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Investment opportunities What to do with the savings in inflation?

Status: 22.06.2021 12:28 p.m.

Even in times of rising prices and zero interest rates, many Germans have their money in savings books or call money accounts. But if you want to protect your savings from inflation, you need alternatives.

From Lothar Gries, tagesschau.de

Consumer prices in Germany rose by 2.5 percent in May – more than they have been for almost ten years. At the same time, there is practically no more interest on overnight and fixed-term deposits, the most popular form of investment among Germans. Cash is also in great demand. The value of the notes issued by the Bundesbank rose by 9.5 percent last year. A similarly high growth rate was last seen in 2014. At the end of May 2021, banknotes issued by the Bundesbank to the value of 839 billion euros were in circulation, 52 billion or 6.6 percent more than a year earlier. But if you want your money to grow, you have to consider other investments than hoarding cash or putting it on savings accounts. There is no shortage of alternative investment opportunities. The long lucrative federal bonds are no longer one of them. The yields on these securities have fallen below zero since August 2019. Investors who lend money to the German state have to pay for it – a turning point, as they still got a return of five percent at the beginning of the millennium. “Today federal bonds have no place in assets that are designed to maintain or increase in value,” explains Ulrich Kater, chief economist at Deka-Bank, which is part of the savings bank group.

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No prospect of rising interest rates

Investors should also not give in to the hope that consumer prices, which have recently risen again, will lead to higher interest rates. Inflation is likely to accelerate further until the end of the year, but the European Central Bank (ECB) has repeatedly emphasized that it will adhere to the zero interest rate policy. The priority is to stimulate the economy again after the corona crisis, said ECB boss Christine Lagarde. In addition, the current rise in inflation is only temporary.

Investments that are considered to be risk-free, such as savings books and fixed-term deposit accounts, no longer offer any prospect of positive returns for the time being. In order for the saved to experience growth, stocks in particular offer themselves as a way out. Fund savings plans, for example, are a good way to get started. Investors pay regular amounts, in many cases from 25 euros upwards, into an investment fund in which various securities are bundled and which is managed by professionals. Alternatively, of course, investors also have the option of taking their money into their own hands and buying shares in individual companies on their own. In the past few years, you couldn’t go wrong when buying technology stocks.

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Alternative ETF?

If you don’t dare to do this, but still want to invest in stocks, you can invest your money in a so-called Exchange Traded Fund (ETF). These funds replicate a stock market index (often with so-called derivatives). This can be the German share index (DAX) or other indices such as the US leading index Dow Jones. The performance of an ETF is closely linked to the respective index. As a result, the fees are usually lower than with other funds. Investing in the stock market is of course not without risk: If the index behind an ETF falls because the stocks in it fall, the fund also loses value.

Nevertheless, ETFs are enjoying growing popularity. According to industry experts, there are almost 7,000 of these funds. This is also due to the low interest rate phase. It ensures that more people invest their money in funds than before. Many have done well with this strategy and have achieved better returns than they would have achieved on a call money account. For example, an ETF on the DAX alone has generated a return of 55 percent in the last five years – provided that you kept your nerve at the beginning of the pandemic and did not sell when the markets collapsed by a third in spring 2020.

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Gold and open real estate funds

A popular investment, especially in times of crisis, is gold. The corona pandemic has confirmed this again. By early August 2020, the price of a troy ounce (31.1 grams) had risen to an all-time high of $ 2,063, around a third more than at the beginning of the year. But then things went downhill again, to $ 1,684 in March. It is currently $ 1,775. In fact, gold is extremely volatile because the price is mainly driven by demand, because it has no “intrinsic value” like companies do. The precious metal is therefore not considered a reliable investment. There is also the often unsafe storage of bars or coins.

Those who shy away from the capital market and don’t believe in precious metals can also invest their money in real estate funds. They collect capital from investors and invest it in offices, shopping centers, residential buildings or logistics centers. The so-called open real estate funds are particularly popular with private investors. The income from such a fund, i.e. the rental income after deducting costs, is distributed to the owners as profit. With well-managed funds, an annual return of four to five percent can be achieved, a little more than the inflation rate.

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Sometimes there is a risk of total loss

But the system has a catch. A minimum holding period of 24 months applies to open-ended real estate funds. An investor must also announce the return of his money to the fund company. Then he will get his system back after twelve months at the earliest. So if you have to get your money at short notice at any time, you should refrain from such investments.

The examples show that there is no shortage of alternatives to the savings book or a federal bond. But if you want to increase your money, you also have to be prepared to take risks. In some cases, for example when purchasing shares, there is even a risk of total loss, as the example of Wirecard recently showed. A look abroad – especially the USA, where far more people own shares than in Germany – shows that long-term wealth can only be built up with investments in the capital market