Gap between interest and inflation not acceptable
20. October 2022
Interest rates have risen slightly, but inflation is soaring. And there is no end in sight. So what options do savers have to invest their assets in a reasonably protected manner and maintain long-term return opportunities?
These are gloomy times for savers. On the one hand, interest rates are rising only very moderately; on the other, a horrendous inflation risk is building up. Inflation is already more than seven percent, and annual averages of more than six percent are expected. The president of the German Institute for Economic Research (DIW), Marcel Fratzscher, even warns in a media report that inflation rates of up to ten percent could be possible in the event of an oil and gas embargo against Russia or a halt to deliveries of Russian gas.
“This can result in horrendous financial losses, because the money is simply devalued. Yields on ten-year government bonds from Germany were 0.58 percent at the end of March, and inflation was more than seven percent. This means that we are talking about a gap of 6.5 percent. Over the course of the year, we expect an average gap between interest rates and inflation of between five and six percent,” says Hannes Fahrnberger, CEO of the Insurance company Vienna-Life Lebensversicherung AG in Liechtenstein, which is part of the international holding company Vienna Insurance Group in Vienna. Vienna-Life is one of the recognized and established specialist providers of flexible unit-linked and unit-linked life and pension insurance solutions issued in accordance with Liechtenstein insurance law.
“It is therefore urgent to push ahead with asset protection. Almost three trillion euros in cash and bank deposits are held in checking and call money accounts by private households in Germany. This money is under concrete threat from rising inflation and other risks such as national debt. The aim must therefore be to find alternatives to saving in accounts that protect against the negative phenomena and open up opportunities for long-term returns,” emphasizes Hannes Fahrnberger.
This can only be achieved through broadly diversified and professionally managed investments on the capital markets that significantly exceed the average capital market return of just over zero on a sustained basis. For this reason, the focus is primarily on securities such as shares. According to Hannes Fahrnberger, it is better to accept certain fluctuation margins than to fundamentally accept considerable financial losses on the account. For this, a sufficient time horizon is needed to minimize equity risks.
The fact that patience pays off on the stock market is shown, for example, by the yield triangles of the Deutsches Aktieninstitut (DAI). Those who bought DAX shares at the end of 1996 and held them until the end of 2013 recorded an average annual increase of 7.3 percent. It goes on to say: “The DAX yield triangle shows that broadly diversified and long-term saving in shares has paid off over the past 50 years. Those who have saved in shares of the German DAX share index have participated in the price performance and dividends of the major German stock market stocks. For example, over an investment period of 20 years, it was possible to generate an average annual return of 8.6 percent on the money invested. In the worst case, the annual return was 3.3 percent, in the best 15.2 percent.”
This means: “Those who have a longer horizon can therefore rely on the success of their capital investment. Experience shows that risks are limited and opportunities increased, especially with a broadly diversified investment. The longer a securities investment runs, the lower the risk. So if you sit back and don’t let short-term downturns upset you, you can look forward to returns in the future. That is true asset protection,” emphasizes Hannes Fahrnberger.
For many years, the Liechtenstein provider has focused on the “Wealth Creation Policy” and the “Private Wealth Policy”: Both products are protected by the Liechtenstein Insurance Supervision Act and, by intelligently structuring assets, aim to achieve sustainable success in personal wealth management, capital protection and retirement planning. The funds available for selection include international equity and bond funds and ETFs on the one hand, and precious metal funds and money market funds on the other. “In this way, we create a broadly diversified structure for asset protection and asset development!” the CEO of Vienna-Life points out.