Rick Lover


What is fixed deposit?

As fixed deposit or time deposit money on the deposit accounts is called for, a period of time at a fixed rate is applied. There are short-term fixed-term deposits with terms from 30 to mostly 360 days and longer-term deposits with terms of up to ten years. It is not uncommon for time deposit accounts to be opened with a minimum investment amount, which often ranges between USD 2,500 and USD 5,000.

Who is fixed deposit suitable for?

Time deposits are particularly suitable for people who only invest a few years and do not want to take any risks. Because of the high level of security, the returns are usually lower than those of riskier securities. Fixed-term deposits are also a good building block for mixed investment portfolios.

Which term should investors choose for fixed-term deposits?

Usually within the negotiated time frame, fixed-term deposits cannot be cancelled. According to certain financial websites, in periods of very low interest rates it is best not to make fixed-term deposits for too long terms. Otherwise, as interest rates increase again and the market offerings get stronger, you couldn’t respond flexibly. That’s the reason. This claim is logical at first glance. However, after a closer examination, it proved to be a confusion.

In principle, short terms are advantageous when interest rates rise, and long terms are advantageous when interest rates fall. However, it is unknown how the interest rate level will develop after a fixed-term deposit account has been concluded. If interest rates are very low compared to the past, most people assume that interest rates will have to rise again in the future. But this is a mistake. Even if the interest rate level is already very low, it can fall further, as the past decade has shown. As early as 2007, many professional investors thought that interest rates could not fall any further. In fact, they continued to decline in the years that followed. In 2012, for example, at a very low interest rate level, it was advantageous to take out long-term fixed-term deposit contracts. Because interest rates kept falling.

Investment strategies with time deposits

Those who choose either short or long terms are also placing a bet on the development of interest rates. Investors who do not want this should spread their fixed-term deposits over different terms. With this system, often referred to as the “interest rate staircase” , you can quickly participate in rising interest rates and achieve an average return in the medium term. For example, divide into four equal parts the sum you want to spend. Spread the money over time deposits with terms of one to four years . In this way, a fixed deposit is due every year. If you invest the money again with a term of four years, this rhythm continues. Of course, you can also increase the term. This is especially worthwhile if the interest rate differences between the terms are large.

But there is a more convenient strategy than the interest rate ladder: You invest half of the capital in overnight money , the other half in fixed-term deposits with a three-year term or longer. With this strategy, the average interest rates are as high as with the interest rate ladder. When interest rates rise, the interest rate ladder yields higher returns because investors benefit from better fixed-term deposits every year. If interest rates fall, on the other hand, the overnight money strategy is ahead. It is also more flexible because half of the money is available at all times.

Investors have to cancel many a fixed-term deposit account

There is also an important difference at the end of the term. Some banks then transfer the investment amount and income unsolicited to the customer’s current account. However, you must terminate other contracts before the deadline expires. Otherwise, the bank or savings bank will reinvest the money with the same term as before – at the then current conditions. So that you are protected from surprises here, you should study the modalities before signing a fixed-term deposit contract. You should beware of combination offers. Some providers lure customers with high fixed-term interest rates and at the same time oblige them to buy other investments, such as a fund . Those who do not need such additional financial products should not be blinded by high interest rates. This also applies to other lure offers that are tied to unfavorable secondary conditions.

Diversify equity portfolios with currencies. In contrast to the international stock markets, there are always winners in foreign exchange trading – even in crashes such as during the financial crisis in 2008. Investors who use currencies skillfully in their portfolios can improve their diversification and increase their returns based on risk. This is shown by various studies.


But the recent financial crisis dragged almost all assets down. For example, stocks and commodities suddenly fell against each other. During the internet crisis at the beginning of the new millennium, commodities had risen when dividend stocks plummeted.

Of the asset classes that are also accessible to every private investor, only safe government bonds rose in 2008 (which most banks and asset managers had strongly advised against in 2007 due to low interest rates) – and some currencies. Investors from the euro zone were able to diversify their portfolio with Swiss francs (CHF), yen (JPY) and US dollars (USD).

Unlike other investments, there are always winners in the currency markets, regardless of the market phase. That’s in the nature of things: currencies can only be traded in pairs. Their value is always measured in relation to another currency. This relation is expressed by the exchange rates. If the value of one currency in a pair rises, the other must fall. That is trivial. But it makes it clear that diversifying a securities portfolio with foreign exchange can also work in a crisis – provided the right strategy is used.

Lower the risk in the portfolio with foreign exchange

In principle, the risk of mixed portfolios consisting of stocks and bonds can be reduced by adding currencies. This applies both to portfolios that only consist of securities in the home currency of an investor and to international custody accounts, as a number of scientific studies show. The volatility is usually used as a measure of the risk. It is measured statistically with the help of the so-called standard deviation. It indicates how much a variable, in this case the return on a portfolio, fluctuates around its mean value.

