In the latest MPC, the SARB voted to keep interest rates low. There are several different strategies for dealing with prolonged periods of low rates. Fixed income vehicles and equities represent obvious alternatives – but what about the portion of individual savers’ portfolios that need to be protected from volatility?
This remains one of the most attractive features of cash savings products: the fact that your capital is protected. The low rate environment makes returns less attractive, but at the same time, lower rates do not guarantee exceptional performance in other asset classes.
Regardless of the current rate environment, savings remain an important part of a balanced portfolio. It is essential that savers keep their funds with institutions they trust – that will be there tomorrow, and that will serve them well while providing a range of savings solutions.
When choosing a savings solution, make sure that you understand the rate quoted: so that you can compare like for like. The better rate is not always the safest rate – nor is the rate the only factor to consider. You may want to access your money at any time, or only after a notice period, or even at the end of a fixed period.
The better rate is not always the safest rate – nor is the rate the only factor to consider.
Things get even more complicated when comparing interest rates because interest rates are stated as either “effective” or “nominal”. The annual effective rate is the interest rate paid each year. As interest is actually paid monthly, there is a compounding effect even within a year. The nominal rate therefore means the annual rate before the effect of monthly compounding, while “effective” is the interest rate when taking monthly compounding into effect.
You also want to constantly assess if your chosen savings product is still suitable for your own changing needs, as well as the current economic environment.
Investec has a variety of tools and people ready to assist you. You can talk to your personal cash investment consultant, or use Investec’s Savings Wizard to reassess which solutions best serve your savings strategy and objectives.
Speaking with an independent financial adviser about optimal asset allocation can also help investors navigate persistently low rate environments.
There is no doubt that 2020 is a year that challenged a lot of assumptions, and directly affected many people. It is more important than ever to understand how savings fit into your overall portfolio – and to ensure that you have the right solutions and the right partner for building up your cash reserves.
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