Crying into your term deposits as interest rates head towards 2%

The Reserve Bank of Australia has piled more pain onto weary savers, cutting interest rates to 2.75%. At this rate we'll have no option but to invest in stocks

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The Reserve Bank of Australia has just cut interest rates, down to 2.75%.

And the pain for savers may not end there, with lower interest rates in the future looking a monty — some leading brokers predict our cash rate is headed to 2%.

It seems billionaire investor George Soros might be in agreement, with rumours he is shorting the Aussie dollar — effectively betting it will fall.

I'm no currency trader, but I think Soros could be on to a good thing…

Unemployment is rising, retail spending is falling, the mining boom is over, taxes are set to rise, government spending is set to fall, and just today, news is out that Australia's construction sector shrank for the 35th consecutive month in April.

Interest rates: nowhere to go but down

Against that backdrop, clearly interest rates have nowhere to go but down. And although the Aussie dollar has defied logic by staying stronger for longer, the forces of gravity will eventually prevail, dragging it below parity sometime this year, likely sooner rather than later.

The potential for a 2% cash rate should have savers crying into their term deposits.

We're all grown-ups here. Crying isn't going to change anything.

On the weekend, Warren Buffett said…

"I feel sorry for people that have clung to fixed-dollar investments."

He was talking about Americans, where the one-year yield on a Certificate of Deposit (CD) can be as low as 0.15% — and that's a special rate. The standard CD rate for one year at Wells Fargo is 0.05%.

No wonder Buffett feels sorry for them.

And no wonder the US stock market is trading at an all-time high. If you want to make a return on your money, you have virtually NO OPTION but to invest in stocks.

The real hurt — a 2% cash rate

Australian savers are already hurting. But the real hurt could still be ahead, especially if interest rates do fall as low as 2%.

Unlike Americans, time is still on your side. But perhaps not for too much longer.

So what's a Fool to do?

Firstly, don't have Warren Buffett feel sorry for you. You have been warned.

Secondly, for all the comfort and safety of term deposits, they are likely to be terrible investments in the years ahead. That said, cash has good option value, allowing you to pounce on attractive investments if and when they fall to silly prices. I did precisely that a couple of weeks ago, snapping up one of our Motley Fool Share Advisor buy recommendations for myself. A little more on that below…

Thirdly, if you are looking for income, and capital growth, you'll likely need to look outside the largest ASX 20 stocks. The valuations of our big banks and supermarkets are looking quite stretched, despite stellar results last week from ANZ (ASX: ANZ) and a special dividend from Westpac (ASX: WBC).

Up 30% one week, back to earth the next

I mentioned above how I waded into the market a couple of weeks ago when I saw an opportunity to pick up shares in a company that I thought had fallen to silly levels.

After initially jumping close to 30% after my purchase, knock me down with a feather but by the close of business yesterday, the damned stock had fallen all the way back to my "silly level" buy price. My pain could be your gain. Readers of our free Take Stock email will have the opportunity to find out the name of the mystery stock.

When measured over such a short period of time, stock picking can be a humbling business. Thank goodness my prized dud stock Lynas (ASX: LYC) jumped 16% higher yesterday, my Berkshire Hathaway (NYSE: BRK-B) shares hit a new all time high, as did my AIG (NYSE: AIG) shares. God bless America, and the strong Aussie dollar.

In a perfect world, all stocks rise, in unison, every day.

Stating the obvious, it just ain't going to happen.

Good stock pickers are reckoned to have a 60% strike rate, winners versus losers — because your winners can rise hundreds, maybe thousands of percentage points…whereas your losers can 'only' lose 100% of their value.

My colleague Scott Phillips has an extreme focus on downside protection — he hates losing money himself, and he HATES it even more when our subscribers lose money.

Thankfully Scott can sleep well. Of our 18 ASX stock recommendations to date for Motley Fool Share Advisor, an astonishing 17 are in profit, dividends included. The best pick is up over 140%, the only loser being down just 1.5%… and that stock was only just recommended.

Whichever way you look at it, by comparison, term deposits don't stand a chance of competing.

The Australian Financial Review says "good quality Australian shares that have a long history of paying dividends are a real alternative to a term deposit." Get "3 Stocks for the Great Dividend Boom" in our special FREE report. Click here now to find out the names, stock symbols, and full research for our three favourite income ideas, all completely free!

As ever, I wish you happy, profitable and ultimately Foolish Investing.

More reading

The Motley Fool's purpose is to help the world invest, better. Click here for your free subscription to Take Stock, The Motley Fool's free investing newsletter. Packed with stock ideas and investing advice, it is essential reading for anyone looking to build and grow their wealth in the years ahead.  This article contains general investment advice only (under AFSL 400691).  Bruce Jackson owns shares in ANZ, Westpac, Berkshire Hathaway, Lynas and AIG.

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