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Interest in deposit accounts

By John Hayward
This article is published on: 11th January 2024

Interest in deposit accounts

As we enter a new year, we face another year of known and, so far, unknown global problems which could impact our finances. Many “experts” will guess and then advise us what will happen but, as so often in the past, be wrong, or lucky if the guess works out to be true. The world is governed by a handful of people. Therefore, there are very few who really know what is happening.

Fortunately, in the Western world at least, we are allowed to get on with our lives with an element of freedom. As financial advisers, especially as old as me, we can make some judgement based on how people react to global events. Some people over react, fed by questionable journalism. In the investment world, this leads to the wealthy becoming wealthier aided by panic selling by the less wealthy enabling the wealthier to buy into the market at a lower cost.

2022 was a rotten year overall for investments. 2020 was not great but people then were more concerned about living with Covid-19 than what was going on with their money. Stock and bond markets both had a torrid time, mainly as a consequence of Covid-19 which introduced high inflation once we had a chance to spend money again. A consequence of this was a reluctance in 2023 to commit to investing at a time where inflation was rampant. History has shown us that investing in traditional markets can overcome inflation. With high inflation came attractive interest on cash, something that we had not seen in decades. Back to the history book and we see that interest rates on deposit accounts have not outpaced inflation over the long term. However, the expression “long-term” seems to disappear from the vocabulary of some investors and short-term problems become the index to follow. Many have caught the interest rate bug over the last few months feeling that doing this would be sensible in the short term and then switch into investment markets when the time is right(?). Paraphrasing Jim Bowen of Bullseye fame, “Let’s look at what they could have won” had they not taken this approach.

Let us look at two different examples of investors. One who was invested on 1st January 2022 with 50% in the Rathbone Strategic Growth fund and 50% in Aegon High Yield Bond fund who decided to sell on 31st December 2022 due to the downturn in 2022 and another who was thinking about investing on 1st January 2023 but decided not to. In both cases, they eventually put their cash into a deposit account with a fixed rate of 5% (for 12 months) in July 2023.

1/1/22 to 31/12/222 1/1/23 to 31/12/23
Rathbone and Aegon -9.10% 11.45%

The person who sold from the two funds at the end of 2022 was 9.10% down for the year and only recouped 2.50% (6 months at 5% p.a.) by the end of 2023 instead of 11.45%.

In a similar way, the potential investor, who was holding off until things improved, missed that particular bus. Again 2.50% versus 11.45%. I appreciate that there are underlying charges with our products but nowhere near 9% a year and there are also tax considerations with the deposit account being taxed annually whereas the Spanish compliant bonds that we promote have tax deferred, if not completely negated.

Very few are smart enough or knowledgeable enough or lucky enough to time markets correctly. In the last year we have seen this proven once again.

When I tell people that they should be prepared to leave their money invested for at least 5 years, I often get the response that they are not young and that they may not survive 5 years. In a region such as the Costa Blanca where I live, with 300 plus days of sunshine a year and plenty of olive oil, the risk people face is living too long! In the “good old days” when the life expectancy was 65 or less, long term care and dementia were not a consideration. Making money work over the long term is not only a good idea but possibly essential.

We have products that can work with you and your family throughout your life, and beyond. Following the scaremongering headlines is not a great idea and can be very harmful to your wealth, and your health.

I know that it is possible to solve a Rubik’s Cube wearing boxing gloves but try it.

Article by John Hayward

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