When interests rates go down…
We are currently in a complex and at the same time very interesting time. In this context, the vast majority of current paradigms and absolute truths are changing. We are facing a situation of profound political (new lines of world power), social (new ways of interaction and of approaching life) and economic changes (new and revolutionary business models).
One of the most significant aspects that have conditioned a large part of these changes is the deep economic crisis (mainly of a financial nature) that all countries have gone through since 2008, whose most well-known trigger (but not the only one) was the bankruptcy of Lehman Brothers.
Given a crisis “unlike” any previous one, the actions of the Central Banks are particulary interesting. In an attempt to solve this type of crisis, unknown until then, they have taken, practically all of them, two radical measures:
- The increase of the monetary mass:the placement on the market of a large amount of “new money” through the purchase of assets from companies and financial institutions (in many cases of doubtful solvency)
- The drastic reduction of interest rates:in Europe, for example, we have gone from traditional interest rates in the 3% and 5% range to current rates of 0%, following the path previously taken by the US Federal Reserve.
Today we would like to focus on the aspect that has had the most direct influence on “our wallet”: the reduction of interest rates. This reduction has had a double effect on the economy:
- Positive effect: On the one hand, the endebted companies and individuals have had significant savings in the interest they were paying on their debt. In Spain, for example, some studies indicate that thanks to the ECB policy, Spanish families and companies have saved between 150,000 and 200,000 million euros.
- Negative effect: the abnormally low levels of interest rates have hurt millions of savers, because the returns on the classic products in which they invested have been practically zero or at least well below inflation.
This negative effect has significantly affected Spanish savers and investors, given that they have meintained two fundamental premises in the management of their savings:
- Passive Management. The management of our savings and investments is left to financial institutions or financial intermediaries. Unfortunately, in many cases, their management has proven to be expensive, inefficient and even insufficiently professional.
- Risk Aversion. Spanish investors are very risk-averse, which explains their interest in guaranteed funds and plans or in investing in real estate assets.
As a result of this risk aversion, Spanish savers have traditionally been very conservative and a large part of their savings have been invested in current accounts, time deposits, fixed income products or guaranteed products. The objective of all these products was obviously to obtain a return higher than infation in order to maintain savers´ purchasing power.
In the current context of financial crisis, inflation, understood as the increase in prices, has been abnormally low (1.1% in 2017, 1.2% in 2018 and 1.1R% in 2019, compared to an ECB inflation target of 2%). However, as a result of the rate policy pursued by central banks, bank accounts and deposits currently have virtually no profitability (it is difficult to find deposits with a rate above 0.1%), public debt (issued by a large part of European countries offers negative rates and he vast majority of the most conservative investment funds cannot find sufficiently attractive assets. In short, most savers have lost a lot of money due to inefficient management of our savings and investments.
At Fellow Funders we have been mentioning for a long time the need for an active management of our savings and investments. This active management does not mean, in any case, that we do not resort to professional advice however, considering that its role should be that, to advise, we are not exempted from a timely and rational monitoring of the investments that make up our portfolio.
Also in Fellow Funders we have spoken on many occasions of the necessary diversification of our investment portfolio. We must consider a fixed income portion, an equity portion and a liquidity portion. In addition, and within this low interest rate environment, a part of investment in alternative assets.
At Fellow Funders, through our live alternative investment platform, we have made a commitment to our users and investors to periodically present “different” alternative investment opportunities. However, always with the criteria that have traditionally guided all our activity: professionalism, transparency, security and trust. All the investments we publish on our platform have passed strict criteria (scoring, valuation, due diligence, …) with the ultimate goal, at all times, of being able to offer our investors interesting opportunities in a medium and long term time horizon.
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