Of course, losses cannot be ruled out even with foreign currency in the depot. But they can be restricted. The price for this is a lower absolute performance. Measured against the risk taken, the return increases – the risk-reward ratio of a portfolio improves. A measure that is often used for this is the so-called Sharpe ratio. It sets the portfolio return above the risk-free interest rate in relation to volatility. The higher the value, the greater the return per unit of risk.

Investment specialists differentiate between passive hedging methods and active currency strategies. The latter either follow fixed rules according to which the individual currency positions are regularly adjusted, or a fund manager decides on the basis of an investment model which currencies are bought and sold. Passive positions and active strategies can be combined, which can lead to a further improvement in diversification.

Passive hedging strategies

Most investors have an internationally diversified share portfolio. It is a building block in an overall portfolio. Every investment abroad involves an exchange rate risk, but of course also the chance of additional currency gains. Most investors believe that just spreading the share capital across many countries reduces risk. At first, this also seems plausible. Surprisingly, however, there is no solid evidence for this.

The right currency positions

For mixed equity portfolios from these currency areas, long positions in EUR, CHF and USD and short positions in the other currencies tended to be optimal. A large long USD / short CAD position proved to be a particularly effective diversification instrument. If this currency pair is not available to an investor, the combination long EUR / short AUD is an alternative. These hedging positions work independently of the exact composition of a globally diversified equity portfolio, as tests show. The main reason for this is likely to be the high correlation between international stocks, which in the past rose even further during downturns. Investors who do not have the opportunity to have an optimal strategy calculated by their asset manager, for example, can only use their thumbs to gauge the extent of their currency hedging. Risk-minimizing investors should be well advised with a long USD / short CAD or alternatively long EUR / short AUD position of 50 percent of the equity portfolio. These positions should be checked at least every three months and closed in the meantime if the sign of the correlation should have changed. The best strategy for hedging foreign bonds, on the other hand, is straightforward. They develop relatively independently of currencies. Exchange rate risks should therefore be fully hedged. Another argument for this approach is the high volatility of currencies compared to bonds. In the case of unsecured foreign bonds, currencies contribute up to 95% to the fluctuations in value.


Inflation is causing your wealth to melt. Before the recent financial and sovereign debt crisis, the world was largely okay for investors. If you played it safe and didn’t want to take any risks, you could, for example, put your money in fixed-income securities such as federal savings bonds and federal bonds. Investors who bet on these securities receive regular interest payments and their money back at the end of the term. Interest rates were mostly above inflation, which measures the average increase in the cost of living. So investors received compensation for rising food prices, energy costs and rents. And the interest rate that went beyond inflation ensured steady growth in wealth. With federal securities, investors could maintain the purchasing power of their wealth and increase it at the same time. Those rosy times are long gone. Since the outbreak of the crisis, interest rates have plummeted. They have now reached historic lows. With federal securities, investors have long ceased to be green. These are the people who want the highest level of security today have to pay for it – with a gradual loss of wealth. Because many federal securities only deliver negative returns. In the case of bonds that still yield low returns, after deducting inflation and withholding tax, a real loss is also recorded annually.

The situation is similar for bank deposits such as overnight money and fixed-term deposits , savings bonds and savings books . In addition, banks and savings banks are no longer unreservedly viewed as a haven of stability, as they used to be. Financial institutions and, with them, entire states can get into dangerous difficulties.


Bad times for investors who have so far mainly focused on fixed-income investments and avoided risky papers such as stocks. Such an investment strategy, which was considered cautious until a few years ago, now harbors the risk of a steady loss of purchasing power.

Today more than ever, careful investment is a question of expectations: Someone who is convinced that paper money will soon be worthless is, from a personal point of view, behaving cautiously when investing the assets in gold, real estate, stocks and inflation-protected bonds. From the perspective of another cautious investor who believes in the continued existence of the international financial system, this strategy is tantamount to a visit to the casino. Because gold and stocks in particular, but also real estate, are risky investments.

Most cautious investors are likely to have at least one thing in common: for them, preserving their savings comes first. They want to avoid painful losses. But how to achieve this goal today- opinions differ. Extreme strategies, in which you put all your money into a single investment, perhaps for fear of a financial market catastrophe, are by no means the yellow of the egg. On the contrary: the risk of being completely wrong is considerable. One of the golden rules for cautious investors is never to put everything on one card. It is safer to spread your wealth across different investments, which include stocks. Because without the return opportunities that they offer, it is hardly possible to preserve your assets. It seems strange: But it is a consequence of the crisis that today, of all people, cautious investors can hardly do without shares.


