Editor’s note: This article was first published in May 2011, and its figures are from that month: Spanish treasury bills yielding 2.77%, CPI at 3.80% and 12-month deposits at 3.50% APR.
Let’s imagine that investing in the stock market scares us, because the market is complicated, we don’t really understand it, or we simply want a zero-risk investment. Clearly there are alternatives that carry no risk at all, or where the risk is controlled and/or insured.
To give a couple of examples, two investments that are safe are fixed-term deposits and treasury bills. Obviously, if the state went bankrupt, your investment in treasury bills would be the least of your worries, since we’d be talking about a financial apocalypse for the country and everything would suffer. As for bank deposits, they are backed up to 100,000 euros by the Deposit Guarantee Fund, so both are safe options. The question is: can I lose money even while earning a return on these investments? As things stand today, the answer is yes, and here’s why.
Very few people take two terms into account when they invest, even though they should be familiar with them. These terms are inflation and the CPI (the consumer price index).
To keep this article from getting too technical, we’ll explain it simply. 100 euros didn’t have the same value 12 years ago as they do today, and at the rate we’re going, 100 euros will be worth much less a year from now.
Many individuals are unaware of this simple fact, which would explain why they have invested in treasury bills yielding 2.77% while the CPI stands at 3.80%. These people, or small investors looking for a safe investment, have found it in treasury bills, but they don’t realize that even though it’s safe, they will have lost purchasing power 12 months from now.
The same goes for those who have taken out 12-month bank deposits at 3.50% APR. It’s as if both investments had kept their money in a safe. In practice, the money is standing still.
Others look for an easy investment that other people or institutions have studied for them, so they decide to put their money into guaranteed funds, structured funds or simply investment funds, which, as most of you already know, I’m not a big fan of. Be careful with investment funds.
These facts confirm an old saying in economics: the only way to get a return on your money is to take on risk.
The greater the risk, the greater the return. The greater your knowledge, the greater your control over the risk.
Further reading
- The dangers of investing through third parties
- Why do individual investors get better results than financial advisers?
- Why the stock market is the most profitable investment
Featured image: Raisin – Finance Stock Images, CC BY 2.0, via Flickr.
