If you want to protect your wealth and/or keep money in savings accounts and multiply it, you first need a suitable financial concept. It usually involves long-term investments as the best way to manage your money, so you will need to choose a reliable project. However, it is unlikely to bring any substantial income in the short term as its main goal is saving money and protecting it from inflation.
If you intend to open a foreign/offshore account as a safe place to put your money, we recommend making a wise choice with the help of our experts.
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Traditional Investment Tools: What is the Safest Place to Keep Cash?
Most investors (even those who are making their first steps) know the following formula: shares are a high-risk investment that yields good returns, while bonds are low-risk instruments that yield modest returns. There are several major sectors in the investment market that allow you to protect assets:
- precious metals
- real estate
Each of them has its own characteristics, and we would like to consider them in more detail in the table below.
|Type of investment instrument||Features|
|Shares||Shares are the securities that make their owner a company’s shareholder and ensure reliable asset protection. The price of shares enables the investor participate in changing the company value. If the price of shares rises, shareholders make a profit, while its decrease logically entails losses.|
|Bonds||Governments (or companies) issue bonds at a fixed interest rate to be held to maturity. As a result, they attract new (risky) capital and give customers a chance to protect assets. Bonds are similar to a loan: as a bondholder, you are a creditor and the state is a debtor. Government bonds have a fixed interest rate and are generally considered safe (depending on the country, of course).|
|Real estate||Real estate is a way to protect assets in the long term and keep your money in a safe place. However, buying a real estate object as an investment product is always associated with cluster risk. If you invest all your assets in only one house, you can no longer diversify them. This approach differs from ETF real estate or REIT index funds where you simultaneously invest in many objects.|
|Precious metals (mainly gold)||Gold enjoys a good reputation among investors, showing a rise in value in the long run. It helps you to protect your money in a more reliable way than by using savings accounts. At the same time, gold is by no means a completely safe investment as precious metals are very volatile. The historical performance of precious metals moves around the zero line if we make inflation adjustments. However, a high yield was observed for some metals (for example, palladium, rhodium) in the recent past.|
|Secure savings account||Savings accounts include demand accounts and fixed-term deposit accounts. Savings accounts can be considered safe as they are subject to government-guaranteed deposit protection. In principle, a demand account is less risky than an investment in shares or bonds, but there is currently no prospect of getting income due to low interest rates. In this way, money can be protected from volatility but not from inflation.|
Each instrument has its pros and cons, as you see. For instance, bonds will help you protect your assets in a more reliable way as low risk reduces the chance of losing investments.
However, low-risk investment strategies will not protect your money from losses due to rising inflation. Is there any way to overcome it? Well, it currently makes sense to invest the money available in savings accounts in shares. This is a good chance to make considerable profits in the long run and ultimately protect your wealth.
The strategy that combines making real profits and reducing high risks will require you to:
- Invest money from bank accounts in the shares for long periods of time
- Diversify investments and take an effort to protect them
Given the current political and economic situation, financial experts and consumer advocates advise investing money from savings accounts by diversifying your portfolio as much as possible. Many people opt for ETFs as a reasonable solution to the problem.
Exchange-traded funds (ETFs) are stock funds (also called index funds) that track the stock market index performance. They trade shares of different companies on the stock exchange, which allows for capital diversification and protection.
ETFs are considered a relatively solid investment and are extremely popular now. However, even if we assume that these index funds are transparent enough, stock market prices are still constantly changing, so we cannot automatically consider ETFs to be absolutely safe investment tools.
The risk here decreases with increasing maturity as well: non-professionals are advised to invest money from savings accounts in ETFs for a term of 10 to 15 years to protect it from market volatility.
Cryptocurrency and NFT: Best Investment Instruments or Not?
Don’t buy cryptocurrency unless you fully understand the concept behind it! Crypto tokens are speculative, which makes it difficult to protect these funds once withdrawn from savings accounts. What is more, price fluctuations are extreme.
Cryptocurrencies are not pegged to an existing real currency such as the euro or the dollar. Therefore, they are not managed by the Central Bank which can partially protect currency investors, and this is the reason why they are so risky. For example, one tweet posted by Tesla CEO Elon Musk can make the price soar or fall rapidly, and this has happened several times to Bitcoin, the best-known cryptocurrency.
What about NFTs?
At the end of 2021, the world’s first SMS was sold at an auction as an NFT. Most NFTs are images or videos. On the whole, they are unique digital samples, a type of digital proof of ownership or authenticity. Like cryptocurrencies, NFTs are based on blockchain technology, which helps to protect customers from certain types of fraud.
If you are interested in cryptocurrencies, you have definitely heard about NFTs. However, NFTs are just as risky as Bitcoin and Ethereum, the most popular crypto tokens. Prices can fluctuate greatly, and NFT prices may jump to millions of dollars in a short period of time.
