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Safe investment in uncertain times?

An escalating conflict between the great powers USA and China, the increasingly noticeable climate change; the refugee problem that flares up again and again; the aftermath of Brexit; disrupted supply chains worldwide; the chip shortage in many industries; the fifth wave of the Corona pandemic; and, of course, the recently erupted war over Ukraine with all its repercussions – all these crises make people feel that we are living in uncertain times.

Without question, there is a lot going on on our planet at the moment

The prices of many necessary natural resources and goods are going crazy; the markets are in disarray, and inflation is running wild. Seldom has the future been more uncertain than today! In such uncertain times, the desire to make a safe investment becomes all the more urgent. It is not without reason that the demand for fixed-interest investment strategies has increased immensely in recent years.

What makes a safe investment anyway?

Searching for a woolly pig-in-milk that lays eggs. There are several forms of security in a financial investment:
  • The security of regularly receiving a predictable interest coupon;
  • The security of receiving the full amount back at a previously defined date;
  • The security of being able to liquidate or sell the investment before maturity;
  • The security of not being subject to price fluctuations.
Of course, a combination of these various securities would be the best solution for an investment. Unfortunately, there is no absolute security in this world. We’re all still looking for it: the perfect all-in-one solution!
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An experienced asset manager can provide much helpful advice in this respect.

Never forget, security often costs a lot of money.

All security comes at a cost. Costs that often translate into reduced returns. In principle, security and returns behave in opposite ways in a financial investment. The higher the security of an asset is supposed to be, the lower usually the return. The same applies to the reverse case. So we will have to sacrifice returns for a safe investment. This becomes clear in the all-familiar magic triangle of investing money.

Source: (adapted)

Although there are virtually no "penalty interest rates" any more, the interest rate level for savers is still very low

In the current climate of meagre interest rates, investing money as securely as possible means foregoing any interest or even having to accept negative interest rates. Even though the ECB will announce a first interest rate step these days, savings interest rates will remain completely unattractive for a long time. Especially if the loss of purchasing power due to an inflation rate of around 9% remains immense.

The significant loss of purchasing power despite rising interest rates

Savers and investors are still gifting the state with money!
The 10-year federal bond currently yields around -0.3% (as of January 2022), as shown in the chart below. This means that when you buy this bond, you consciously accept that you will get back less money than you invested initially, despite the interest coupons at maturity! So you to accept a guaranteed high loss of purchasing power while give money to the state!

  • 10-year federal bond at 1.23% as of July 2022;
  • Inflation rate: 8.6% as of June 2022;
  • The security of being able to liquidate or sell the investment before maturity;
  • Annual loss of purchasing power for 2022: 7.37%.
The highest security level of investment thus costs 7.37% loss of purchasing power per year as things stand at present (July 2022). This can no longer be called an investment but rather a deliberately incurred divestment. Money destruction par excellence just to be as safe as possible? It makes no sense!

So do you have sacrifice security?

You will certainly have to forego a hundred per cent security if you want at least a reasonable return on your investment. If you replace the very highest credit rating of the Federal Republic of Germany with the lower credit rating of a company like Volkswagen, for example, you can achieve a return of around 3.5 % over a period of 8 years. For small and medium-sized companies with a lower credit rating, 5 % or 6 % now possible again. Expertise is needed here! Investors can have an enormous influence on the security of their investments by setting long-term strategic goals. In addition to a sufficient investment horizon and the selection of fundamentally strong companies, this also includes adequate diversification.

So, what matters in insecure times?

Effective diversification makes the difference: Money should be strategically invested for the long term!
Above all, achieving a broad diversification of credit risk across several companies from different sectors and countries is vital. This way, private investors can control the credit risk to a certain extent (this applies particularly to corporate bonds).
Investors should also focus on different asset classes (stocks, bonds, alternative investments), which provide effective diversification and don’t correlate too strongly with each other.
Therefore, striving for a strategic investment is crucial, especially in uncertain times. But even after the investment has been made, you must continue to observe and analyse all companies to intervene if necessary. This can be tedious and time-consuming. But:

Experts can help

Strategic investment requires a thorough understanding of economic contexts, knowledge of company key figures, and a considerable investment of time. Those who shy away from this can seek advice and support from an experienced asset manager. And so, even in these uncertain times, making a safe investment that also earns you extra money is still entirely possible.

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