Question: I have five years left before I retire. I have time deposit placements that I kept on rolling over for the past five years. Unfortunately, the interest on these time deposit placements has been coming down and it seems that I just end up giving the bank cheap money to borrow. Please help me find a better place where I can invest my money for the next few years or up to the time I retire.—posted on PFA’s “ask a friend, ask Efren” service.
Answer: You are not alone as many people have been complaining about the continuing decline in interest rates over the past three decades.
After hitting a high of 23.20 percent a year in 1984, short-term time deposit rates had been on a decline and settled at just 1.44 percent a year by the end of 2013 (source: Bangko Sentral ng Pilipinas).
So if you are ready to grrrrrumble about the low interest rates, join the club. (Forgive the pun as I am writing this reply on the day that Manny Pacquiao got into the ring for his rematch against Timothy Bradley).
Low interest rates are not necessarily bad. On the flip side, low interest rates on placements also mean relatively low borrowing rates that support any country’s economic growth.
In fact, there is a strong negative correlation between the country’s short-term time deposit rates from 1984 to 2013 and the country’s gross domestic product or Gross Domestic Product (at constant 2000 prices) for the same period.
In other words, when time deposit rates are low, the country’s GDP growth tends to be high.
Of course, you are correct in saying that banks get to borrow your money at a cheap rate. But it does not stop there.
Banks are also able to lend out your money at affordable rates to those who need to finance their operations and expansion programs. The more economic activity there is, the higher will be the growth in GDP.
Now the above arguments still do not change the fact that you are receiving low interest on your hard-earned money that is intended for your retirement.
Well, short-term time deposit rates are comparatively lower than interest on other financial instruments because you can get back your money over a short period, there is a guaranteed rate, there is deposit insurance from the Philippine Deposit Insurance Corp., and you can seek compensation from your bank if problems with your placements crop up (for reasons other than bank closure).
Going after higher rates means taking on higher risk. Please do not forget the odds.
To better explain this further, please consider the Pacquiao-Bradley rematch.
Each boxing match has betting odds. For the previously mentioned rematch, the most popular betting odds are -200 / +200.
This means that if you bet on Pacquiao to win and he eventually wins, your $200 will win for you only $100. However, if you bet on Bradley and he wins, your $100 will win $200 for you.
So why does your bet on Bradley have the potential to earn a 200 percent return while a bet on Pacquiao has the potential of earning only a 50 percent return?
This is because the unbreakable rule in investing also applies to gambling: the higher the risk, the higher the potential return; the lower the risk, the lower the potential return.
Pacquiao is considered to be the better fighter and necessarily with the lower chance of losing as compared to Bradley.
So going after higher returns will give rise to some risk for you. If you are now considering long-term instruments, you may ask your bank about their higher interest-bearing five-year tax-exempt time deposit instruments.
Please note that your money will face more risks because it will be exposed to market forces over a longer period of time.
You may also consider bonds whose original maturities range from longer than one year to as long as 25 years.
However, you will lose PDIC coverage, exemption from the 20 percent withholding tax on interest income if what you are buying are non-bank issued bonds, having recourse to your bank, and the guarantee of return of principal should you sell your bond before maturity date.
But you will enjoy higher guaranteed interest rates.
Also, please remember that a guarantee is only as good as the guarantor. That is why you should also review the latest credit rating of bond issuers and bond issues. You can check out bond ratings at www.philratings.com. Just click on their ratings database tab. And don’t forget to match the risk/return profile of your investment with your own risk/return preference.
If you want more free money management tips not just for you but for your friends and family as well, please visit www.personalfinance.ph.
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By the way, congratulations Manny!
Efren Ll. Cruz is a Registered Financial Planner of RFP Philippines, personal finance coach, seasoned investment adviser and bestselling author. Questions about the article may be sent by SMS to 0917-505-0709 or emailed to efren@personalfinance.ph.
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