Editor’s note: This article was first published in June 2011, during the euro debt crisis. The yields quoted, 5.90% on 15-year obligaciones and 3.25% on 5-year bonds, and 12-month fixed-term deposits paying around 3.25% reflect the Spanish market at that time.
Spain is going to hold an auction of 15-year obligaciones (long-term government bonds) yielding 5.90%, and of 5-year bonds at 3.25%. Is this kind of investment profitable? Is it risky?
To answer the second question first: bonds, Treasury bills, obligaciones… are the safest investment there is, because if the state couldn’t meet these payments, it would mean everything else had already fallen: the stock market, the banks and so on. The country would be in chaos. Could it happen? Yes, it could. In fact, it would be similar to what happened in Iceland, where some countries are demanding repayment on behalf of these “institutional investors”. Even so, once the situation is cleared up, there will be no problem getting paid, and as a last resort the European Union would step in.
Is it profitable?
Rather than asking whether this type of investment is profitable, since we already know the return you’ll get on your money (5.90% over 15 years and 3.25% over 5 years), the question should be: “What kind of investor am I?”
In my view, investing for 15 years only makes sense when you’re putting in more than 1 million euros. If I had to tie up 10,000-20,000 euros to earn 590-1,180 euros, I’d rather sit still. This kind of investment isn’t designed for the small investor and, if you push me, not for the medium-sized investor either.
Things change when a big businessman comes along, such as the Chinese investors who put billions of euros into 5-, 10- or 15-year terms. When the term ends, what these people collect is less a return on their investment than an inheritance for their descendants.
Comparing it with the stock market
There’s a very simple reason why we prefer the stock market to other investments. Just read why the stock market is the most profitable investment.
These days, getting a 3.25% return on the stock market isn’t hard if you pick the right moment to buy into a stock. One thing is clear: earning 3.25% on your money in 5 years is not the same as earning it in 5 months, and the stock market gives you that option. What’s more, you can earn that return several times over by getting in and out of several stocks, or the same one, as long as you do “smart trading”.
And most importantly, what I like most about the stock market is that you can take your money out whenever you want, whether you’re facing losses or gains. If you’re locked into an investment for 5 years… who knows what might happen in that time, or what business opportunity might come along.
Remember, too, that a 12-month fixed-term deposit is giving you a return similar to 3.25%, and some banks are offering even more.
Of course, there’s also the patriotic investor who, knowing they could get a better return elsewhere, decides to invest in their country as a show of support. That’s admirable too, but if you’re doing it purely to get a profitable return, I wouldn’t tie my money up this way.
That’s my personal opinion.
Further reading
- The dangers of putting your investments in other people’s hands
- Warren Buffett’s talk on investing, in 9 videos
Featured image: Luis García, CC BY-SA 3.0, via Wikimedia Commons.
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