The Worst Place For Your Money Now

Can you remember what were you doing back in June 2006?

As a quick reminder, at that time, some of us could have been dancing the samba to the tune of Mas, que Nada by Sergio Mendes and The Black Eye Peas. Some of us might have been having a “Bad Day” with Daniel Powter.

Apple iWhat?

Some of us might even have been getting ready for the FIFA World Cup in Germany, while others could have been contemplating something called the iPhone.

Yes, it is true. The iPhone was still only a rumour in 2006. It wasn’t launched for another 12 months.

June 2006 is also significant because that was the last time the US Federal Reserve raised interest rates. It seems such a long time ago now, doesn’t it?

It has been nine years since the US central bank last put up interest rates. They went up to 5.25% before crashing to near zero in 2009, where they have remained since.

Interest rates in Singapore were also on the decline at that time. Our benchmark interest rate, namely SIBOR, dropped from around 3.5% to almost zero.

Biggest losers

People at the time were understandably worried. Some were so worried they even cashed in their shares.

But those who had put their money in the bank would have been the biggest losers. The winners would have been bond and stock market investors.

Who, at the time, would have guessed that the stock market would be as strong as it has been?

Since June 2006, the Straits Times Index  (SGX: ^STI) has risen some 20% (even after the recent stock-market collapse). That is an increase of 2% a year, before dividends are included. With a dividend kicker, the annual total return would have been over 5%.

On a total returns basis, companies such as DBS Group (SGX: D05) have jumped 70%; Singapore Exchange (SGX: S68) has more than doubled, while Jardine Cycle & Carriage (SGX: C07) and Super Group (SGX: S10) have almost quadrupled.

All change

But things are about to change. America has hinted – quite strongly, in fact – that interest rates are set to rise. Some think it might be in September. Others reckon it could October or maybe December.

Again people are worried.

But guess what? Here in Singapore, interest rates have already started to normalise, albeit by a little. SIBOR is no longer at near-zero anymore.

The good news, though, is that America is ready for an increase in the cost of borrowing. The US economy is improving.

The number of people applying for unemployment benefits has fallen to a 42-year low. Home sales in the US have been creeping up, and so too have car sales. Those two items are probably the most expensive items that any household ever make. But Americans believe that their future is now reasonably secure.

So should we.

Why wait?

Interest rates could take some time before they return to the long-term average. It could even take over a decade.

So don’t hold your breath for better savings interest rates in the near term. You could be waiting for a very long time. The wait could cost you dearly.

Admittedly, both the stock market and the bond market could remain volatile once the US Federal Reserve decides to pull the trigger. But volatility is a good thing. It could give us the chance to buy more of what we like at a better price.

When we see bargains in the market, we should buy. I do. Do you?

A version of this article first appeared in Take Stock Singapore. Click here now  for your FREE subscription to Take Stock – Singapore, The Motley Fool’s free investing newsletter.

Written by David Kuo, Take Stock - Singapore tells you exactly what's happening in today's markets, and shows how you can GROW your wealth in the years ahead.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore Director David Kuo doesn’t own shares in any companies mentioned.