If you divide your money into different investments, the chances are that some of them will always do well, regardless of what happens in the financial markets. A possible support for bond prices means limiting the losses that investors can make with bonds in the worst case. At the same time, the debtor states are guaranteed acceptable financing costs in this way. The dreaded downward spiral of rising interest rates and growing burdens on national budgets, which could ultimately lead to bankruptcy, appears to be broken.


Some investors fear that the states could reach into their bag of tricks and try to purposely increase inflation in order to pay off debt through higher inflation. In theory it is possible. In practice, however, it is not that easy to implement.

You can’t just make debt go away (if you can’t or won’t repay it). But you can put it into perspective without having to pay a cent from the treasury (read here how exactly it works ). Ultimately, it is not the inflation rate that is decisive, but the difference between interest rates and inflation, the so-called real interest rate.

Wealth keeps depreciating in value if the interest investors get is lower than inflation. In economic terms, your loss of purchasing power can also be interpreted as a redistribution from the investor or lender to the state, which gradually lowers its debt ratio without having to cut spending. Critics also speak of an “expropriation of savers”.

But how can a government ensure such redistribution? Either inflation would have to rise without the interest rate rising. Or the interest rate would have to fall while the inflation rate remains unchanged or increases.

Your investment goals

  • Are you pursuing special goals with your investment advice (e.g. building up assets in order to buy a property at a later date or to finance a degree)?
  • Are you interested in retirement provision, asset or liquidity accumulation or speculation?
  • How strong is your willingness to take risks?
  • Is the system subject to a time limit?

Your financial situation

  • How high are your securities assets, how high are your financial assets?
  • Do you have other assets ( e.g. real estate)?
  • What regular income do you generate ( e.g. salary, rental income, capital income)?
  • What regular obligations do you have ( e.g. rent, loans, maintenance payments)?
  • Your knowledge and experience
  • How well do you know about financial instruments and financial services?
  • Which financial instruments and financial services do you have experience with?
  • How long did you gain experience?
  • What amounts did you bet?
  • Do you have experience with investments in foreign currencies?

These are common questions. The advisor may also ask you for further information. You can also name other investment goals that are important to you. It is important that the investment advisor receives the most comprehensive picture possible through his questions. You should therefore answer his questions conscientiously and in detail and notify your advisor of changes or updates. Your advisor will only receive all relevant information through your cooperation. The investment advisor cannot and may not advise you without information about your investment objectives including your risk tolerance, your financial situation, your ability to bear losses, and your knowledge and experience.

What information does your advisor need to give you?

Before starting advice, you must be informed whether the advice will be provided as an independent fee-based investment advice. If this is the case, the consultant is not allowed to accept or keep any commissions, but has to have the advice paid directly by you. In the case of fee-based investment advice, the commission must be paid out to you in full and immediately. You need to get information about all the circumstances of the plant that are material to you. This also includes information about all costs of the financial instrument and service offered and their effects on the return. Donations, such as commissions paid by third parties, must also be disclosed.

This information must be printed out or made available electronically in front of your system, for example. If you request this, your advisor must also give you a breakdown of costs according to the individual items.

Your advisor is also required to provide you with an information sheet prior to entering into any trade in financial instruments. This provides information about the key factors of the respective financial instrument and contains, among other things, information on the type and functionality as well as the risks and costs. In the case of so-called packaged investment products, such as certificates and structured bonds, one speaks of a basic information sheet and, in the case of investment funds, of key investor information.

Which products can the investment advisor recommend to you?

Your advisor may only recommend financial instruments that are suitable for you. The recommended deal must meet your investment objectives, you must be able to accept the investment risks, and use your knowledge and experience to understand the risks.

What is the purpose of a declaration of suitability?

Every time you give investment advice, you must be given a declaration of the suitability of the recommendations – for example, printed out or electronically.

This declaration of suitability is intended to enable you to understand the reasons for the recommendation before concluding the contract so that you can make an informed investment decision. This means that you can immediately identify and address discrepancies in your information. Even after a while and for follow-up advice, you can still refer to the documentation and the reasons for recommendation given therein. You must also be provided with a declaration of suitability if you use the advice several times or at regular intervals or if you do not buy a financial instrument after the advice.

The contract for the recommended business may only be concluded after you have received the declaration of suitability. Exceptions only apply if the advice is given by telephone, for example, and you insist that the contract be concluded immediately. Then the consultant may provide you with the suitability declaration even after the contract has been concluded.

What other records are there?

If you give your advisor an order after the consultation, the time and place of the meeting, the people present, the initiator of the conversation and information about the order itself (such as price, scope and type of order) must be documented. You can request that this documentation be given to you. Companies can combine this information with the suitability statement. If advice is given or an order is placed by telephone or electronically, the company records the content (taping). They must inform you about this in advance. You can object to the recording, but then the company is not allowed to provide the service in this way. The company has to keep the records for five years. You can request a copy of the recording at any time.

