High interest rates could help investors, but you can’t avoid taking risks

HIGHER interest rates are making fixed-income investments more attractive than they have been in years. Who doesn’t like the idea of making 3 per cent to 4 per cent without doing anything?

First-time investors should take advantage of the higher rates to learn a little more about active portfolio management; but this should be a stepping stone to other kinds of higher-yielding investments.

The 10-year Singapore Government Securities were paying 3.08 per cent per annum in June 2023.

This can be taken as the risk-free rate of return for most Singapore-based investors.

It’s not a return that beats inflation, which was 5.6 per cent in the first half of this year. For savers used to getting 1 per cent or less over the last decade, however, it is a psychologically attractive return.

Researcher Neo Hui Yi, 25, said she first invested in local Treasury bills (T-bills) in March this year because she heard from friends that the six-month T-bills were yielding interest rates north of 3.8 per cent.

Since information about T-bills could be found on the Monetary Authority of Singapore’s website, she found the decision-making process less complicated than for stocks.

“There’s more work on my end to go and figure (stocks) out,” she said, adding that while she would consider buying stocks, she would not do so until she had read up more on a company’s financials.

Neo is among many people who have begun considering active allocation of their funds into something other than savings accounts and insurance policies.

On the SingaporeFI subreddit, which is dedicated to discussions on finance, numerous threads have been posted comparing T-Bills and Singapore Savings Bonds (SSBs) with equities and exchange-traded funds.

The discussion – akin to what might be found on equity investment forums – includes advice on how much to invest and how long to hold in order to optimise the transaction fee of S$2 for each application and redemption.

Beyond a simple buy-and-hold strategy, investors should also consider bond laddering with T-bills and SSBs.

The concept is similar to dollar cost averaging with equities. Rather than buying T-bills or SSBs with all your savings at once, buy them with a percentage of your savings each month.

This will help shield you from unfavourable fluctuations in interest rates, and reduce the reinvestment risk when rolling returns from maturing bonds into a new tranche of bonds.

Don’t stop there, though.

Once you have grown comfortable with the idea of investing a portion of your savings each month into fixed-income products, consider adding other slightly riskier instruments that are based on equities.

Fixed-income investments only appear attractive now because the global interest-rate environment has changed.

Since the 1980s, the gap between the US 10-year Treasury note and the US personal consumption expenditure price index has been narrowing as interest rates fell.

Investors have therefore had to take steadily more risk with their investments in order to generate real returns.

Historical data does not go so far back for Singapore, which has a relatively less mature financial market, but the experience is not too different. Investors have mostly relied on equities to generate returns in the last decade.

Those returns, for the Singapore market at least, have not been stellar. Over the 10 years to Jun 30, 2023, the Straits Times Index (STI) delivered total returns of 3.9 per cent per annum. For the most part, however, that rate of return would have beaten inflation.

The July tranche of SSBs pays 2.99 per cent per annum if held over 10 years, which makes the STI return significantly less attractive when risks are taken into account.

At the same time, inflation is now far above that.

A portfolio that combines both safety and inflation-beating returns must include a healthy mix of bonds and equities, depending on your risk appetite.

It is understandable that equity investing seems daunting and stock markets – volatile as they are – appear a far riskier way to invest.

Yet, the safe harbour is not going to bring sufficiently high returns over the long run.