Editor’s note: This article was first published in September 2010, in the middle of the euro debt crisis. The experts’ preference for emerging-market debt, Spanish bond yields being below deposit rates, and the ‘stability’ of the stock market all describe 2010.
Where is it wise to invest in a crisis? Fixed income or equities: which is more profitable, and which carries less risk? This question comes from David, in Madrid. I’ll start with what you all more or less know already: the higher the return, the higher the risk. That’s logical and, up to a point, very healthy for a country’s economy.
Before working out where you should invest, you need to consider a few factors, such as how long you want to keep your investment, how much money you want to invest and to what extent you’ll need that money. Let me explain.
Believe it or not, some investors put money into high-return investment vehicles with, obviously, extremely high risk, and their mindset is: “If I lose this money chasing a higher return, it’s no big deal. It won’t do me any serious financial damage. I’ll make it back.”
Then there’s another investor mindset: “If I lose this money I’m counting on for next year, I’ll be ruined.”
As you’ll understand, once you weigh up these factors, you have to strike a balance between return and risk and decide how much risk you’re willing to take.
That said, the big experts are currently advising long-term investors to put their money into debt, bonds and options in emerging-market countries, which over the last two years have proven to have better liquidity and better prospects than developed countries.
If you decide to invest in a fund, make sure part of its portfolio is invested in emerging markets.
What about Spanish government debt?
Although at one point we recommended investing in Spanish government debt because of the good returns on offer at 3 and 5 years, those returns are now lower than a 12-month bank deposit, so it’s clearly not a good investment option right now.
10- and 30-year bonds
With an interest rate of 6.75% APY, and bearing in mind that our money will be tied up for all those years, inflation itself would eat up part of the return. As you all know, €100,000 today isn’t worth the same as €100,000 in 10 or 30 years’ time.
Returns come from keeping your money moving: like water, if it doesn’t flow, it goes stagnant. I don’t mean that long-term investing isn’t profitable. Quite the opposite: it’s still the most profitable approach, especially in equities. But you should invest in an asset that is as liquid as possible and that you can certainly sell without trouble whenever you see fit.
Shares
Shares are still a very attractive market for medium- and long-term returns. It’s true that fear of this asset because of the crisis has meant few eye-catching moves, so for now it’s in a period of stability.
In my view, and in the view of many experts, the stock market is still the most profitable liquid asset in the long run, as long as you invest in companies with potential for growth and innovation.
To answer David’s question, even if the answer sounds repetitive, there are two options:
- No risk: fixed-term deposits and bonds. Lower return.
- With risk: stocks, currencies, derivatives. Higher return.
You can read an explanation of the different types of financial markets.
Further reading
- Why the stock market is still the most profitable investment
- Free beginner’s course on investing
- How to analyze shares before investing
- 12 Warren Buffett quotes for understanding investing
Featured image: Nikodem Nijaki, CC BY-SA 3.0, via Wikimedia Commons.