Remember: your participation is essential! Check carefully that the documents are correct. In particular, you should carefully read the information about your personal situation, i.e. your investment goals, financial knowledge and experience, and your economic situation. Make sure to check whether the advisor has made the right balance between higher earnings opportunities and the safety of an investment.

Banks and asset managers are happy to recommend tangible assets when inflation rises or clients fear market crises. But gold, real estate and other real assets such as forests, airplanes and raw materials are not saviors. Some of them harbor high risks that investors should be aware of. When it comes to real assets, most investors think of gold and real estate first . But stocks are also real assets. They certify a share in a company and thus in its production capital, for example in machines, buildings, trademarks and patents. Gold and real estate in particular have enjoyed increasing popularity since the banking crisis of 2008 swept the globe and pushed a number of euro countries to the brink of national bankruptcy.

Banks and fund companies also promote a large number of other tangible assets. These include investments in wind parks, forests, arable land, dairy farms, infrastructure facilities such as ports, hospitals, retirement homes and day-care centers, diamonds, art, antiques, vintage cars and of course in raw materials such as oil and copper.

Real assets can protect against total loss in a crisis

The legitimate hope that such real values ​​will not become completely worthless during an economic catastrophe is linked. They are intended to help maintain assets in difficult times. Above all, they should protect against inflation , but also against the consequences of government bankruptcies and currency crises. In most cases, however, it is very questionable whether tangible assets are an effective insurance against rising prices, as numerous studies suggest. But in the event of extreme market distortions, at least in the past, investors did not suffer a total loss.

Inflation is eating away at nominal values

The owners of financial assets and government bonds fared much worse . Your savings vanished almost overnight. Cash, bank balances, and debt securities such as bonds are so-called face values. Their monetary value is fixed. The price at which a bond has to be repaid at the end of its term is determined when it is issued, as is the annual interest rate. These two sizes cannot be shaken. When inflation is high, with inflation rates higher than interest rates, the real money value of the bond, measured by purchasing power, falls. This can go so far that investors can no longer buy anything for the repayment amount, as was the case during the hyperinflation.

Cash is particularly vulnerable to inflation

Interest-free cash is even more susceptible to inflation than bonds. The nominal monetary value of coins and banknotes is set by law by the central banks. The purchasing power of these means of payment is falling in step with inflation.

While bonds are often backed by assets and the issuer’s economic strength guarantees their repayment, cash and bank balances are claims against the central bank. After the Second World War they were backed by gold in the Bretton Woods system of fixed exchange rates until 1971. Central banks could exchange US dollars for the yellow precious metal at a fixed ratio at the US Federal Reserve. Today, independent central banks guarantee monetary stability in industrialized countries. The money they issue is covered, among other things, by foreign exchange reserves, i.e. by claims against other countries. People trust that the central banks will not print too much money and thereby devalue it. But this confidence has apparently continued to decline after the Internet bubble burst at the beginning of the new millennium and in the wake of the banking and sovereign debt crisis.

The disadvantages of real assets

Compared to nominal investments, real assets seem to be something tangible. But if you take a closer look, you will also discover disadvantages and dangers, which often make an investment seem less promising. Many real assets are not liquid. This means that they are not traded on legally regulated exchanges. Investors cannot sell them easily at any time. This applies to real estate, forests, fields, aircraft, ships and many other tangible assets. In addition, very few investors are so rich that they can buy their own forest or a shopping center. Private investors usually have to invest in such properties through funds. These are mostly so-called closed investments , which are associated with high costs and risks. Investors should therefore avoid them. An exception are so-called private placements, which are not publicly advertised and well-heeled investors may only be offered under the counter.

Real values ​​are risky

For less wealthy private investors, it is more likely that there are real assets traded on the stock exchange: stocks,  gold and raw materials. However, such investments in real assets are sometimes associated with much higher risks than bonds from solid issuers or interest-bearing bank balances that are protected by the deposit guarantee. Shifts should therefore be considered very carefully. If, for example, you are not investing time deposits that have matured securely with interest and instead buy gold, you may have purchased good insurance against financial market disasters. At the same time, however, you expose yourself to considerable price fluctuations and a risk of loss that becomes greater the less likely a crash appears on the stock exchanges. The bottom line is that you may have exchanged a comparatively low risk for a significantly higher one. You should always remember when planning to move from safe assets to tangible assets.

Every bank must be liable for incorrect financial advice. If a financial advisor provides insufficient or misleading information to an investor, he or she can seek compensation. However, this is often difficult to enforce. Because of the burden of proof rests with the investors.