For example, the magazine Wirtschaftswoche goes about the topic as follows: “The mere existence of the NFT does not guarantee, in case of doubt, that the alleged property right is really behind it or that it should be valuable. The boom in the NFT market is actively attracting shadow speculators and scammers.” Therefore, buying NFTs tends to be more interesting for investors willing to take risks rather than protect their money.
Your Safe Savings: 6 Alternatives to Bank Deposit Accounts
Bank deposit accounts still remain the most understandable way to invest money and protect funds for the majority of people. However, financial advisors regard deposit accounts as an ambiguous investment tool. On the one hand, they guarantee more stability in a period of high stock market volatility, which helps to save the clients’ assets from major losses. On the other hand, inflation eats away any possible savings due to low interest rates.
Deposit accounts work as follows: the depositor transfers money to the bank, and the latter invests it in its own projects to make a profit. The client actually gives the bank a “loan at interest” by opening an account. Banks use different investment instruments to gain profits:
- loans to enterprises and consumers at a high interest rate
- investments in real estate
- investments in bonds
- purchase of shares
What does that practically mean? Bank serves as an intermediary here by using the money in your account. It takes some risks but does not give you enough profit to even cover the inflation. Consequently, you can independently invest money from your account in different projects and thus protect it from inflation more effectively. Here are six ways to do that:
- Federal Loan Bonds
These are considered to be the most reliable investment tool since the investor lends the money to the state itself. Federal Loan Bonds are government securities that provide the investor with a guaranteed income, a clearly regulated amount, and a payment procedure supposed to protect the interests of investors.
The reason why the state issues Federal Loan Bonds is simple: it lacks its own funds. Federal Loan Bonds help it to deal with the federal budget deficit. These bonds are officially taken into account when public debt is calculated, and they are considered to be the main tool for asset attraction.
- Real estate
The attractiveness of real estate investments is constantly growing. There is an opportunity that has recently appeared on the market and seems really promising: investment in rental real estate. These are the projects built to lease real estate for a long time rather than sell it. The risk of such investment projects is low, which allows you to better protect your money. If you compare them with high-yield and high-risk projects for sale, they seem to be more reliable.
If you are thinking of investments in real estate for sale, this tool can be unreliable due to the issuance of mortgages.
- Precious metals
Precious metals were used long before the invention of money as part of the barter system. Their value is constantly growing, which helps to protect money. Unfortunately, the inflation rate takes over, so the resulting income is nearing zero.
On the other hand, possession of precious metals allows to feel the ground beneath your feet when you face currency fluctuations. The currency may collapse due to sanctions or political decisions, while the cost of precious metals rarely goes in tune with economic and political changes in the world.
- Luxury goods
These are the tangible assets that include:
- fine arts (paintings, sculptures, photographs, video, architecture)
- means of transport (cars, yachts, planes)
Luxury items can make high profits and protect your money better than savings accounts, but the information on historical returns is ambiguous. The cost of luxury goods does not increase fast enough to compensate the inflation rate, which makes such investments unprofitable.
However, that’s not always the case as many fine art objects considerably grow in price with time. The cost of paintings, sculptures, and photographs is often determined by excessive demand for them, which helps you protect the money spent.
Business acquisition can bring huge profits. Buying company shares is also an investment in a business to some extent that helps to protect money better than savings accounts. In fact, “business investment” is a broad concept that includes tangible and intangible investments.
Intangible assets include patents and scientific developments, while tangible ones refer to equipment and machinery, for example. Investments in a business are quite risky as you have to be well-versed in the nuances of a particular industry to see whether the company will make a profit. Otherwise, the investment will simply not pay off.
- Certificate of Deposit (CD)
This is a good alternative to keeping money in a savings account as the interest paid on them is higher. It also depends on the term: the further away is the CD’s maturity, the higher is the interest.
There is a considerable drawback here, though: you cannot withdraw your money before interest falls due, or you will have to pay a penalty. To avoid this, you can use the approach called “CD laddering”: you open a few Certificates of Deposit with different maturity dates, short-term and long-term ones. This will allow you to combine higher interest with more flexibility when it comes to disposing of your funds.
Which Investment is Better?
This is a subjective question that should be based on 3 factors:
- whether you intend to invest money in the short, medium, or long term
- whether you value security (safety of funds) more than high profitability, or vice versa
- whether you need flexible access to invested money
If you are looking for a balance between yield, flexibility, and high security, the best option available is an investment in real estate and stocks.
Real estate is the best way to invest money from bank accounts in a secure, profit-oriented way. Moreover, it is combined with low monthly payments, attractive long-term returns, and a high level of security.
The benefits of stocks are just as evident:
- they bring high profits
- money can be easily withdrawn from circulation
- the investment portfolio is easy to protect from volatility if you diversify investments in a competent way.
