Investing

Why You Should Invest In Stocks

Calvin Lo

Are you worried about how surging inflation affects your hard-earned savings?

In Singapore, the consumer price index (CPI) or overall inflation was 4.3% in Feb 2022. MAS core inflation which excludes accommodation and private transport was 2.2%. The main culprit for much higher overall inflation was higher car prices, likely due to higher COE prices.

Singapore’s core inflation eases to 2.2% in February

Consumer Price Developments in February 2022

Source: MAS

This means that even if you’re not paying rent and/or not intending to buy a new car, you would still be hit with 2.2% increase in prices overall on your expenses.

For instance, if your expenses were $5,000 per month in 2021, you can expect it to increase to around $5,110 in 2022. In fact, core inflation is expected to increase further and only ease towards the latter half of the year.

What that means for us in the long term is that even at a modest 2% average inflation rate for the foreseeable future, that $5,000 monthly expenses increase by 81% in 30 years and balloon to a whooping $9,057 per month!

If you’re elsewhere in the world, you would likely also be feeling the effects of inflation as well but probably to different extents.

I’m not trying to scare you, but to point out the downside of holding cash in low-interest bank accounts for the long term (unless it’s your emergency fund).

So that begs the question, what can we do with our money so that it keeps up with inflation?

Increasing our income

Most of us, including myself work a full-time job and earn a regular income. We should ensure that our salary increases at the same rate or faster than inflation. So if inflation is 2%, our income should at least increase by 2% too otherwise our lifestyle will be affected.

If our income is not even increasing as fast as inflation, we need to find ways to boost our income either by asking for a raise, getting a higher paying job, or try to earn side income.

But increasing our income is only one part of the equation. We need to also ensure our savings are not eroded by inflation too. This is where investing comes in.

Bank savings account interest rates are too low

Currently, leaving our cash in the bank in low-yielding accounts is not feasible for the long run especially if it is money we’re saving for retirement. Right now, the baseline interest rate is a paltry 0.05% (practically zero).

Of course, there are ways to earn a higher interest rate but that usually requires meeting certain requirements like spend on credit card, investing or buying insurance with the bank.

Let’s say on average we can get 1% interest rate on our bank savings account. That’s still a 1% shortfall vs inflation rate, so our money is still not growing as fast as prices are rising.

The further we are from retirement and the larger our savings, the more important it is to earn returns on our savings that keep up or better yet exceed inflation.

There are no shortage of options to earn a higher return, but we need to take into account the associated risks that come with the different options, as well as our time horizon.

Grow our retirement savings

For Singaporeans, the best way to grow our retirement savings safely is in the Central Provident Fund (CPF) which is a form of forced savings that’s practically risk-free (backed by Singapore government). CPF yields at least 2.5% on your OA and up to 5% on the first $60,000 if you’re below age 55.

Source: CPF

However, CPF monies can only be withdrawn partially at age 55 and CPF Life only starts paying out monthly payouts starting age 65. Also, there’s a maximum annual contribution limit we can put into CPF every year.

If we’re lucky enough to earn and save in excess of CPF contributions limits, we need to consider other avenues to grow our retirement savings.

This is where stocks come in.

Stocks or equities have delivered the best returns historically over the long-term, even after adjusting for inflation (known as real returns).

Source: Traders Insight by Interactive Brokers (credit Jeremy Siegel)

Note that the time period is extremely long – in the order of decades, not days or months or even years. For shorter time horizons, it’s a toss up between asset classes as to which one performs best over any given period of time.

So depending on what you’re saving for and how long before you need the money, you should consider the appropriate vehicle for your money.

See my previous post on other ways to protect your portfolio against inflation and rising interest rates here.

Closing thoughts

There’s been a lot of buzz around inflation recently, and even fear about how inflation could trigger a recession and/ore bear market in stocks.

We might be paralysed in fear of entering the stock market and tempted to hoard our cash. Existing investors might even still be nursing losses from the recent stock market sell-off (like myself).

However, we need be aware of the bigger risk of inflation eroding our savings especially money we’re setting aside for retirement in 20-30 years.

Losses in the stock market can be painful in the short-term but now more than ever with surging inflation, we need to put our money to work and earn a return.

Where better to do that than the stock market, especially for the long term.

Personally, my preferred investment vehicles are exchange-traded funds (ETF). If you need some ideas or inspiration, check out my post on the best ETFs to buy for passive investors here.

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Disclaimer: This is not financial advice. I am not professional financial advisor nor do I work in the finance industry. Anything I write here is purely my personal opinion. Please do your own research and due diligence before investing into anything. All investments come with associated risks. Best to consult a financial advisor if you’re still unsure.

For more investing resources, see my Referrals page.

Disclosure: This post may contain affiliate links and I may get a commission when you click on the links or open an account through the links, at no additional cost to you. I only recommend products or services that I have personally tried and have found useful.

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