In principle, an investment advisor is obliged to correctly inform his clients about all essential aspects of an investment. Regardless of a specific product, he must first ask what his client knows about securities, what he would like to invest the money for, what investments he already has and how much risk he is willing to take. If bank customers are forced to use products that do not fit their risk profile and life situation, this is wrong financial advice. Then investors are entitled to compensation.

Typical cases:

  • The advisor recommends a senior citizen shares in a risky real estate fund or bonds from a bond issuer with questionable creditworthiness , even though the customer only wants to supplement his pension.
  • The financial advisor hides the risks of a product. This is viewed by some courts as false financial advice even if the customer was willing to take higher risks for higher returns.

The burden of proof rests with the investors

What the consultant said in the customer meeting can often not be reconstructed exactly in retrospect. The advice protocol, which has now been prescribed, was supposed to remedy this. But consumer advocates criticize the fact that in practice it helps the banks to protect themselves from lawsuits rather than the customers in enforcing their claims. Investors only get compensation if they can prove wrong financial advice. Most of the time, the courts hear the investor, any companions and the advisor. Incorrect advice is proven if the court is convinced that it is established after the evidence has been taken. If doubts remain, it is at the expense of investors.

Compensation for hidden commissions

Investors, on the other hand, have a good chance of claiming compensation if banks collect commissions from product providers behind their backs . The case law is now clear: If the bank receives money for a certain investment recommendation, it must disclose this during the consultation. The central argument in the judgments of the courts: Investors cannot make a reasonable decision for or against an investment without knowing the bank’s self-interest. The banks therefore have to pay for losses if they received secret commissions.

The secret commissions have long been documented in countless legal proceedings. The courts assume in favor of the investors that they would have waived the investment if the bank had correctly informed them about the commissions.

They therefore condemn the financial institutions to repay the entire investment amount – of course, minus the amount that the fund units are still worth in the end.

Only claim damages from the bank

Without a lawyer, damages against banks, savings banks will not be applied. However, you should write to the bank yourself first. Because then the financial institutions have to pay all legal fees in case they are sentenced to compensation.

Background: Legal fees that were incurred prior to a legal dispute do not have to replace convicted financial institutions- unless you first claim the damages yourself before you call a lawyer. Then you can also request compensation for out-of-court attorney’s fees. These fees can amount to well over 1,000 dollars, depending on the amount of the claim for damages.

Formulate the letter to the bank

This is how you should proceed with your claim for damages from the bank:

  • Write to the bank, savings bank that advised you on investing.
  • State the investment, the date of the conclusion of the contract and, if possible, the consultation appointments.
  • Show how much money you lost on the investment.
  • In the case of funds that you cannot sell, request the reimbursement of the entire investment step by step in exchange for the return of the fund units.
  • Claim: The financial institution collected commissions for this investment without informing you.
  • Request compensation for the losses within a reasonable time. What is appropriate depends on how long it was since you bought the asset and how complex the case is. Usually three to four weeks are sufficient time for the bank to examine possible claims and respond.
  • Announce hiring a lawyer as soon as the deadline has passed.
  • Send the letter as a registered letter with acknowledgment of receipt or have it personally put into the mailbox of the financial institution by a reliable messenger who is available as a witness if necessary.
  • If you mistakenly wrongly claim damages or if you make mistakes in the letter of claim and it is ineffective, it will not do any harm. In the worst case, you only have to pay the costs for out-of-court representation by your lawyer yourself. If you forego a letter of claim from the outset, however, it is clear that you will definitely have to take over this part of the lawyer’s bill yourself.

Wrong financial advice – find the right lawyer

  • Anyone who feels they have been loaded by their financial advisor should look for a law firm specializing in banking law that exclusively represents investors – and not also intermediaries, fund companies or even banks and savings banks. It is beneficial if you find a law firm that has already successfully enforced claims for damages against your bank. You can usually assess the chances of success of your claim faster and more reliably. Search on the Internet and the business directory. Ask if you are missing information.
  • There is no general answer to whether it is better to involve a single lawyer, a small or a large law firm. In the case of individual lawyers and small law firms, the client care is sometimes better and more personal. Good, large law firms can sometimes fall back on more relevant experience and special know-how.
  • Be skeptical if you come across interest groups or similar associations. Self-help and networking initiated by those affected are a good idea and can be useful. Interest groups of aggrieved investors are often initiated and controlled by lawyers. You want to acquire clients in this way. You are often better advised to hire a law firm directly.
  • Many law firms offer the initial consultation, including a check of the chances of success, for a flat rate of 100 to 200 dollars. An initial consultation shouldn’t cost more than 250 dollars anyway. An advance payment on the fee is usually only due when the lawyer is actually supposed to take action.

