Often beginners think that right after opening a brokerage account they will start actively trading stocks and earn 100% p.a. like in Hollywood movies. But in reality even professional funds with many years of experience and first-class employees lose to the market in most cases.
This is confirmed by statistics. S&P Dow Jones Indices analyzes SPIVA performance in global markets every six months – comparing active funds with their respective benchmarks, i.e. indices quoted in a particular region. Well, SPIVA research shows that most actively managed funds do not reach the index level, and the longer the investment horizon, the lower the success rate. For example, in the U.S., within a year, only 39.67% of active funds outperformed the S&P 500 index – in other words, brought in more than the market average for their participants. Within five years, that figure drops to 24.73%. And so on.
Whereas passive investing – in the global sense, the “buy and hold” strategy – shows much more stability. So where to invest to forget about inflation and currency fluctuations? Let’s look at a few options.
Popular, but not particularly effective
Advantages. On the one hand, it is very simple and almost 100% reliable. 42% of Russian population considers bank deposit to be the best way to save their savings in terms of safety.
Risks. Given that interest on deposits varies from 1.5% to 7%, there is no way to make money on them – only to protect your capital from the effects of inflation, which in May 2021 exceeded 6% per annum.
Renting out your home
Advantages. It’s an obvious, fairly simple, and reliable option. In addition, it is fervently loved by Russians – a survey of “Romir” showed that more than half (52%) of respondents would prefer to invest in real estate (which is often understood as a house).
Risks. The entry threshold is quite high – depending on the city of residence, on average, in the purchase will have to invest 1.5 million rubles, moreover, there are additional costs (taxes, utility bills, repairs, etc.). In other words, taking into consideration big investments, this option, just like a deposit, will allow making about 4-7% per annum – which means it will only help to save, but not to multiply.
Purchase of precious metals
Advantages. Precious metals, especially gold, act as a universal asset and are quoted in any region. Price on them slowly but surely grows, and there are a lot of tools for making transactions – from physical bullion to futures and options contracts or ETF.
Risks. Usually, deposits in precious metals are not insured – if the bank where you keep your jewelry or metal account goes bankrupt, the savings with the greatest likelihood of simply evaporate. In addition, they are unlikely to bring a stable substantial income – from 1979 to 2019 the price of gold, for example, rose by about 3-3.5% per year, which, again, less than average inflation. Well and in general, investments in precious metals are relevant at a horizon of more than ten years, because in some years the prices can fluctuate strongly and even fall.
More difficult, but more profitable
Bonds are like “loans in reverse”: you give money to the government or a company, and in return you receive interest (coupon payments) during the term of the bond. Ruble bonds can be a great alternative to bank deposits, while dollar or euro bonds allow you to hedge against currency fluctuations.
Advantages. This is probably the most popular and stable tool among conservative investors, which in addition can beat inflation, providing a return of 6% on government bonds and up to 10% on reliable corporate securities. In addition, this tool is considered one of the most accessible – you can buy such a security from $15.
Risks. The yield from the lowest-risk bonds is quite low, and in the case of high-risk bonds, there is a risk of borrower bankruptcy.
Technically, owning a stock is owning a piece of a company and potentially gives you the opportunity to outperform an index several times over. It is easier and more reliable to buy “blue chips” (stocks of the most liquid companies) or “dividend aristocrats” (stocks where dividends have been rising every year for decades).
Benefits. In case of purchase of reliable shares for a long-term period the investor saves time – he does not need to constantly monitor the situation on the stock market, it is enough to rebalance the portfolio once in six months. Commission expenses are minimal.
In addition, Russian dividend stocks are among the most profitable in the world. Passive income in rubles averages from 5% to 20% of the purchase price in the long term, while the entry threshold is very low – from 1 thousand rubles.
Risks. When you buy individual shares on your own, there is a risk that the market (the index) as a whole will be more profitable since individual securities may drop in value, while the index of the market as a whole contains many shares and thus just smooths out the drawdown on individual issuers.
