Investing Advice Amid Low Interest Rates: Which Investments Still Offer Competitive Returns?
In the aftermath of the 2008 financial crisis, the European Central Bank (ECB) initiated a period of low interest rates to aid crisis-stricken countries. This phase, still ongoing, has brought both opportunities and challenges for German investors and savers.
The low-interest rate environment has resulted in minimal returns for savers, with an average interest of 0.17% on savings accounts, contrasting sharply with rates as high as 3.82% pre-crisis. However, the landscape has since shifted, with savings interest rates climbing back up to around 4%.
The low-interest phase has led to significant losses for many German savers due to inflation and the devaluation of money. On the other hand, it has encouraged borrowing and investment, making it cheaper for businesses and investors to borrow. This has typically led to increased investment and borrowing activities.
The return differential between short- and long-term German government bonds has narrowed, making long-term government bonds less attractive for investors seeking higher yields. This may prompt investors to shift towards alternative assets such as equities or corporate debt to achieve desired returns. However, this shift can potentially lead to capital misallocation and lower bond yields, pushing investors to refine strategies towards productivity and return quality rather than volume alone.
Riding out market downturns and not selling stocks at those times is crucial for long-term gains in the stock market. Investing in stocks offers the chance of attractive returns in a low-interest rate phase, but temporary losses are possible due to market fluctuations. Those who can afford to wait and have a long-term perspective can benefit from the stock market, despite its potential risks.
Crowdinvesting, involving investing in companies or real estate via an internet platform, offers high profits but also high risk. If a crowdinvested company is not successful or goes bankrupt, investors may not get their money back. In crowdinvesting, investors can receive profit-sharing rights or silent participation, but they do not grant voting rights.
Exchange Traded Funds (ETFs) track indices and offer market returns, averaging around 8% even in low-interest phases. They have low management costs at the bank and can be a sensible form of retirement provision, although their worthiness depends on individual cases due to rising real estate prices and increasing mortgage costs with rising interest rates.
Central banks worldwide, including the ECB, determine interest rate levels. The Institute of the German Economy predicts that low interest rates will persist until 2050, influenced by demographic change and increasing life expectancy. The current deposit rate, relevant for savings interest, is 2%. The ECB's main refinancing rate, however, has seen fluctuations, rising to 4.5% in July 2022 and then lowered again to 2.15% in the summer of 2024.
In summary, prolonged low interest rates in Germany tend to encourage borrowing and investment broadly but bring challenges of capital misallocation and lower bond yields, pushing investors to refine strategies toward productivity and return quality rather than volume alone. Strategic diversification and a cautious approach to evaluating returns vis-à-vis economic productivity and inflation expectations are advisable.
Even though the low-interest rate environment has resulted in minimal returns for savers, it has encouraged personal-finance activities such as investing, making it cheaper for businesses and investors to borrow. In contrast, the devaluation of money due to inflation has led to significant losses for many German savers.
As central banks, including the ECB, continue to maintain low interest rates, investors may consider refining their strategies towards productivity and return quality rather than volume, to counter potential risks of capital misallocation and lower bond yields. This shift in personal-finance strategies could lead to exploring alternative assets such as equities or corporate debt to achieve desired returns.
