Term deposits or ASX stocks? Which should you invest in?

Term deposits or ASX stocks is a good question, but here’s the real question to answer first

The question of whether to invest in term deposits or stocks is really a question about what kind of uncertainty you can live with, and what you want your money to do for you over time. With this in mind…

Term deposits are built for certainty. You know exactly how much you’re putting in, how long it’s locked away, and how much you’ll get back at the end. That makes them emotionally easy to hold and practically useful for short-term goals or money you absolutely cannot afford to lose. They protect capital rather than grow it.

The downside is that their returns are usually modest and often barely beat inflation, especially after tax. Over long periods, money in term deposits can quietly lose purchasing power, even though the number on the statement goes up. There’s also opportunity cost: while your funds are locked in, you miss out on higher-return investments.

Stocks sit at the opposite end of the spectrum. They represent ownership in businesses, and over long time horizons they have historically delivered much higher returns than term deposits. They’re one of the most effective ways to build real wealth and outpace inflation. The trade-off is volatility. Prices move daily, sometimes violently, and short-term losses are normal for a variety of reasons, some in a company’s control but others completely outside.

Stocks demand patience and emotional resilience, because the worst possible moment to sell often feels like the most rational one. And even when selling is rational, that may not even be an option, just ask CTD investors.

There’s also uncertainty: returns are not guaranteed, and individual companies can fail. However, diversification and long holding periods dramatically reduce the risk of permanent loss.

What does the data say?

The overall picture suggests ASX stocks return more. Of course, to say this is only to allude to market indices rather than individual stocks.

One widely cited long-term measure is the Australian All Ordinaries Accumulation Index, which includes both price growth and dividends (i.e., the total return you’d actually receive if reinvesting dividends).

According to Morningstar-sourced data going back~40 years, this broad share market benchmark has produced average annual returns of about 12.2% per year up to 2024. Over the most recent decade that figure moderates to around 9.1% per year as short- and long-term cycles are averaged together.

By contrast, average term deposit rates in Australia have historically been much lower. Data over long periods shows average term deposit rates around 3.35% per year, significantly below share market returns.

A comparison in that data suggests that $10,000 invested in ASX shares with dividends reinvested since 2005 would have grown to around $45,000, whereas the same amount in term deposits earning around 3.35 % would be closer to $18,500 — even before accounting for inflation.

Looking at current conditions (early 2026), the best quoted term deposit rates in Australia are generally in the 4–4.7 % range for new deposits depending on term length and provider. These are higher than in recent years but still materially lower than long-term stock market averages.

The risk of losing it all

If a company goes bust, shareholders are last in line after creditors, bondholders, suppliers and employees. In a collapse scenario your shares could go to zero and you’d lose your entire investment. There’s no government safety net covering investments in equities, managed funds, ETFs or similar products — their value rises and falls according to market performance and underlying business prospects, and losses are part of the inherent risk.

With term deposits, the context is quite different. In Australia, most term deposits are held with banks, building societies or credit unions that are regulated as Authorised Deposit-taking Institutions (ADIs).

The Australian Government operates the Financial Claims Scheme (FCS) which, if activated, guarantees eligible deposits with ADIs up to $250,000 per account-holder per ADI. That guarantee applies to term deposits as well as savings and transaction accounts in Australian dollars. So if an ADI were to fail and the FCS were activated, you’d be reimbursed up to $250,000 for your eligible deposits with that institution.

Now it is important to note that there are technicalities with the FCS, the most important is that the cap applies per institutional banking license rather than account. So if you have multiple term deposits worth $500k for instance, just $250k would be covered. If you had $500k split across 5 banks $100k each, all 5 deposits would be covered.

The ‘risk of loss’ you face with term deposits are inflation eroding your real purchasing power or missing out on higher returns from other investments, not the nominal loss of principal like you can see in equities.

So who is each option actually for?

Term deposits make more sense for people who need their money in the near future, rely on it for essential expenses, or simply cannot tolerate market swings without panicking. Retirees drawing income, people saving for a house deposit in the next couple of years, or anyone with a low risk tolerance may rationally accept lower returns in exchange for stability and predictability.

Stocks are better suited to investors with time, surplus cash, and the psychological ability to sit through downturns. Younger investors, people investing for retirement decades away, and anyone aiming for long-term wealth growth benefit disproportionately from equities. For them, volatility isn’t a bug—it’s the price paid for higher expected returns.

Conclusion

With all this said, the “ultimate” decision, isn’t about which investment is better in the abstract. It’s about matching the tool to the job. If the job is preserving capital and sleeping well at night, term deposits win. If the job is growing wealth over time and beating inflation, stocks are the more rational choice.

Most financially healthy people eventually land somewhere in between, using term deposits for short-term security and stocks for long-term growth, but there are absolutely investors for whom leaning heavily toward one side is not just acceptable, but optimal.