Emerging market bonds attract with high interest rates. But they are far too risky to replace safe European government bonds. Instead, emerging market bonds look good in the portfolio when investors add them to the equity component. Shares in companies from emerging markets are now an integral part of internationally diversified investment portfolios. The MSCI Emerging Markets Index, which the stock market development of 24 emerging countries such as Brazil, China and Russia, is observed by many investors as a barometer of sentiment. In contrast, very few investors have heard of the JP Morgan Emerging Markets Bond Index (EMBI). It mainly contains government bonds from emerging markets as well as a small proportion of bonds from state-controlled companies – a segment that many investors have not yet looked into. Because the global emerging market bond market is small. It has grown strongly over the past two decades.

Investors prefer emerging market bonds in US dollars

More than 60 percent of the emerging market bonds outstanding at the end of 2017 were issued in so-called hard currencies, primarily in US dollars, but also in euros and yen, because many international investors do not trust local emerging market currencies. For example, US investors stay away from fluctuations in exchange rates spared when they invest in US dollar bonds from emerging markets. The respective issuer has to stand upright for the local currency to decline in value. This is different for emerging market bonds issued in local currencies. In this segment, foreign investors generally have to bear a currency risk. For investors from the euro area, this also applies to bonds in US dollars.

How much return do emerging market bonds bring?

Government bonds from emerging countries typically offer higher yields than bonds from mature industrial countries such as the US and Germany, which are considered safe. The average yield premium for emerging market bonds in US dollars was around 3.6 percentage points per year from 2008 to the end of 2018. Compared to German government bonds , the yield of which was far below that of US government bonds, the premium was even higher at the end of October 2018: the effective interest rate of an exchange-traded index fund, or ETF for short, which contains 416 emerging market bonds in US dollars from more than 32 countries 6 percent annually with an average remaining term of 11.85 years. German government bonds due in early 2030, on the other hand, only offered a yield of 0.38 percent per year.

What drives emerging market bond yields

The total return on emerging market bonds consists of the coupon, exchange rate gains or losses, and exchange rate gains or losses. While short-term exchange rate fluctuations dominate the performance, in the long term the interest coupons are decisive. The latter are usually firmly agreed. The coupons are paid regularly by the issuers as long as no country gets into financial difficulties. The interest payments are largely predictable income.

The price development of the bonds and exchange rate fluctuations, however, are anything but predictable. Both are influenced by a variety of factors. The rating plays a very important role in the bond prices. If a country’s credit rating is downgraded, bond prices usually fall – and vice versa. The US Federal Reserve, which influences the interest rate level in the US dollar area, is also a decisive factor. When US interest rates rise, most emerging market bond prices fall- in both US dollars and local currencies. International investors withdraw capital and place it in US bonds. They also dissolve so-called carry trades, which are riskier and less lucrative because of the lower interest rate differential. This leads to further capital outflows from emerging market bonds- prices fall.

Investors also react to changes in the political environment. If stability falls, as in previous years in Brazil, where the involvement of leading politicians in corruption scandals rocked the largest economy in Latin America, bond prices often fall too. Investors assume that the risk of default increases when a state is no longer run by a solid government.

Important macroeconomic indicators that investors watch with hawk eyes are also the debt ratios of emerging markets and their current account. Rising debt ratios and increasing imports than exports, which add to the current account deficit, are not doing well with lenders. Conversely, falling debt and current account surpluses support bond prices.

Diversify your portfolio with emerging market bonds

However, investors should not focus too much on the performance of the individual investments in their portfolios. What matters is the interaction of the various depot modules and the overall result that they deliver. Emerging market bonds have also played an advantageous role in this area in the past. Used correctly, they lower risk and increase returns in mixed investment portfolios. First, the analysts examined portfolios that consisted only of developed market bonds and gradually added an increasing proportion of emerging market bonds denominated in US dollars.

Result: The portfolio return increased, but at the same time the volatility increased even more.

The result: In relation to the risk, the higher the proportion of emerging market bonds in the portfolio, the further the return fell.

This shows that emerging market bonds are no alternative to secure bonds from European countries. No matter how tempting the high interest rate may be, investors increase their risk disproportionately if they swap emerging market bonds for industrial country bonds in their portfolios.

After the price of WTI (West Texas Intermediate) crude oil fell, many investors are suspecting a bargain. But they cannot invest directly in oil and other commodities. Investors need to buy financial products that are based on commodity futures – a treacherous market that one should not enter without adequate background knowledge. Investors can diversify their portfolio with commodities – or make short-term bets, for example on the price of crude oil. But only those who understand how commodity futures work can understand the performance of financial products on commodities and are safe from unpleasant surprises.

What are futures on commodities?

