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Stocks and fixed-deposits

This article is reproduced with permission from
Normandy Advisory Services Sdn. Bhd (Licensed Investment Advisor)
15th Floor Menara Multi-Purpose, No 8 Jalan Munshi Abdullah, 50100 Kuala Lumpur
Tel : 03 - 469 5560 Fax : 03 - 294 5561


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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


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