My job as a financial planner is to help our client families make wise financial decisions.
With all the negativity, distractions and noise propagated by the media, this is easier said than done (I previously wrote about the negativity of the news here).
The most recent “head turner” is the increase in interest rates by our friends at the Bank of England. Pretty much all major global banks have pulled this lever in the last 12 months to help dampen inflation.
“The deals being offered for savers now are better than anything seen for years” reports the BBC. This is true. As of April 2023, you can get 3% easy access interest at your local branch.
With global economy concerns, is it therefore time to ditch your investment strategy?
- No downside volatility
- A safe deposit with an established UK bank
- You know what your investment return is going to be
You opt for security now, immediately safeguarding your money for the short term. You will be watching on from the side-lines and will sleep like a baby.
So should you take the deal?
The client families we look after here at Serenity have universal objectives for their money, one of them being:
Preservation, safety, and the overall enhancement of their wealth
If that is important to you (and for multi decade retirement horizons, it should be), this requires achieving returns over and above inflation over the longer term.
This is not available via cash deposits. Historically, it rarely has been. So, by accepting the cash interest rate:
- Your cash will inevitably be wiped out by inflation , increasing the real risk of running out of money in your lifetime and creating financial insecurity.
- Global markets, for various reasons, are temporarily down on their previous highs. So, selling now would convert the temporary decline into a permanent loss (the difference between the two is huge).
- Interest rates will inevitably reduce as global inflation eventually dampens.
But what if…
- You’re young, I’m retired already. What if I don’t have time to wait for the market to come back from a big decline?
Why would you need it to? The level of the market when you pass has little to do with anything.
- But what if I move to cash now, and reinvest when “things have settled down”?
Getting out and “waiting to see what happens” tends to result in far worse returns than does riding the decline out – because the market can’t be timed successfully.
It is not possible to gain a consistent timing advantage over the equity market, that is, to achieve an enhanced return by getting in and out opportunely. The only way to be sure of capturing the full return of the equity market is to fully experience its tougher times, as well as its advance.
The Key Message
For nearly a century, mainstream equities have provided compound returns exceeding three times the general rate of inflation. They have thus been the greatest generator of real wealth – net of inflation – effortlessly available to ordinary people. The price of admission is being able to sometimes stomach temporary declines and weather the storms.
Over time, and if history is our guide, our belief is that they will continue to do so.
Resist temptation of the allure of immediate short-term security. The interest rate increases are a welcomed boost for your short-term savings and emergency fund, and that is it. The very best investors stick to the strategy and stick to the plan, helping to secure your financial future and generate wealth for you and your family.
Your future self will thank you for doing nothing.