A country’s interest rate will go through cycles, with higher rates yielding higher returns for savers. Unfortunately, inflation can devastate one’s savings if not accounted for. Therefore you must compare the rising interest rate with the inflation rate to see the true impact on the financial status of your investment savings.
Here are a few things to consider:
Account for inflation
Inflation erodes the buying power of your money. Many people know that their savings grow by the interest rate, but forget about the negative effects of inflation. If you want to maintain your money’s value, then your investment returns need to compensate for the time period of the investment. The interest rate is only attractive if it’s higher than inflation, otherwise your money loses value.
To achieve any real returns your investment will have to grow more than inflation each year. Rising interest rates will not always protect your capital. This means, you may need to seek other alternatives to the bank in order to achieve any real returns. Equities have been proven to significantly outperform inflation over the long term. However, this performance comes with increased risk and short-term volatility. Long-term investors may benefit from the equity exposure if they can weather the short-term volatility.
The long-term tactic
Short-term underperformance will often surprise investors and can lead to emotional reactions like switching, which often results in locking-in losses. The only time to rethink your investment strategy is if your risk profile or objectives change.
Many investors opt to leave the asset allocation decisions to an investment manager by picking a balanced fund, which allows managers to allocate assets according to available opportunities. It is important to choose an investment manager who is experienced and who you trust. If any of this overwhelms you then consider visiting a good independent financial advisor to help formulate your plan.
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