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Fixed deposits or stocks? How rising rates affect your investment strategy
UOB’s Winston Lim answers some of your key questions and shares tips on how to build a resilient investment portfolio
You should assess your risk appetite and time horizon before making any investment decisions.
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The US Federal Reserve once again raised interest rates by 75 basis points on Wednesday, in its continued battle against red-hot inflation. How will this affect your investment strategy? What opportunities can you consider?
In this column, Mr Winston Lim, UOB's head of deposits and wealth management, answers some of your key questions on investing amid rising interest rates. Mr Lim, 47, has over two decades of experience in financial services. He previously headed the personal financial services and private wealth management team in UOB China.
Q: Deposit interest rates have been rising. Is it still worth taking risks by investing at this point?
A: We always advocate our Risk-First Approach to managing your wealth. This means you should assess your risk appetite and time horizon before making any investment decisions.
If you need your savings in the shorter term, you can keep your funds liquid and still benefit from today’s deposit interest rates. For example, the UOB One Account offers higher rates if you simply credit your salary or make Giro transactions, and clock a minimum spend on your UOB card.
If you have a longer time horizon and the appropriate risk tolerance, there are still compelling investment opportunities you can consider. For example, lower-risk asset classes like US investment grade bonds are offering higher yields than current fixed deposit rates. Investing in high-quality bonds now can help you lock in higher yields to receive recurring income and potentially benefit from capital gains in the future.
Stock market valuations are also at historically low levels in many markets. If you have a higher risk appetite, you could look for quality, high-dividend stocks whose prices have been pushed down by bearish investor sentiment. Keep an eye on long-term megatrends too – for example, investments in renewable energy to fight climate change and rising demand for healthcare services for the world’s ageing population will continue to gain momentum long after today’s market volatility has subsided.
Q: With interest rates still rising, should I be looking to invest in properties? What kind of strategy should I take with my investments?
A: You are right to factor rising interest rates into your decision. Local interest rates are highly sensitive to the policies of global central banks such as the US Federal Reserve, which is likely to continue hiking rates as we enter 2023. To be safe, you should use higher interest rates to calculate your potential mortgage payments and assess whether you are comfortable with them.
More importantly, property investing typically requires a significant capital outlay and longer time horizon, so be sure this is appropriate for your risk appetite and that you do not need the funds in the short to medium term.
To build a resilient investment portfolio, we recommend that you diversify your assets and tailor your investment mix according to how much risk you are able and willing to take. To do this, we typically recommend different allocations of core and tactical assets for our clients. Core allocations carry lower risk and are less dependent on market cycles in helping you progress towards your long-term goals. Tactical allocations are higher-risk in nature and focus on capturing targeted opportunities.
The most important thing to remember is that investing is a highly personal journey. What works for someone else may not be suitable for you, so you should speak to a financial advisor if you need help planning your investments.
Q: I'm a working mother and I'm planning for my retirement. Should I set up a Supplementary Retirement Scheme (SRS) account?
A: Top-ups to an SRS account are a useful way to supplement your retirement savings. This also brings benefits such as dollar-for-dollar tax relief, which means your taxable income for the year is reduced by the amount you contribute, up to designated amounts. You can withdraw your SRS savings when you reach the statutory retirement age and enjoy a 50 per cent tax concession on the funds at that point.
There are factors you should keep in mind before you make any top-ups. Firstly, review your financial position. Do you have enough rainy day savings? Also consider whether you need your savings for shorter-term goals such as buying a home, because you incur penalties on early withdrawals from your SRS account.
Remember, you also enjoy tax savings as a mother. There is currently a cap of $80,000 for the total tax relief you can claim each year.
If you decide to set up an SRS account, consider investing your savings to try and achieve higher returns than the 0.05 per cent a year interest on the account. You can use your SRS funds for a wide variety of investments, including insurance savings plans and unit trusts such as those found within the UOB SimpleInvest platform on the UOB TMRW app.
Since you can only withdraw your funds at the statutory retirement age, you likely have a longer-term horizon on these savings – assuming you start early – and a longer window to recover from any potential downturns.
Rethink Your Wealth is a fortnightly advice series where experts share insights and answers to your money-related questions.
