There are people who have a little more money and are thinking of putting it somewhere for the long term, maybe even for retirement. They look at stocks, investment funds, third-tier pension funds, government bonds, deposits.

There is no such thing as a perfect instrument: that is, very high returns and very low risk. If someone promises something like that, don’t believe it.

The problem is that many people think that all money should be in one basket: €50,000 in government bonds only, stocks only, bonds only, fund shares only, etc.

The thing is, you need to build a portfolio. To have everything. How much for each? This is an answer that only you can answer. That is, it depends on your own risk appetite.

What should not be in your portfolio

Adrian Angel, investment specialist at OTP Asset Management, says that for those with a long time horizon, say with a retirement plan in mind, stocks should not be absent from the portfolio, it just depends on the weight they are given.

Why

He argues that stocks are actually an investment in the real economy, and a diversified portfolio of stocks in solid companies is bound to perform well and generate profits and dividends over this period.

In addition, the stock has performed very well over a longer period of time, with past returns of 8-10% depending on the time period chosen and a good chance of profit.

“After we consider how much of our portfolio we can tolerate high volatility (equities), we can delegate the rest to fixed income instruments that currently offer very attractive returns,” explains Adrian Angel.

How much will you earn in 10 years if you invest €50,000 but €100 per month

As I already said, you should not put all the money in one basket, but, let’s say, a person has 50 thousand euros and does not want to touch it for a month, let’s say 10 years.

The path of market development is obviously unpredictable.

Given that the stock market returns 9-10% (historically), this would mean more than €150,000 in 10 years.

Not everyone has a lot of money, and some people think about smart saving, as it is also called. Let’s imagine that a person can save 100 euros every month. In ten years, it can reach 21,000 euros.

*I used a compound interest calculator in the above examples

Of course, within 10 years, a crisis may come, a period when your tools depreciate, but the main thing is not to panic and keep buying. The moment you panic and react that way, you lose.

Direct investment in the stock market is not for everyone. You have to learn, understand it, know how to react.

There are also investment funds, some mutual funds, but even there you need to understand that they are related to the market. Let’s not forget that last year there was a negative return on bond funds due to inflation, and many sold at a loss. It’s because they didn’t understand that in the end they get what they hoped for on this tool. They just didn’t understand investing. Now these funds are positive again.

Adrian Angel argues that expected return is only part of the discussion: it must also be correlated with time horizon and risk tolerance.

All these 3 limitations should direct our choice to a financial product or more, with which we are comfortable and in which we save periodically.

“There are diversified investment funds that offer us diversified portfolios in several classes of financial instruments and even geographically. And these investment funds are available to everyone, they can be accessed online through the banks we transact through, so there is no reason for us not to start saving healthily and efficiently,” says the investment expert.

It is important to consider one thing: liquidity. That is, to have access to money in the event of an unforeseen event: an operation, an emergency.

What is the difference between Tier III pension funds and investment funds

Pension funds and mutual funds are different. “Pilon III pension funds have a tax limit of €400 per year, which is very low. This limit should be significantly increased in order to stimulate long-term savings, especially from the demographic point of view of Romania,” states Adrian Angel.

Many monthly contributors to Pillar III have seen small gains in their administrator accounts. As for pensions, these managers do not invest very much in stocks: only about 25%. Most of them are in government bonds, which had a negative yield last year. The rest of the money is placed in bank deposits and other instruments.

Therefore, even these funds have diversified portfolios, as everyone should.

“Investment funds are more numerous and offer a wider range of products for Romanians, depending on their needs, from conservative fixed income funds to industry funds, real estate or technology funds and ending with equity funds,” the expert explains.

So we can have Tier 3 funds as well as additional investment funds.

Based on last pension replacement expectations of 30-40%, he says, it’s clear that we need to save more to maintain our current lifestyle even after retirement.

Government securities and bank deposits: part of the portfolio

The state has been offering Fidelis and Tezaur state titles for several years, which are in high demand among Romanians. In 2023, they subscribed almost 7 billion lei to Fidelis and 10 billion lei to Tezaur, and new shows are currently underway for both programs.

See also: What to do with 5,000 lei or 1,000 euros at the end of 2023 if you don’t intend to touch them and don’t have a big appetite for risk

Since the demand is so high, it is most likely that the Ministry of Finance will launch such instruments next year as well. They compete with bank interest, the only difference is that securities are not accrued.

Bank deposits are subject to income tax (withheld at source) and incomes above 6 minimum wages in the economy are also subject to CASS tax (i.e. EDD must be filed).

Tezaur is purchased through the Romanian Post, SPV or directly from the Treasury, and Fidelis through partner banks or through a broker on the trading platform.

In conclusion, Adrian Angel tells us that everyone’s portfolio should take into account our constraints (time horizon, risk tolerance) and then be designed to maximize expected return.

“But diversification is crucial. We also need some emergency liquidity and access to fixed income instruments (deposits, government bonds, corporate bonds), as well as access to the real economy through stocks,” the investment expert explained.

Those who know what they’re doing, he says, can also have a small impact on alternative investments such as art, commodities, real estate.

The answer to the question in the title: More tools depending on your knowledge and your own risk appetite!

There is no perfect recipe: someone likes it saltier, someone sweeter, someone sourer, someone hotter. The main thing is to invest in what you understand.

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