The aim is to come up with a long-term strategy for your personal finances.
Whether you save a small amount each month or you’ve built up a substantial nest egg, the key question remains – should I save or invest? The interest on savings accounts remains low these days despite inflation. The markets are unpredictable and the risks are not insignificant. So what should we do?
Saving is generally safer; investing yields more in the long run but the trade-off is you take on more risk. Aside from this rule of thumb, there are a few other things to consider when making this kind of financial decision. The aim is to find the right mix and come up with a long-term strategy. Managing your assets means building up and maintaining your financial security.
At the top of the pyramid are the investments that fund major life projects.
A three-tiered pyramid is a good representation of how to save and invest. At the base is the financial safety net, which is your buffer against unexpected or major expenses. This is built up over the course of regular deposits into an account, usually by standing order. Building loan contracts and savings plans also fall under this category. It’s also worth thinking ahead and diversifying your savings to protect you and your family should your assets drop in value or your income suddenly disappear. The middle tier of the pyramid consists of life insurance and/or pension plans, among other things. The interesting thing about these products is that you can immediately benefit from tax advantages. At the top of the pyramid are the investments that fund major life projects. The best solution here will naturally depend on your investor profile. If you don’t have one yet, you can contact your Relationship Manager who will be happy to help. This profile serves as a guide when choosing which investment products to use (SICAVs, structured products, equities, bonds, etc.), and helps define the level of professional asset and financial management support required.
Repaying debt as an option
In many situations, a good investment is to pay off debt. Of course, it’s even better to limit borrowing wherever possible or even avoid it altogether. This can be achieved with careful investment planning in advance. After all, debt often costs more than the return on investments, especially when you opt to save over invest.
To save or to invest; that is the question
Saving and investing are different objectives; you just need the right mix. It’s not about deciding on one over the other, but finding the best solution that fits your needs. The following table gives interesting answers to key questions:
|What goal?||Good things come to |
those who wait
|Well begun is half
(risk and return)
|What configuration?||Build up a safety net for larger, unexpected expenses or to fund medium-term projects||Grow capital,
diversify your investments
or build up a supplementary pension
|When?||As soon as possible, because it always makes sense to have money put aside||Depends on the person, but
the investor profile
should always be adapted to
|What investment horizon?||Very short-term to long-term||Medium-term or long-term
(short-term is possible
but strongly discouraged,
unless the investor is experienced)
|What risk and return should be involved?||Low to limited||Moderate to very high; no requirement in terms of result|
|How much expertise and time are required?||Little to none||Lots of know-how, lots of time (especially without professional assistance)|
Overview of popular investment solutions
Bonds are fixed-income securities issued by companies and other institutions that wish to raise capital. Put simply, when you buy a bond you are lending to the issuer. This money is paid back in full at a certain point in time (the maturity date); however, the bondholder may receive regular interest payments (coupons). The term “fixed-income” means that the investor knows exactly how much they will receive at maturity.
Equities are securities that represent an ownership interest in a company. Purchasing an ordinary share of a company generally grants the investor the following:
- The right to vote at shareholders’ meetings, as a general rule, and thus potentially to have a say in the company’s future direction. The more shares a shareholder holds, the more voting rights he/she has. The Board of Directors of a company is also elected by the shareholders.
- The right to a share of the profits made by the company (in the form of a dividend); how much of a share depends on the quantity and type of shares held.
- The ability to grow the capital invested. The investor’s capital grows if the stock is worth more at the time of sale than when it was initially purchased.
Equities may be bought and sold on stock exchanges (also referred to as equity markets). When a company offers its shares for sale in this market for the first time, this is referred to as stock market flotation or initial public offering.
In simple terms, structured products are a combination of two or more financial instruments. They are designed to match a very specific risk/return profile. They usually consist of a traditional financial instrument that is combined with derivatives. The individual components are linked to an integrated product.
As a rule, this alters the payout profile of the conventional security. For example, the periodic coupon payments of a bond may be replaced by payouts that depend on the performance of one or more underlyings. These underlyings may be equities, interest rates, commodities, currencies or a basket of assets. A structured product can offer exposure to multiple underlyings. If the underlyings perform as expected, this can be very lucrative for the investor.
A SICAV which has the European label of UCITS is a public limited company whose shares are offered to the public, and whose sole purpose is to invest the share capital in securities (or other liquid assets) in order to diversity risk. More generally, with very strict European investment regulations, its purpose is to ensure maximum protection for investors. A SICAV’s share capital is always equal to the its net asset value, hence the “variable capital” part of “société d’investissement à capital variable”. In Luxembourg, these companies are subject to prudential supervision by the Commission de Supervision du Secteur Financier (CSSF), and have a board of directors and a General Meeting of shareholders. These companies can be established on the initiative of investment managers, banks or insurance companies.
The capital put in by many investors is pooled in the SICAV and entrusted to a professional fund manager, who invests it in securities (equities, bonds, etc.). By buying, selling or swapping securities, this fund manager takes care of the portfolio’s day-to-day management. The SICAV may not manage any asset which does not fall within the authorised and strictly regulated composition of a UCITS. Its aim is to obtain the best possible return for investors while following the defined investment strategy.