Editor’s note: This article was first published in November 2022, amid rising interest rates and high inflation; the savings account offers it mentions, such as Bankinter and CaixaBank payroll accounts at 5% up to €5,000, were the conditions of that moment and have certainly changed. No investment is free of risk, including during periods of crisis or high inflation. This article reflects the author’s views in 2022 and is not investment advice.
We already wrote an article explaining how to protect your money during periods of high inflation. This time, let’s look at which are the most profitable and lowest-risk investments during a crisis, so we can squeeze a little extra return out of our money when inflation is high.
Since I don’t want to make this article too long, I’ll simply remind you that, as a lover of stock market investing (where we find ways of investing in equities with higher and lower risk, and therefore lower or higher returns), I will always recommend, when stock markets fall, starting a long-term investment strategy, both with index funds and by choosing a small, diversified selection of stocks on your own.
One thing is clear: in difficult times, with rising interest rates and high inflation, the advisable thing is to move your money so that it doesn’t lose purchasing power.
The most profitable and safest investments in hard times of high interest rates, crisis and high inflation
1. High-yield savings accounts
High-yield savings accounts might seem like a joke in themselves, given that their returns are usually not high. But in periods of high inflation, when money loses value and the bank even charges us hefty fees just for managing our money, these savings accounts at least pay us some interest on it.
What kind of investor are high-yield savings accounts for?
Rather than investors, these savings accounts are aimed at savers who don’t want to lose purchasing power and, on top of that, don’t want to take on any kind of risk. Bear in mind, however, that there will always be a minimum period for keeping your money in the account, generally 12 months, if you want to avoid any penalty when you take it out. In addition, most banks set limits on how much you can put into these accounts, so they would only work for part of our money, making them an add-on to our main saving or investment strategy.
Where to find the best high-yield account in Spain
Online banks are the ones stepping up here. But don’t worry: as you probably know, nowadays the main banks have a parallel online bank that charges no maintenance fees and even pays interest on your money, as in the case of Banco Santander’s Openbank.
Their conditions for new customers tend to change from month to month, but Expansión has put together a table of the best high-interest savings accounts of the moment along with their conditions. As I said, these can change, so look up the type of savings account on the bank’s official website and read the terms carefully.
What are the risks of high-interest savings accounts?
The truth is that they carry no risk at all, because your deposits are backed by the Deposit Guarantee Fund in Spain and its counterparts in Latin American countries. In this case, they deliver what they promise with no risk to the saver-investor.
To give you an idea, if we take the highest-yielding high-interest savings accounts in the table, the “Cuenta Nómina CaixaBank” or the “Cuenta Nómina Bankinter”, they would require you to have your salary paid into the account in order to get a 5% return (for one year at Bankinter and two years at CaixaBank), both with a maximum limit of €5,000.
2. Short-term certificates of deposit (CDs)
Certificates of deposit, or CDs, are a type of account offered by banks and credit unions that pays interest over a fixed period of time, generally at a higher rate than traditional savings accounts.
How do CDs work?
Before investing in CDs, you need to look at a few things, including the term. You must be very clear that you won’t be able to touch the money you put into a CD until the end of the contract (except with a penalty, or even a loss of capital). In other words, if you buy a one-year CD, you are committing to the bank not to touch that money for those 12 months. Once the term ends, the CD matures and you can withdraw your money or roll the CD over for another term.
The longer the term of the CD, the higher the interest rate offered on it. A CD pays interest at regular intervals. Once it matures, you get back the money you invested plus any accrued interest.
Is it safe to invest in CDs?
They are considered safe investments, even though they pay higher interest rates than savings accounts, as long as you understand that the money invested will be tied up for the term of the CD.
The only risk with CDs is reinvestment risk; that is, we are exposed to the opportunity cost if rates go down. That is why, in scenarios where interest rates or inflation are highly volatile, it is advisable to invest in shorter-term CDs, so that you can take advantage of the opposite scenario, rising rates, without having your money locked up. Regardless of all that, we need to understand that both inflation and taxes could erode the purchasing power of our investment.
A strategy for investing in CDs
As a way of always having money available for a new interest rate environment, CDs are ideal for a ladder strategy. For example, if you want to earn a return on €5,000 over 5 years, you can invest the money in 5 rungs, staggering the maturity dates. It would look like this:
- €1,000 in a one-year CD.
- €1,000 in a two-year CD.
- €1,000 in a three-year CD.
- €1,000 in a four-year CD.
- €1,000 in a five-year CD.
This way, one CD would mature every year, and the CDs with the longest terms would probably be the ones generating the highest returns.
