 |
The recent market slide has prompted some investors to look for other investment
options notably fixed deposits. Considering the current market condition, a layman
would argue that stocks are no longer as attractive as fixed deposits.
Fixed deposits have been the traditional channel of investments for many local investors.
Conservative investors prefer this type of investment as they usually consider preservation
of capital as an important objective.
In Malaysia, fixed deposits generally form the backbone of many investors' financial
portfolio because they offer a steady rate of return with a high degree of safety.
It is not unusual to find local investors whose assets are heavily skewed towards
this type of investment.
While fixed deposits provide you maximum protection against market volatility, it
does not protect you against inflation, a hidden risk which shrinks the value of
your money. In short, fixed deposits are not effective hedge against the erosion
on your investment value over time.
If you think inflation is no big deal to you, picture this. RM1,000 invested at an
average investment of say 7% compound would be worth RM1967.15 at the end of 10 years.
If you factor in an inflation at the rate of 4% p.a, your investment would only be
worth about RM1370 at the end of the period.
Fixed-deposits unlike stocks do not provide long-term capital growth which is
a key aspect of any investment portfolio (see Table 1). In some instances, few fixed
deposit returns may be a little better than inflation over time. However fixed deposit
does have the added security feature.
Although stocks provide you growth, do not expect huge returns within a short
time frame. A well-balance portfolio should include not only fixed income investments
but stocks as well - even during times of uncertain market performance.
Stocks are more volatile. Stocks are affected by various influences such as economic
and political forces but they provide investors long-term capital growth.
Volatility is a normal characteristic of stocks. Higher risk could mean greater potential
rewards in the future. Stocks unlike fixed deposits have the edge over inflation.
Historically, stocks have outperformed inflation in particular stocks invested over
the longer term.
Despite all the hiccups, the fact remains that stocks have outperformed all other
securities over the longer term. Table 2 compares the returns between the Kuala Lumpur
Composite Index (KLCI) and local fixed interest rates over the past five years.
Even if you are conservative, stocks should still be considered to add some growth
to your portfolio and to cushion against inflation. Long-term growth is an important
aspect as it helps to secure financial needs such as buying a house and college funding.
Follow a systematic fundamental-driven stock-screening approach and do not time the
market during market turbulence if investing in stocks. This helps to limit your
losses.
|
Table 1. Comparison Between Fixed Deposits and
Stocks
|
|
|
Fixed Deposits
|
Stocks
|
| Capital growth |
No
|
Yes
|
| Steady Income |
Yes
|
No
|
| Inflation hedge |
No
|
Yes
|
| Degree of volatility |
Low
|
High
|
Source: Normandy Research
|
