Companies with adequate cash holdings are usually faced with the problem of no longer being able to protect this money from loss of substance. A 1 to 2 percent inflation rate cannot be invested in the money market at the same percentage. Thus, various (evasive) reactions can be observed. On the one hand, companies are increasing their investments, as they guarantee a chance of (significantly) higher earnings and returns. On the other hand, companies are increasing their willingness to take risks. This behavior is quite questionable, as it means nothing less than an admission that risks are increasingly ignored in order to meet return targets.
If this is done with a sense of proportion and seems borderline but still acceptable, are there any investment opportunities above 2 or 3 percent at all? Certainly, these opportunities can be found, even if they fall prey to a fallacy. A little more return does not mean a little more risk, but rather a disproportionate increase in risk.
Unfortunately, we observe companies that fall victim to exactly this error in thinking. In other words, returns of 5 percent, for example, cannot be realized with easy risk opening, but only with extremely high risk. If you now look at the corresponding investment offers from commercial banks, it is noticeable that there is hardly a significant number of investment ideas in the portfolio. If you also look at what else the (grey) capital market has to offer, the number of investment opportunities is already increasing and the return statements are already becoming more optimistic.
Investing in low interest rates – How should you assess them?
Well, for this it is sufficient to always rely on the usual principles and to ask yourself the following questions, for example:
- Anyone who (and here it is deliberately left open whoever the issuer, provider, salesperson, etc. may be) promises his investors 12 percent must generate 15-18 percent himself. To do this, the level of risk must be stretched extremely. This risk may be hedged to some extent, but not on the investor side! So who owns a business model with double-digit returns?
- The decisive word total loss is guaranteed to be mentioned in brochures, presentations, etc., but is often hidden or talked down. So where do I find this word?
- Surely what went well for 5 to 10 years may still work for the next 10 years. But it could also go wrong as early as next week. In volatile times, the derivation from history is to a large extent meaningless. How much does my “salesman” rely on the past? We know of a specific case where the company was founded in 2009 and the first admittedly successful 4 years for a plant idea are extrapolated to exactly 30 years. Without exception, without a weak year. Who guarantees a steady increase in value until 2045?
- The instruments necessary to achieve returns are often declared, unless offered by a bank, as “insider knowledge from high finance”. Anyone who argues with this has successfully climbed the first step to investment fraud. So what is the reason for an increase in value?
- As a rule, such returns can only be realized on a property-based basis, via venture capital or as unsecured promissory note loans and the like. This is not doomed to failure per se, but may well work in individual cases. Nevertheless, the inherent risk should be assumed. So how much do you really learn about the source of return?
Result
A threefold conclusion can be drawn from these considerations. First, that any investment that goes beyond the usual 1 to 2 percent is associated with disproportionate risk. Secondly, that acceptable investments in the “midfield” of 4 to 6 percent returns are virtually non-existent. Thirdly, that promises of returns around and above 10 percent exist more abundantly, but represent pure speculation that is unlikely to be successful.
Do you still have the attractive investment in low interest rate phases? We look forward to your comments!
Image source: Fotolia.com, Photographer: rangizzz
