This is no trivial matter. Just a few years ago it was not too difficult to earn returns through no-risk financial assets such as term deposits or interest-bearing accounts, thanks to a situation where interest rates were working to the advantage of savers. But these days, the expansionary monetary policy being pursued by the European Central Bank has created a scenario where some interest rates are actually negative. What does this mean? Essentially this means that it is now impossible to earn returns without taking on a certain level of risk, even if it is minimal.
The option of just giving up on the possibility of achieving a return on your savings is not a good solution since this creates a scenario that could expose your savings to the “silent enemy”: inflation. Inflation reduces the buying power of your savings so that every year you are not earning a return on your savings they are being reduced at a level equivalent to the inflation rate. During the last few years, we have seen very low inflation rates, which has brought a certain amount of relief to investors, especially those with a conservative profile. However, inflation is starting to rise again, and it may return to more typical levels of around 2%. What alternatives are available then for investors who do not want to see their savings fail to grow? To put it simply, there is no other solution but to take on some risk, although there are also some practices that can help you minimize it. These include:
One way of decreasing risk is known as diversification, or in other words, distributing your money into various types of investments instead of putting it all in one place.
If you decide to invest everything in a single option, you run the risk of losing some or even all of your capital if that investment ends up yielding poor results.
In contrast, if you diversify and create an investment portfolio containing multiple assets, you can reduce the risk of losing all of your money, since for this to happen all of these investment types would need to have poor results at the same time.
Diversification does not only refer to the types of assets you invest in. It is also a good idea to diversify by investing in different geographical regions or different currencies.
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Furthermore, as an additional way to diversify risks it is always much better to avoid making a big investment all at once, but instead to do this over time in multiple stages. This is because instead of acquiring securities, shares, or stocks at a single price, which could be either favorable or unfavorable, you can do it at the average price of the various purchases you make on different dates.
How to find returns but with minimal risk
In the environment described, the way of earning returns becomes that of incorporating a moderate amount of assets that can still produce returns in a scenario of very low-interest rates, such as variable-income assets (equities). In the case of conservative investors, these must represent just a small percentage of the overall portfolio of assets and should be incorporated in the manner described above: gradually and with a high degree of diversification.
We can consider an example of a well-diversified portfolio that is made up of 85% low or very low-risk assets and 15% variable-income assets. The first type will offer only a modest return, but with a low level of risk. This part of your investment will provide security and stability. The second type is more volatile but is only held in a low percentage and in a diversified manner. These investments will increase the portfolio’s average return, and in this way achieve a positive overall return on your investment with a controlled level of risk.