Just like the 2008 financial crisis, the coronavirus pandemic hit the markets hard in 2020 and the global economic situation remains uncertain and unstable even now. In this context, investors are looking to shield their capital. This is possible with risk-free investments where the capital is 100% guaranteed. But is that the right solution when most of these savings products no longer offer any real prospect of returns? Is it even desirable? Especially since taking a risk won't necessarily end in an accident... Birdee takes stock.
Risk-free investments: yes... but!
Despite historically low interest rates, there's an unprecedented amount of money deposited in conventional savings accounts. There are several reasons for this:
- Regulated savings accounts offer security, immediate availability of funds, a guaranteed rate of return and tax breaks since interest is generally taxed at a low or zero rate;
- Guaranteed savings accounts are often used as a "buffer account", holding funds before they are moved into a new investment later or to receive the profits from other investments (bonds, agreed maturity accounts, etc.);
- Finally, turmoil on the equity markets has made many reluctant to invest in the stock exchange. Instead, they prefer to keep their money safe.
However, in return for these advantages, the interest rates that savings accounts offer are very low. Worse yet, they are often lower than inflation. You may not notice it because, if you leave the money untouched, the amount shown at the bottom of your statement will increase slightly year on year thanks to interest. In reality, however, the combination of low rates and inflation means you are losing purchasing power: consumer prices are rising faster than the interest you're earning.
It really makes you wonder if it is wise to keep your money in a risk-free savings account. The answer is yes, provided you put it to good use. Indeed, savings accounts should mainly be used to build up a buffer, a financial reserve to cover an unexpected event: a washing machine or radiator breaking down or a car that needs to be repaired. Beyond this need, it is advisable to invest in other, riskier investment vehicles. And Birdee encourages you to do so! We're here to guide you. Investing has never been easier.
Investing can carry a certain level of risk. But what is risk at the end of the day?
In simplified terms, when it comes to an investment, risk means market liquidity or price fluctuations that may lead to a loss of capital. In other words, when you sell your securities, the price you get may be lower than when you bought them. A risky investment, therefore, offers an attractive potential return but, at the same time, also carries one or more risks.
Depending on the type of investment, you may face a loss of capital, your funds being locked in, high volatility, etc. In investment terms, return is therefore closely linked to risk-taking. This is known as the risk/reward ratio: the greater the risk, the greater the potential return.
However, this principle must be put into perspective by taking into account the duration of the investment. Over the long term, most investments prove fruitful, smoothing out the ups and downs. Investments in the stock exchange are perhaps the best example. It is extremely risky to buy stocks today and expect to make a capital gain in a few days or weeks (that's speculation). On the other hand, investing now and aiming for a positive return in 5 or 10 years is far more reasonable and attainable.
A risky investment is not necessarily doomed to failure
If that were the case, the stock exchange, securities accounts, unit-linked life insurance, crowdfunding, rental real estate... none of these options would exist!
Of course, the risk of capital loss cannot be eliminated entirely, but it can kept within limits by taking a few precautions:
- Only invest after you have built up savings buffer;
- Take the time to study potential investments and understand how they work;
- Choose vehicles based on your goals and experience;
- Diversify your portfolio by choosing different types of investments, different economic sectors or geographical areas, etc. (don't put all your eggs in one basket);
- Favour long-term
In conclusion, risk can be your "ally" as long as you put a number of safeguards in place. Shape your investments to your needs and where you are in life. Birdee can support you in this process by offering pre-diversified investments, adapted to your profile and goals, in a simple and transparent manner.