3. Short-term government bond funds
Government bond funds are mutual funds or ETFs that invest specifically in debt issued by governments and their agencies. As with CDs, long-term bond funds will have a higher return than shorter-term ones, although with short-term bonds we avoid the risk of interest rate changes over the long term.
Is investing in government bond funds safe?
Government bonds are usually among the safest investments (this is fixed income), as they are backed by the government itself, so investing in a fund that holds these bonds carries no risk for the investor.
How to invest in government debt ETFs (bonds and Treasury bills)
Most investment management firms can offer you this type of fund. You can even turn to online banks, where you will find plenty of fixed-income ETFs. On the other hand, don’t forget that, as a private investor, you can buy bonds and Treasury bills directly without going through a third party, although in most cases the fees for this kind of investment are really low anyway.
4. Short-term corporate bond funds
Some companies, often even large corporations, raise money by issuing bonds to investors, and there are funds that hold the bonds of dozens or even hundreds of these companies. Short-term corporate bonds usually mature in one to five years.
Is it safe to invest in corporate bonds?
Investing in these bonds over the short term carries little risk, but we need to understand that corporate bonds, unlike government bonds, are not backed by anyone. If a company goes bankrupt, the investor would be the last to get paid, so they would probably get nothing. Nor is this investment covered by the deposit guarantee fund.
The good thing about investing in a corporate bond fund, however, is that at least it is broadly diversified across companies, which can reduce the financial impact of any one company going bust. Remember that a company can have its credit rating downgraded or run into financial trouble. If the fund has picked good companies, an event like this is unlikely, but the probability does exist.
5. Index funds: the most profitable investment in the long run
I won’t go on at length about index funds, since they are what we have recommended most often lately. Even though we are talking about equities, with the right strategy and the right time horizon it’s like talking about fixed income. Here we explain the differences between index funds and ETFs. Followed with the right strategy, an index fund is by far the most profitable long-term investment of all the ones we have mentioned so far.
Other profitable investments in times of crisis
Having covered the investments we consider safest among those that offer a return, we are left, of course, with equities. Although it may seem contradictory, when the stock market falls mercilessly, investors can get in and ride the rising wave that follows in the markets, to the point where investing in the stock market becomes extremely profitable, having greatly limited stock market risk by choosing an ideal moment to get in. But you have to choose well, because sometimes there is no dumber reason to buy something than the mere fact that its price has fallen.
Personally, I will always recommend that you either choose a strategy for investing in an index fund or learn what you need to be able to pick the stocks to invest in yourself. But there will always be those who won’t follow this advice or aren’t willing to learn about stock market investing, and this is where we should give them these other alternatives.
See also: Where to invest your money: 14 options
See also: The best books for learning about the stock market and finance
Dividend stock funds
These investment funds hold the pick of the stocks that pay dividends in their portfolios. They usually choose stocks whose dividend payments have been sustainable over time. These stocks tend to be less volatile than growth stocks, so they are considered safer, within the bounds of equities. They will also have a lower expected return than growth stocks. Even so, they are a way into equities while taking on less risk.
You can also choose, on your own, several companies that have paid a sustained dividend over time. And if, on top of that, you buy these shares at a point when the market has pushed their price down, over time you will get the rise in price plus the accumulated dividends (in most cases dividends are paid quarterly).
But remember: if you choose this kind of investment, don’t look for the company paying the highest dividend right now, but for the company that has raised its dividend steadily throughout its history. This was one of the requirements Benjamin Graham set for a company to be considered suitable for his “value investing” method. Among other kinds of stock funds, we have the following:
Growth stock funds
These investment funds choose companies that promise very high returns because they are just getting started, but by the same token they carry more risk, since the company has no track record. They usually include a lot of tech stocks.
Value stock funds
These value funds choose companies they consider to be priced at a bargain because of falls, or simply whose intrinsic value is below their market value. That is why they tend to carry less risk than other kinds of companies, given that the market usually ends up moving prices towards their real value.
We are still investing in equities, though, so the risk has not been eliminated. These funds may well do well after the current market falls. But at the same time, and always in my personal opinion, it would be much more advisable to learn what you need to choose these companies on your own, taking advantage of market dips.
Investing in cryptocurrencies
If you’re not investing in cryptocurrencies, you’re missing out on the chance to get rich. No, come on, seriously now. Stay away from this market unless you treat it as pure speculation and not as an investment, because, as we have explained before, cryptos are not an investment.
Here is also an article in which I have gathered the most common arguments of Bitcoin enthusiasts, answering many of those fallacies.
Featured image: Marinus van Reymerswaele, Public domain, via Wikimedia Commons.
