Your savings in the bank are losing money

By Marian Ross

Sunday, June 24, 2018

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Your savings in the bank are losing money every day. Keeping your savings in cash is one of the fastest ways to burn a hole in your net worth. This applies to many repurchase agreements (repos) as well. By ignoring the rate of inflation or accepting sub-par returns on your investment you are reducing the future value of your investments.

It's also important to note that interest rates on lower-risk US-dollar investments are now higher than interest rates on Jamaican-dollar investments.

To calculate how much your savings are costing you, look at the rate of inflation. If you are saving in US dollars, your US dollar savings are losing roughly two per cent of their value each year.

That means that US$10,000 in 2018 will be worth US$6,730 in 2038. That is a 33 per cent decline over a 20-year period.

If your money is on a repo earning two per cent, it is also just breaking even. On average, over the last 16 years your Jamaican-dollar savings in the bank lost 9.3 per cent per annum, excluding the impact of devaluation.

Inflation is a very important metric for quantifying the return on your investments and for valuing any future streams of cash flows.

A small difference in rate makes a large difference over time. You may think that three per cent or two per cent don't sound like much. However, these small differences make a big difference over the medium to long term.

For example, if my US-dollar repo investment is earning two per cent, I may be ignoring the fact that I could be earning six per cent on a medium-term bond issued by an investment-grade company. The math shows that four per cent compounded over 10 years increases your principal by 49 per cent. For example, US$10,000 earning four per cent each year will become US$32,433 at the end of 30 years.

Don't ignore small differences in the rates of return on your investments.

Back in January 2009, the thee-month BOJ Treasury Bill yielded around 22.3 per cent. At the most recent Bank of Jamaica (BOJ) Treasury-Bill auction in June 2018, this yield was recorded at 2.54 per cent.

Sovereign yields have also declined quite significantly. Today, 11-year Government of Jamaica (GOJ) Jamaican dollar paper is yielding just over five per cent. Interest rates are at historical lows in Jamaica. Jamaican dollar liquidity levels are also higher thanks to the absence of sovereign issues in the local market.

Indeed, these conditions are prerequisites for economic growth and the Bank of Jamaica has successfully created an environment that no one thought was possible. However, investors are now challenged to find higher-yielding investments without a corresponding increase in risk.

Don't ignore inflation in your return calculation and, most of all, don't accept lower returns on your investments.

The good news is that there are instruments available with HIGHER yields and at LOWER risks than those available locally or regionally.

Marian Ross is an assistant vice-president of trading & investment at Sterling Asset Management. Sterling provides financial advice and instruments in US dollars and other hard currencies to the corporate, individual and institutional investor. Visit our website at . Feedback: If you wish to have Sterling address your investment questions in upcoming articles, e-mail us

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