What the recent reduction in interest rate means for you?

Lately, I have had to deal with a spate of inquiries on what the recent reduction in the Reserve Bank’s interest rates (or policy rate) means to different individuals. The answer has never been a straight forward one because it is honestly dependent on what you do—a business person, financial market investor, just a depositor? What you do will determine the benefit (or fears) that will accrue to you.

If you are a depositor, you could suffer if banks lower the deposit interest rates—you lose out. Relatedly, if you are a financial market investor, you are generally better buying shares and treasury bills since the deposit rates could now be less lucrative – but that very much depends on whether government curtails its appetite to borrow which keeps treasury bill rates high. But with the lowered interest rates, then as a businessperson you can borrow money more cheaply than before—I have already seen some banks reducing their lending rates already.

However, when all is said, it is your propensity to take risks that matters. Most investment vehicles, with sustained patience are bound to be lucrative. Unless you are a speculative investor, you could still make money by staying put in your financial market investments given that banks are unlikely to have as much liquidity and hence will still rely on depositors’ money. This ensures a high probability of the deposit rates staying high.

This reminds me on the role that perceptions can have on the type of investing you do or whether you invest at all. For example, a friend of mine will never want me talk him into share ownership because he strongly feels stock investment is too risky to even consider. For most people in Malawi, their tolerances for risk begin and end at savings accounts and fixed deposits. The choice of whether to invest in one investment vehicle or another is not determined by concrete knowledge of the performance of the investment vehicle but based on emotions and attitudes.

In investing, like life, there are no guarantees. However, if you take an informed approach to investing, you can take into account actual risks and opportunities. If you refuse to consider any investment other than savings accounts or fixed deposits because you fear you could ‘lose everything’, you are allowing fear to prevent you from seeing returns on your investments that you could be well equipped to make. Or if you continuously sink all your funds into the investments that promise the highest return with the lowest expenditure, chances are that you are not only losing your shirt more times than you care to recall, but that you are also missing out on investments that can help you achieve your goals.

By now, you are wondering what you can do about your emotional baggage other than go into therapy. While I would never dissuade anyone from pursuing other investment avenues, once you recognise that you have an issue with risk, there are two basic steps you can take to get your investments on course:

First, become knowledgeable about fundamental investment principles. You are already on your way by getting this far with this column. Knowledge is the most powerful tool you have when it comes to investing, and understanding the basic principles behind investing can prevent you from making costly mistakes based on false perceptions.

Secondly, set specific personal finance growth goals. Once you set your goals, you can realistically assess the level of risk appropriate for what you are trying to accomplish in the time you want to accomplish it.

My free advice is for you to remember that the benefits you reap from reduction in interest rates will depend on your tolerance for risk. As a matter of fact, analysing what is there for you and how best to take advantage of the situation can help you define where to invest and the likely returns to specific investment vehicles. Have a blessed weekend.