For short-term needs such as shopping and holidays, banks are the best place to put our money. But what about our longer-term goals like buying a house, retirement or our children’s education? Is the bank the best place for your money?
Bank interest rates are there just to track inflation and protect our spending power over time as goods and services rise in value. It may appear that our money is going up in value, but it isn’t. What $100 can buy today will be roughly equal to what $200 can buy in 10 years’ time.
In fact, if interest rates stay at their current low levels then your bank savings will buy less in 10 years time than they can today.
Is a Fixed Term Deposit a solution?
Expats in Phuket may choose to use Asian banks for savings as they appear to offer better returns than banks back home. Typically, a fixed-term deposit is used to provide a safe return over a short period, such as one year. However, this still has the same problem that your money will likely only track inflation and will not be growing.
Investing in foreign currencies can be very dangerous; currencies can swing massively overnight, and any growth that has been accumulated can be wiped out in seconds. Only invest in foreign currencies if you intend to spend the money in that currency.
Bonds are an income-producing product; they do not grow in value. If you are employed, then you probably do not need income from your investments.
When chosen well a bond can be a relatively safe asset and produce a higher level of income than a fixed-deposit account. Make sure you seek professional advice from someone who understands the fixed interest market.
Where do we invest for goals over five years long?
Invest in companies, otherwise known as equities, but always take a minimum of a five-year time horizon as markets are unpredictable over the short-term.
Over the long-term equities will always provide you with the best return compared to cash and bonds. The S&P 500, an American index which tracks the growth of the 500 largest companies in the US, has grown by over 90% in the last five years.
Be aware that investing in the index will give you all of the up and all of the down of the markets. Your return will be, by definition, average. Another option is a mutual fund, which also invests in companies but has a single manager, or team, making the investments decisions.
However, not all mutual fund managers are equal; most do not beat the index. There are only a select few who for decades have shown that they can grow their assets by more than the market. Make sure you, or your advisor, has a criteria for choosing the correct investment managers.
If you are not an experienced investor then always speak to a financial professional. A personal advisor can take you through all the steps necessary to find something that suits you and your family. An advisor should try and build a lifelong relationship with you, always doing what is best for your situation.
William Frisby of Hampton Bridge, is a British expat who has been advising clients in the Far East for the past 10 years. To contact him write to firstname.lastname@example.org and quote The Phuket News.