Have Some Cash? Here Are Some Basic Investment Options

If you have savings, you need to invest them somewhere, at the very least to preserve their value. Ideally, you will want to invest them in such a …

Alternative Investments

If you have savings, you need to invest them somewhere, at the very least to preserve their value. Ideally, you will want to invest them in such a way that over time, even when adjusted for inflation, your capital will increase rather than decrease. If you don’t have any savings, we recommend that you improve your financial literacy as soon as possible.

Remember that even if you don’t invest your savings anywhere, you are in fact investing in the most worthless asset with a negative real rate of return: cash.

In order to choose the right option of where to invest your money, you need to somehow estimate their expected return on investment. The question can be posed to someone who is offering you a particular investment and they will tell you that there is nothing better in terms of the rate of return on that particular investment.

How can I evaluate the profitability of an investment?

Investing money in any type of investment involves investing in one or more asset classes.

An asset class is a notional group of instruments that have similar characteristics and behave similarly.

Let’s start by looking at financial assets: those that can be turned into money on the market fairly quickly. Traditionally there are three main classes of financial assets: money and cash equivalents, debt instruments (bonds) and equity instruments (stocks).

Money Markets

Money markets are the most liquid of these investment, the value of which is least susceptible to unexpected short-term spikes and fluctuations. This asset class is often colloquially referred to as “cache.”

So, if you think your savings are securely protected from inflation when investing in dollars, you are mistaken. The long-term real return on the dollar is unambiguously negative. To give you an example: if you bought cash dollars in early 1996, by the end of 2019 the exchange rate would have appreciated by more than 13 times. In general, long-term exchange rate movements follow more or less closely the comparative dynamics of inflation in different countries.

Short-term US Treasury bills. If cash has such a dismal real rate of return, who among investors would want to invest in it? In fact, hardly anyone. The fact is that investors give the term “cash” a slightly different meaning than the average person: it most often refers to the safest short-term government bonds, which can be turned into cash almost instantly without the risk of losing value.

Note: even if you invest in ten-year Treasuries now, and the US Federal Reserve raises the interest rate later, you will still end up with the same nominal rate over 10 years that you originally invested at (0.65%). The bond market is designed so that when interest rates rise, the price of long-term securities will fall sharply and the remaining term to maturity will slowly catch up to the par value – meaning that you can’t “roll over” without loss into bonds at a higher rate of return.

Real assets

In addition to financial assets, there are also real assets. Their peculiarity is that in addition to their ability to be converted into money, they are also capable of being useful in their own right. We will look at two important real assets: gold and real estate.

Gold. Gold was once the backbone of the monetary system. Now all of the world’s currencies have long been decoupled from gold, and its value is largely based on collective ‘habit’ rather than on an actual need for the metal itself to make jewelry, for example. But Pacific Precious Metals provides an opportunity to invest in coins.

The price of gold rose sharply in the 1970s, then fell sharply in the 80s and 90s, then rose again in the early 2000s.

Real estate. A lot of questions can be raised around real estate estimation – no exact data for a long period is available, economists have to go out of their way to calculate/estimate various indices on indirect data, which sometimes makes us doubt the reliability of the conclusions.

But the main income from real estate should come from renting. According to the study, taking into account the appreciation of the price of the property itself and the average rental rates, the long-term real yield on property is 6.6 per cent per annum.

So, real estate looks even more profitable than equities? But here we should consider that this calculation assumes a spherical asset class in a vacuum, when you kind of invest in all the housing of the world at the same time, and without the additional costs of managing the whole affair.

To summarize: where to invest your savings in 2021?

Looking at the currently adjusted expected long-term returns of asset classes, we would like to additionally note the following:

  • Low interest rates everywhere are killing yields on debt instruments: Positive real yields on deposits and bonds are not to be expected.
  • The current level of quotations on global equity markets can be expected to generate yields at least as good as the historic average. However, the uncertainties about the impact of the current pandemic on the economy make quite significant drawdowns quite likely in the moment – so the path to these good returns may not be a straight one.
  • Real estate may look attractive “on the chart,” but in reality it may perform even worse than equities.

Unfortunately, there are no easy “where to invest” options in the current market. A significant correction in asset prices amid a developing pandemic could help improve future expected returns, but sitting around waiting for it in conservative assets runs the risk of losing even more over the long-term horizon.

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