Exchange-traded funds (ETFs)
Buying many different stocks of stable and promising companies from the world’s top companies is an excellent example of diversification and profitable investing. However, in this case, you will need to make constant manual adjustments to your portfolio. Instead, you can buy shares in a fund that has already assembled the right stocks in the right ratio. Such funds are called ETFs (exchange traded funds).
Advantages. ETFs usually have a very accessible entry threshold: let’s say, at the Moscow stock exchange, the price of a single ETF lot ranges from 1,000 to 10,000 rubles. There is no need to keep track of companies’ reports, the news agenda or the market situation.
Risks. It should be taken into account that ETFs do not pay dividends – you get a growing asset, but not a steady stream of money. Also keep in mind that an ETF is just a collection of securities, so you shouldn’t expect any outstanding results.
Mutual funds are the Russian analogue of ETFs. The essence of mutual funds is that either the investor delegates the management of his money to the organization for a commission, and it, in turn, tries to increase it, or a mutual fund, just like an ETF, simply picks securities included in an index and follows it.
Advantages. Such companies are managed by a whole team of experienced professionals, and investors do not have to spend time analyzing the market themselves. Moreover, it is possible to purchase shares for just a few thousand rubles.
Risks. Even professional managers rarely outperform the market as a whole, but they always take their commission – even in case of losses.
Collective investments in commercial real estate
One of the most convenient and profitable formats of passive investing is American REITs (real estate investment trusts). This is essentially a management company which invests in real estate, receives income and distributes dividends among participants. In Russia there are no classical REITs at the moment, but collective investments in real estate are still possible through closed mutual funds with a management company or through joint stock companies owning real estate.
Advantages. Commercial real estate gives high yield compared to other investment options with a similar level of risk – high-quality commercial real estate, taking into account the growth of the value of the asset brings an annual yield of 8% to 18%.
And if in the case of individual investment this sector implies low liquidity, the need for great expertise and a very high entry threshold (from several tens or even hundreds of millions of rubles), with collective investments everything is easier. For example, our investment platform SimpleEstate allows you to invest in professionally selected commercial real estate as a novice investor with a small capital (from 100 thousand rubles), and experienced investors with a capital of hundreds of millions, who do not want to spend time on independent analysis and management. If desired, anyone can sell their share in the object through the online platform, and it will take an average of 1-3 months, as opposed to the sale of the entire object, which could take years.
Risks. Given the high complexity of the market, the intermediary company should always be checked for reliability. You may do it judging by the following criteria: professionalism of the team and quality of investment analysts, legal structure of the transaction and investment conditions, control of the regulators (for example, mutual funds and joint-stock companies are controlled by the Central Bank). Another important indicator is whether the organizer participates in the proposed objects with its own money.
Also potential investors may be embarrassed by the fact that because of the lockdowns in 2020 the market of non-residential real estate sagged. Thus, according to Knight Frank, in Russia the volume of investment transactions in the office segment decreased by 25%, in retail real estate – by 79%, in the hotel segment – by 67%.
But what is interesting – investments in warehouse assets grew to a peak and reached 41.3 billion rubles. This can be explained by the development of e-commerce and the increasing role of logistics and storage facilities.
A separate promising direction of commercial real estate – street retail in large residential areas. Such objects are almost unaffected by the mass transfer of commerce online – they meet the basic and sudden needs of people, and therefore will be relevant even in a crisis.
How to make a choice
Of course, each asset class has its own specific advantages and disadvantages, and there is no clear answer, which of them is more or less profitable from an investment point of view. Much depends on time, amount of capital and market conditions. Let’s say a passive investor with a substantial amount on a short investment horizon would be better off with more conservative and profitable instruments (for example, bonds or dividend company funds), while if you’re ready to play the long game, you can look into commercial real estate or stocks.
In any case, it is best to follow a diversification strategy – spread your spare cash across different countries, different types of instruments, different companies, and different currencies. This is the only way to minimize all risks and achieve a stable yield without wasting time on active management.
I always recommend focusing on portfolios of the richest people in the world, i.e. UHNWI (ultra-rich private investors with assets over $30 million). According to the Knight Frank Wealth Report 2020, 27% of the UHNWI portfolio is real estate investments, 23% is stocks, and 17% is bonds.