Bank deposits currently offer around five per cent interest. That is much more than a couple of years ago. However there is a fundamental reason why investments in property and shares will always earn higher returns over the long term than fixed deposits: if they don’t, the economy will collapse.
Banks pay interest to the depositors they are borrowing from and make profits by lending that money to other people at higher rates. Their profits come from the margin between their fixed deposit borrowing rate and their lending rate.
Who borrows from the banks at those higher rates? We all want housing and a reliable supply of the goods and services we prefer. Houses and the businesses that supply what we want cost capital to build and run. A large part of that capital is borrowed from the banks at those higher interest rates.
If the highest investment returns we could ever earn were from bank deposits no-one would ever borrow to build houses or businesses. The banks would have no-one to lend to and we wouldn’t have the shelter, goods and services we need. The economy would collapse.
So property and share based investments must provide better returns than fixed deposits over the long term, even though they are less predictable and their values will fluctuate more.
This doesn’t mean every property and share will provide superior returns. Many will but some won’t. That’s where careful investment selection becomes necessary.
For example Woolworths, a major supplier of the goods we need, announced its results two weeks ago. Total sales for the December half year increased 4.4 per cent over the December 2022 half. Inflation was 4.1 per cent. Net profit after tax rose 2.5 per cent, less than inflation.
Coles announced its results last week. Its total sales rose 3.7 per cent and net profit after tax fell 3.6 per cent. That’s a poor return for shareholders.
There is no evidence there of price gouging or profiteering, despite the keenness of politicians on both sides of politics to claim that. Both companies have large borrowings from banks and other lenders.
Investors will sell shares that provide low returns. More sellers than buyers means falling share prices. That could put at risk the company’s future and our supplies of goods.
Who owns the Woolworths and Coles shares? Our super funds own many. If the companies provide poor returns our super balances suffer. Fund managers aim to choose investments that will do better than average.
So long term investors should choose a large proportion of property and share based investments, as they will provide superior returns long term.
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