Never before have the base interest rates in the European economies been so low for so long. At the end of October, the European Central Bank (ECB) decided to keep interest rates on refinancing operations at 0%, loans at 0.25% and deposits at -0.50%. And at the moment there is no sign of a rate increase, as long as the inflation outlook (0.7% in October in the Eurozone) doesn't reach the 2% that the ECB set as its target.

This climate of low interest rates plays a key role in the performance of the most conservative assets. Thus, at present more than 50% of public sector bonds issued around the world offer negative rates, that is, they return less money than is deposited. An example of this is the 10-year German bond, which in October 2019 offered an expected negative return of close to -0.6%. In the same time frame, the Spanish bond offers a 0.14% interest rate which, although it is a positive return, when the expected inflation is deducted, the real return is negative. Over the next few years, the expectation of higher returns on fixed income remains very low.

Nor can savers focus their attention on fixed-term deposits, which are barely paid anything, and no changes are expected until the official ECB rates are increased. Against this background, how can you achieve profitability with low interest rates?

Where to invest your money

In view of these forecasts, conservative investors wonder how to pursue returns with low interest rates. The answer is to look for such returns in markets other than fixed income ones and look at higher risk assets.

  • The first step is to increase the proportion of variable-income assets in your portfolio. Among this type of assets, the best known are shares of listed companies, but you can also invest in currencies, commodities, convertible bonds or investment funds, among others. Another investment product that has recently become popular is the discretionary portfolio management, a service whereby a team of professionals decides which funds to invest in and in what proportion depending on the client's risk profile.
  • And if diversification is already one of the basic rules for all investment, in this scenario of low interest rates it becomes essential. Diversifying your portfolio means spreading your money across various types of assets with different time frames, degrees of risk and liquidity. It is a technique that allows you to improve the profitability of your investment and reduce the risk you take by not putting "all your eggs in one basket".
  • A third element is asset allocation. This is an investment strategy that aims to balance risk and return by distributing the assets in a portfolio according to the objectives, the time horizon of the investment and the risk tolerance of the investor. It is based on the idea that the three main categories of assets (equity, fixed income and cash and cash equivalents) have different levels of risk and return and, therefore, each will behave differently over time. The consensus among most professionals is that the asset allocation has a greater influence on the final result of the investment than the specific choice of securities within each asset category.
  • Lastly, it will be necessary to make long term investments, given that the probability of obtaining a greater return increases when you invest in the long term. The longer you are in the market, the more likely it is that the average annual return on your investment will be positive. And you can also take advantage of the compound interest formula, reinvesting the returns obtained (interest and dividends) on an ongoing basis.

Bearing in mind that there is no expectation that interest rates will rise, at least until 2020, these are the keys to investment if you want to get a return on your savings.

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