A future is a standardized contract that certifies the delivery or acceptance of certain goods at a exact date in the future at a fixed price. The term of futures is therefore limited in time, the contract expires on the delivery date. The seller of a raw material future is obliged to deliver the goods, the buyer to accept them. A seller of a future on a futures exchange holds a so-called short position, while the buyer is “long”. A position must always be matched by an opposing position (otherwise no forward transaction would be concluded) so that the sum of all short and long positions is always zero. Financial investors and speculators close their positions with an offsetting transaction before their contracts become due in order not to actually have to purchase or deliver the physical goods.

Who are the buyers and sellers?

Commodity futures exchanges have a long history and are of great economic importance. In these markets, producers and consumers use futures to hedge against price fluctuations. While producers protect themselves against falling prices, consumers want to protect themselves against price increases. For a muesli bar manufacturer who expects grain prices to rise, it can be useful, for example, to agree the price of the wheat delivery that he needs in a few months using a forward contract. As a rule, commodity consumers hold long positions (buyers), while producers of commodities are on the short side (sellers).

The third group that is bustling around on the futures markets – to an ever greater extent and with more and more money – are the so-called speculators, i.e. financial investors. Even if the term speculation has negative connotations, hardly any economist denies the economic benefit of speculation. Because financial investors act on the futures markets as important liquidity providers who take on price risks and want to be compensated for them with a premium. Ultimately, it’s nothing more than a kind of insurance business. Financial investors, including private investors, hold mostly long positions, which is ultimately also due to the construction of the indices through which they invest in the futures markets.

What have raw materials discarded in the past?

So, there is no general answer for it.Because the success of an investment depends solely on the strategy pursued. The fact that the spot price for oil has risen by 100% in a certain period of time does not mean that the capital invested has doubled as it does on the stock markets. The return of a futures investor can be significantly higher, but also much lower. It might be surprise for you, but studies show that the excess return on a single average future has historically been zero. Risk premiums only yielded portfolios that consisted of several commodity contracts. In the case of commodity future depots, the components of which were regularly reset to the starting weights, a so-called diversification yield could also be demonstrated. It results from the lower volatility of a portfolio compared to the individual components and is higher the more the individual commodities fluctuate.

What are the risks of raw materials?

A total loss with long positions on futures markets for commodities is unlikely. This can only happen if, for example, OPEC gave away its oil in the future and the price fell to zero. Of course, it is conceivable that new inventions will reduce the use of certain raw materials or even make them superfluous. However, it usually takes years to develop such technologies until they are ready for the market. Losses can also arise due to strong price fluctuations, although an investor was always “correctly” positioned depending on the market situation. Especially when commodity prices have risen sharply, the risk of a sharp correction increases, during which spot prices in a backwardation market can fall far below the futures price paid. Then a long investor gets lousy, even though he has actually done everything right. Conversely, in euphoric bull markets, spot price increases can rise higher than expected on the futures market. Anyone who has previously taken a normally promising short position in such a contango situation will lose money. The examples show that sometimes there is no risk premium to be earned. Then those on the winning side are those who bet that the “insurers” were wrong with their price expectations.

Banks often advise investors to buy gold products that are hedged against currency risk. But what is supposedly for the benefit of the customer is more of a disadvantage for them. As is so often the case, the product provider who profits from the protection benefits in particular.

When European investors buy gold, they are also taking a currency risk. Because the precious metal is traded worldwide in US dollars. Exchange rate fluctuations between the euro and the US dollar can reduce or increase the return.

The media and banks regularly point out possible exchange rate losses in gold investments . The latter would like to sell investors protection against this risk, just as an airline wants to persuade its customers to take out travel cancellation insurance at the end of the booking.

The banks argue with the negative relationship between the US dollar and gold: if the gold price rises, the US dollar tends to fall, which reduces the profit of euro investors, according to the rationale. This linear statistical relationship is only weakly pronounced. It was stronger in the 1970s and 1980s. But since the 1990s, the negative relationship between the US dollar and the gold price has either no longer been statistically verifiable or is only very weak.

This means: On a monthly basis, it happens only a little more often that the US dollar depreciates against the euro when the gold price rises. In the other months, however, the two prices move in the same direction. For this reason alone, hedging the currency risk does not make sense.

Currency hedging can increase risk

In addition, an exchange rate hedge for gold can lead to higher risks and lower returns. That may not seem at first glance, but it cannot be dismissed out of hand: If the gold price falls and the US dollar rises, the losses for gold investors from the euro area are dampened. You benefit from a more or less natural risk diversification that reduces the risk of loss. This beneficial effect is eliminated when the exchange rate is hedged.

This can have fatal consequences, especially in a crisis. Because when the financial markets crash, many investors flee to the US dollar, which they consider a “safe haven”. As a result, the US dollar rate rises sharply.

