallen similarly.

In real terms, of course, interest rates have not fallen anywhere near as substantially over the years, and remain attractive for investors, particularly relative to the real interest rates available in many other countries. Indeed, the real interest rate on interest-bearing securities today is considerably higher than was typical during the high-inflation times in the late 1970s and early 1980s. Taking tax into account widens the gap even further, because tax rates are applied to nominal, rather than real, interest income.