ETF: Pros and Cons
ETF stands for Exchange Traded Fund. In addition to company shares, it offers bonds and property assets (oil, gas, precious metals), which guarantees diversification and money protection. However, take a look at the pros and cons before you decide to invest in an Exchange Traded Fund:
- Investment in computer-driven ETFs is a cheap option that allows for more diversification, which helps to protect the money in the account.
- You have the possibility to invest money from bank accounts in any sector of the world economy with a low entry threshold (which means a minimum initial investment of money).
- The possibilities of building a versatile investment portfolio are limited. Investing in ETFs is impractical in niche markets or less structured economic markets such as Asia.
- Commission payments: a part of the money from the account is claimed by the trader.
- Overtrading (trading in excess of existing assets). This method is extremely risky – and traders resort to it just because they can potentially make a large profit. Ordinary transactions are covered by available funds, but not in this case. In fact, there is nothing to offer if you set an incorrect rate.
We recommend inexperienced investors wishing to develop a financial concept to reliably protect the money in the account to seek professional advice.
There are two main arguments against ETFs:
- The investments of most ETFs are based on the market capitalization. Some analysts say that it is much wiser to invest money from bank accounts in future markets: growth ultimately means a change in price, and the size of the market (market capitalization) itself is not so important. Such a strategy will better protect the money in the account.
- Many active fund managers cannot beat the index, and there are some reasons for that. Many funds that are managed as “active” do not have full-fledged active management. A fund manager can choose a sample bank portfolio of 20 funds and make several changes once a year for those 20 funds to be considered “active”, while in reality they are not.
Can Everyone Invest?
Financial experts note that almost any category of citizens can successfully invest money from bank accounts to protect and multiply it.
|Category of citizens||Features|
|Students||Many people tend to disregard the fact that students can invest money at a profit and protect their accounts from inflation even if they have small monthly savings of about 50 euros. The sooner they start investing money from savings accounts, the more they will benefit from the compounding interest in the end.|
|Recent graduates||Career beginners have ideal prerequisites for return-oriented investments as they can count on a steady increase in wages in the future. The accumulation rate can be gradually increased with a long-term accumulation horizon of 30 years or more. The point is that the invested money will approximately triple in 30 years (at a yield of 6%), and this takes into account the 2% inflation.|
|Entrepreneurs and self-employed||An individual financial concept is crucial for a financially successful future if you are an entrepreneur or a self-employed person. You cannot focus entirely on entrepreneurship unless you have a solid financial foundation. Independent financial advice for entrepreneurs can do most of the work and provide invaluable practical tips taking into account individual needs.|
|45 + group||Anyone who starts saving at 40—50 years of age has significantly less time than a student or a young specialist. Therefore, a more secure portfolio is recommended in most cases (for example, stock funds and bonds that protect invested money). Thanks to the fund policy, 45+ investors remain as flexible as possible when they invest money from savings accounts.|
|Millionaires||Many of these multiple bank account owners safely invest in business assets, and real estate investments are just as popular. They need a suitable financial concept to increase the safety and potential profitability of investments.|
|Pensioners||Many elderly people see retirement as an event associated with inevitable financial shocks. They need a financial concept to invest money from accounts wisely at this stage of life. It includes analyzing the financial situation, ensuring retirement income, and determining investment goals. Only then will the pensioner be able to find the right ways to invest.|
|Children||Parents can create savings accounts for their children almost from birth: in the bank (ETF savings plan) or in the insurance company (ETF policy). In this case, very long horizons of financial planning (from 50 to 60 years or more) are logically beneficial. Even small amounts deposited on the account (25 to 50 euros per month) will help accumulate significant assets over a long period of time thanks to compounding interest.|
For many categories of citizens, compounding interest seems to be the main gain in the long run which helps to protect money in a bank account. “Compounding interest” means that the interest is charged not only on the money invested initially but also on the subsequent interest accumulated in the account. In fact, it is the accrual of interest on interest. Such a strategy allows you to compensate for inflation using a long-term investment and obtain profit without exposing investments to high risks.
The power of the compounding interest is practically invisible in the short term but is really second to none if you invest in long-term projects. The procedure is as straightforward as it can be: you simply re-invest the money received as a profit in the same project. This works with stocks, bonds (coupon payments), and ETF funds. However, ETFs often reinvest the profits themselves without paying them to customers, so the scheme is of little use here.
When you work with futures, you can apply a compounding interest scheme here by spending the variation margin on the purchase of assets. However, the risk of losses also increases in proportion to the potential profit since more contracts are used in speculative trading.
As you see, investment diversification helps to preserve assets in the long run without incurring losses due to inflation. All you need to save and even increase your capital is the right financial strategy to rely on.
Contact our specialists now to elaborate one to suit your needs!