Diversify your investments. Diversifying your investments is essential. It allows you to improve your performance while reducing your risk of loss. To use a popular phrase, and thus imagine maintaining the purchasing power of your savings, it is important to “not put all your eggs in one basket”!
If the Livret A is historically the most popular savings vehicle for the French (55 million of them have one, which represents a collection of 550 million euros each year for 10 years!), Its rate Annual interest has continued to fall, until it dropped in February 2020 from 0.75% to only 0.50%. This investment, while safe, is now very low paying. Moreover, its rate being lower than inflation, its interest has become questionable …
Between profitability and risk, do you have to choose? By varying the type and risk of your financial investments, you can improve your returns.
Let’s take a closer look at how to diversify your investments:
Set goals and a savings strategy
The first step is to define the objective sought by the saver.
Firstly, you need to define the amount that you are willing to save, the regularity of the saving effort, the term of the investment, and the level of risk accepted.
Precautionary savings, also known as current savings: must allow the rescuer to cope with everyday life concerns (car repair, home accident, etc.) and personal dangers such as job loss. That’s why it’s so important that these savings are available at all times! For these types of savings, an investment like Livret A or equivalent seems safest. Its role here is to let you build up available capital in the event of a hard hit, rather than allowing it to grow.
*Note that the LEP (Livretd´EpargnePopulaire) is a more interesting alternative than the Livret A, but is not open to everyone (40% of French people would be eligible) and relatively little used.
Creating medium or long-term capital: The objectives are heavy long-term expenditures such as buying a primary or secondary housing, child work Suggested products for such savings would be a Home Savings Plan (HSP), employee savings plans (ESP) or even an Action Savings Plan (ASP) … They have low risk and in return, they have low returns.
Investments in the (short, medium and) long term (s): carrying a higher risk, they are in return much more profitable.
We distinguish :
Stock market shares: this is an ownership title to a fraction of the capital of a listed company. The share price fluctuates up or down, within each trading session in the year.
SCPI investments: they make it possible to buy and manage rental property assets via a collective investment. Investing in an SCPI involves a risk since neither the return nor the capital is guaranteed.
Of course, crowdfunding, which allows you to invest your savings while participating in the real economy
*Compound interest, a more than interesting solution
Compound interest corresponds to the interest of an investment (whether life insurance, bank books, retirement savings, crowdfunding profits, etc.) calculated by integrating the interest accumulated in previous years.
For the more mathematical of you, here is the formula:
C0 x (1 + i) ^ n = Cn
C0: amount of initial capital
(1 + i): echoes one year plus the expected interest based on compensation
Power n (^ n): the number of years that the placement lasts
Example: let’s take 10,000 euros invested at a yield of 10% per year. At the end of the first year, you will have earned 1,000 euros in interest. Over 10 years, these investments with compound interest will generate you approximately 6,000 euros more than an investment without compound interest.
This “snowball” effect is particularly powerful. It allows creating wealth on the generated profit. The more your savings are diversified, the more you will lower your risk, and the more profits you will be able to reinject into your investments.
Whether you invest your money in precautionary savings, in short, medium, or long term investments, the principle remains the same: use your savings to make them grow! And if you are still hesitating about your investments, why not support the real economy, via lifefinanceblog.com?
“The most powerful force in the universe is compound interest” Albert Einstein