To The Moon

With many more options available these days, which should you pick to grow your money in the long run?

Savers are finally having their time in the sun.

After enduring more than two decades of ultra-low interest rates, banks are finally starting to raise rates on their savings and fixed deposit accounts.

Meanwhile, the latest issue of the Singapore Savings Bond (SSB) is offering an attractive first-year interest of 3.26% for its first year.

With banks set to raise their deposit rates even further in line with the US Federal Reserve’s aggressive rate hikes, should investors start shifting their money from stocks to cash?

Is it a wiser choice to park your money in such “safe” instruments over the long term?

A comparison of rates and returns

As a starting point, it’s useful to compare the various yields and interest rates offered by the different banks.

Last month, United Overseas Bank Ltd (SGX: U11), or UOB, raised its promotional fixed deposit interest rate to as high as 3% per annum for a 15-month tenure.

Other banks quickly followed suit, with Maybank offering a rate of 3% for a 12-month fixed deposit tenure.

A variety of fixed deposit options from OCBC Ltd (SGX: O39), UOB, RHB, and HSBC range from 2.65% to 2.9%.

These rates are the highest being offered in 24 years.

Savings account rates have also been on the rise, although these come with terms and conditions attached to enjoy their full effects.

DBS Group (SGX: D05) raised the interest rate of its Multiplier account to a maximum of 4.1% per year on the first S$100,000 but these come with an onerous set of conditions.

Elsewhere, OCBC raised interest rates for its OCBC 360 account to an all-time high of 4.65%, also on the customer’s first S$100,000.

Unsurprisingly, savers also need to fulfil a list of conditions to qualify for the full interest benefit.

The latest issue of the SSB provides a 3.47% average annual return over a decade.

Turning to stocks, units of Frasers Centrepoint Trust (SGX: J69U) offer a trailing distribution yield of 6.4%.

Shares of DBS offer a trailing 12-month dividend yield of 4.2%.

Just looking across these different asset classes, you may feel that the slightly higher returns from owning a REIT or DBS Group may not compensate for the risks taken.

Rates may not stay high for long

But here’s the thing.

Interest rates may not always remain at these high levels.

While you can argue that interest rates have remained too low for too long, keeping them high for an extended period also has severe economic repercussions.

Right now, the US central bank is committed to bringing inflation down to the 2% level and is interest rates hikes to achieve this objective.

The question remains as to when its goal can be attained, but the central bank is also closely watching the US economy at the same time.

High interest rates dampen consumer and business spending as they result in higher finance costs, pushing up the borrowing cost of everything from mortgages to corporate loans.

Hence, persistently high rates usually end up triggering a recession as business activity slows to a crawl.

There is thus an impetus to lower rates quickly once the inflation objective has been met.

And once this occurs, the returns from bank deposits and SSBs will also correspondingly fall.

Long-term stock returns are more attractive

There’s also one special quality about stocks that make them attractive for building wealth in the long run.

That is – there is no limit as to how high a stock’s price can head.

And, there is also no ceiling on how high a company’s dividend can rise, as long as it continues to report higher profits and cash flows.

Take local blue-chip stock exchange operator Singapore Exchange Limited (SGX: S68), or SGX, for instance.

Over the last 10 years, SGX’s share price has risen from S$6.70 to the current S$8.61, netting an investor a compound annual growth rate (CAGR) of 2.5%.

This may not sound impressive, but let’s not leave out the dividends that the bourse operator has paid over the last decade.

From fiscal 2013 (FY2013) till FY2022, SGX’s annual dividend per share has risen from S$0.28 to S$0.32, for a total of S$2.945 over 10 years.

Added to the share price gain, this means investors have enjoyed a total return of 5.6% CAGR.

Or take growth stocks such as Apple (NASDAQ: AAPL) or Nike (NYSE: NKE).

In the last decade, Apple has produced a share price CAGR of 24% while Nike’s CAGR over the same period came in at 16.3%.

These impressive returns more than beat what any bank deposit or SSB can offer.

Get Smart: Stocks for the long run

The answer is clear.

If chosen correctly, stocks can offer a much higher long-term return than either savings accounts, fixed deposits or SSBs.

What you should do now is to go about selecting great businesses that can generate great returns for you over the long term, thus helping to compound your wealth for retirement.

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