For example in 2008. Those who hedged the exchange rate back then did not benefit from the currency gains of the US dollar against the euro. The efficiency of a Goldman Sachs credential obtained was, for example, just under 35 per cent untill the end of 2007, the end of 2010, relative to the unknown variant.

Hedging costs reduce the return

Another argument against currency hedging is its cost. They cannot be higher than the currency losses that would arise without hedging for it to be worthwhile. However, the exchange rate fluctuations are not particularly high over longer periods. Since the euro was first listed in 1999, the common European currency has only fallen from 1.1789 to around 1.1177 US dollars per euro by June 2020 – albeit accompanied by sharp fluctuations.

Accordingly, European gold investor made a small exchange rate gain of a good 5 percent during this period . A currency hedge over 20 years, on the other hand, would have cost a lot of gold and depressed the gold yield. The costs result from the difference between the short-term interest rates in the USA and in the euro area. Investors would pay their difference to the euro interest rate if interest rates in the United States are higher. You gain money for insurance if it’s the other way around. The basis for a good return, and investors should always take this to heart, is avoiding losses. The supposed currency risk with gold actually tends to lower the risk of loss. The implicit possession of US dollars is also an additional safeguard against unexpected crises.

When comparing funds, investors usually choose the actively managed equity funds that have delivered the highest returns in the recent past. But these supposed winning funds will often develop below average in the future. Investors do better when they systematically select loser funds. Anyone who wants to invest in actively managed equity funds usually aims to generate a higher return than the market average. But only a few fund managers manage that. The problem for investors is therefore having to find out when comparing funds which managers will outperform their benchmark index in the future.

But this endeavor usually fails, as various studies suggest. For example, the British competition authority CMA found in a study that even professional investment advisors who sell their expertise at high prices to institutional investors such as pension funds, insurance companies and other corporations are unable to systematically identify funds that will perform above average in the future. The methods they use to compare funds do not seem to work. The main reason for this misery is likely to be the excessive focus on past performance. Both private and institutional investors mostly choose funds that have recently outperformed their benchmark index and / or performed better than their competitors. Fund managers who were particularly successful with their stock selection and market timing will continue to perform in the future.


That seems intuitively plausible, but it is fundamentally wrong. Today’s winners are not tomorrow’s winners, but the clear losers. The majority of investors buy actively managed equity funds that have generated the highest returns in the recent past. These funds also usually have a good rating. They are at the top of fund rankings because the fund ratings are primarily based on past returns.


After fund purchases, investors regularly check whether the managers are achieving the expected above-average return. If this is not the case within a certain period of time, the investors sell the fund again. You are replacing it with a new fund that has outperformed its benchmark in the recent past. To do this, they put together an equally weighted fund portfolio. At the start, it contained the 10 percent of equity funds that had outperformed their benchmark indices by the most in the past 3 years. The winning portfolio was reviewed every three years. The researchers replaced funds that were no longer among the top 10 percent with new funds that were now in the current top group (winning strategy).

For comparison, the analysts constructed a portfolio that consisted of average funds (average strategy) and one that contained the loser funds using the same pattern. That was the 10 percent of equity funds that, measured against their benchmark index, had performed worst in the past 3 years (losing strategy).


The researchers narrowed the population of all US equity funds according to two criteria: They only considered funds that managed at least one billion US dollars, since smaller funds are avoided by institutional investors. They also excluded the 10 percent of funds with the highest administrative costs. It is known from other studies that particularly expensive funds usually achieve below-average returns. The results of this fund comparison are likely to surprise many investors: the losing strategy produced the highest returns and the winning strategy the lowest. The average strategy is in between. While the losing strategy generated a profit of 10.04 percent per year, the winning strategy only brought in 7.43 percent – a difference of 2.61 percentage points annually.

These results cannot be shaken, no matter which methods are used to measure returns. The losing strategy was also ahead of the game in terms of profit, measured by the risk taken. Tests with different strategy variants and different populations from which the funds were selected confirm the results.


The reverse conclusion from these empirical results is that when selecting active funds, you should consistently rely on the losers of the more recent past who have more price potential. However, this strategy, which is unlikely to be widely accepted by investors, does not necessarily lead to above-average returns. In almost all the calculated variants, the losing strategy lagged behind the market average. The yield spread was 0.11 to 1.13 percentage points per year. Only when funds with less than one billion US dollars of investment capital were included was the losing strategy 0.4 to 0.48 percentage points better than the benchmark indices annually. This shows that even if investors do not allow themselves to be absorbed by the winning funds of the past and instead choose the more successful losing strategy, in many cases they should do better with exchange-traded index funds (ETF). They deliver the average market return after deducting costs and taxes- and keep that promise.

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