In the current low interest environment, it’s almost impossible to earn interest on your savings. To invest your money profitably, you’ll need to find alternatives. In this article, we explain why we are in a global low-interest rate environment, how this can affect retirement provision – especially for women – and what low interest rates mean for investors.
Low interest rates: a way of stimulating the economy following a crisis
Today’s low interest rates are the result of the various economic crises of the last two decades and the associated expansionary monetary policy of central banks. Interest rate cuts are a monetary policy measure taken to stimulate the economy. The aim of lower interest rates is to remove the imbalance between intentions to save and investment plans, because low interest rates make saving money less worthwhile. By contrast, investing money – for example, lending it to a company that uses the loan to invest in its business – is made more attractive, which in turn stimulates the economy.
As a consequence of the 2008 financial crisis, central banks like the Swiss National Bank (SNB) have massively reduced interest rates. Following the ensuing sovereign debt crisis in the euro zone, many central banks even felt compelled to introduce negative interest rates.
But even before these crises, global interest rates had fallen due to low inflation and an aging population.
What the low interest rate environment means for your investments – and why you as a woman are particularly affected by it
Interest rate cuts can be understood as a financial injection for the economy, but one which also has side effects. For example, low interest rates trigger a veritable “hunt for yield” – for both private and institutional investors, such as pension funds.
With low or negative interest rates, your savings account pays hardly any interest. If inflation is higher than the interest rate, you end up paying to save, because the real value of your money – its purchasing power – is reduced by more than the increase in your balance. However, women in particular are often reluctant to invest their money. They often leave investment decisions to their partner, for example, because they believe they do not have enough financial knowledge to make good investment decisions.
Low interest rates are also a challenge for pension funds, which have to find new ways to invest money profitably. This is the only way they can meet their contractually stipulated obligations and pension payments. In recent years, many pension funds have therefore been forced to reduce the pensions paid out. This is especially noticeable in retirement provision for women, and there are several reasons for this: lower incomes, lower salaries, career breaks and lower pensions, plus a smaller asset pool from which to finance a longer life.
How can investors invest their money sensibly in a low interest environment?
There are many different ways in which wealth can be invested other than a savings account. When interest rates are low, the following asset classes also offer opportunities for you as a woman investor:
Stocks: benefit from dividends and gains in stock prices
With stocks, you acquire a share of a company listed on the stock exchange. The potential returns vary. Shareholders generally receive a return in the form of a dividend, provided the company is sufficiently successful to pay them out.
As a woman investor, you can also achieve capital gains by selling your stocks at a higher price than you paid for them. However, with stocks there is always a risk of making a loss.
Bonds: An investment type with comparatively higher security
Bonds are a less risky form of investment that still yield returns, though at generally lower levels than with stocks. Unlike stocks, with bonds you are loaning your money to a company or a state institution. In return, you receive regular interest payments and your capital is returned to you at the end of the term.
However, bonds also carry certain risks, such as the risk of default, loss of value due to rising interest rates or an exchange rate risk in the case of foreign bonds.
Funds and mandates: invest in a mix of investments
Funds or asset management mandates enable you to invest in a mix of different investments. The advantage is that the risk is spread between different assets or asset classes right from the start. A fund combines either a certain type of stock, e.g., stocks in sustainable companies, or different asset classes such as stocks, bonds and money market products.
Unlike funds, a mandate enables you to put together a personal portfolio. This will combine asset classes based on your personal investment and risk profile and is managed by an asset manager.
As a woman investor, with funds and mandates there is still the risk of making a loss, but your investments are more diversified. You’ll also pay an investment management fee.
Real estate: invest directly or indirectly in real estate
In the current low interest rate environment, real estate is also regarded as an attractive investment opportunity for achieving regular returns. One option is to buy a property, which is currently easier due to low mortgage interest rates. Renting out the property offers regular returns in the form of rental income. The purchase of a property also entails certain risks and other costs, such as loss of value and brokerage and maintenance costs.
As an alternative to buying a property, you could consider indirect investments. These enable you to invest in a range of different properties via stocks or funds. The benefits are that you can invest in real estate with less capital and that it’s easier to diversify your investments.
Even when interest rates are low, you still need to define your goals and diversify your portfolio
In addition to equities, bonds, funds or real estate, there are also other alternative investment options such as hedge funds, structured products or investments in art. No matter how you invest your wealth when interest rates are low, you need you need to think strategically based on the following considerations:
- Liquidity for short-term expenses: How much in liquid assets do you need to maintain your standard of living and for unexpected expenses?
- Long-term viability for long-term needs: What funds do you need for your retirement, health care or even the purchase of a (second) home?
Based on your investment horizon and individual risk profile, you should create a diversified investment portfolio that helps you to achieve your goals. We’ll help you draw up a personal investment strategy.