How much do you get for having your money in the bank?
Probably nothing, niets, niente, nada, nista, intet, nic, ei mitään, rien, nicht, nada…
And you get nothing only if you are lucky.
I recently got a letter from my Dutch bank saying how it will start charging a negative 0.5% interest rate on certain amounts.
ABN AMRO – negative interest rate – Source: Reuters
Investing is pretty simple. Investing fundamentals are always the same and it doesn’t really matter whether you are from Europe or not. The most important investing fundamentals are:
- Managing risk – Be it through portfolio diversification or knowledge (the more knowledge you have, the less risk you can take as you’ll find the low risk/high reward investments).
- Being realistic about what an investment opportunity can fundamentally deliver and about its risk.
- Understanding the margin of safety concept – a margin of safety means that whatever happens you do well.
Let’s apply these simple principles to the biggest investing issues and opportunities for Europeans.
1) What am I already invested in?
Let’s reverse engineer investing from Europe and start from what you are already long, already invested in, if you are from Europe. To protect yourself from whatever might await Europe and the euro in the future, you might want to first diversify away from what you already have.
Most Europeans are legally obliged to put part of their salary into a pension fund. Unfortunately, pension funds invest like pension funds. They should offer a safe but small yield over time.
A look at the largest investments of my Dutch pension fund ABP shows that I am long government bonds, some real estate in the Netherlands, and the largest global corporations.
European Pension Fund Investments – Source: ABP
Thus, most pension funds hold a globally diversified portfolio and what we should expect from it is a small yield, hopefully above inflation and management costs if we are lucky. But something should come out of it at some point in time.
Your government – social security
Alongside your private pension fund, when you reach 60, 65 or even 67, if you are still alive, your government will probably give you a pension in the form of social security.
However, demographics are not looking good in Europe due to the aging population, government debts are piling and who knows how will Europe look like in 20, 30, 40 years.
Europe Government Debt Levels – Source: European Commission
While things go well and are stable, all is fine, but when things turn bad, reality might not meet your expectations. Greek pensioners have not been happy with what has been going on there over the past decade.
Greek pension cuts – Source: Greekreporter
We don’t know what will be the paying capacity of individual European governments down the road, but that is something, alongside most pension funds already owning government bonds, we are all long.
Home – possibly???
Further, you might be one of those that own a home. Therefore, you might be long European real estate already.
European home ownership – Statista
But then again, your home isn’t likely to produce cash flows, which is what you want to get from investing.
Euro – if you have some money to invest
And the last thing you are probably long, the euro, the currency, sitting on your bank account, earns no yield and is surely losing from 1% to 10% on inflation depending on what you are buying. If you are saving for retirement or a home, the inflation rate is much higher.
The above basket of European investments consisting of European bonds, stocks, government exposure, real estate and cash could be considered simply being long Europe with no diversification. If a government gets into trouble, bonds will follow and governments get into trouble when economies slow down, thus the stocks you own would fall too. And, if governments get into trouble, the euro would too be in trouble and your pension fund too, and even real estate might be hit.
We can say that we Europeans are pretty long Europe and every investment is highly correlated, not diversified at all.
So, where to invest and what to do? I’ll tell you how am I diversified and hedged (protected from downside) as a European living in Europe and you’ll see how that fits your requirements, risk appetite and financial goals.
The core of this article on how to invest from Europe will be diversification and inflation protection. Given the environment, we can’t know what will work and because of the money printing going on, inflation is a certainty.
2) Stocks – or better to say businesses
When compared to what you get from your bank on your cash, investing in stocks that represent a part of a business seems a very smart thing to do. The Royal Dutch Shell (NYSE:RDS.A) (NYSE:RDS.B) stock gives you a high dividend yield, but it gives you also a risk, 100% related to oil.
Stocks are always very volatile because the majority of people see it as a gambling place and not as an investment place. However, if you look at it from an investing perspective, you can be very well rewarded over time.
My message is simple, have part of your portfolio in good businesses that will keep delivering over time. One example is the Visa (NYSE:V) stock that I recently did. I’ll make an analysis about oil soon so please subscribe.
If you manage to not worry about stock prices, but focus on the businesses that you own and the yield those businesses produce over time, you’ll do good and much better than by keeping your cash in a bond or on your bank account.
3) Real estate
An option is to invest in is real estate, another asset class that is still comparatively cheap. The naysayers will immediately say how real estate prices can drop and you can lose your money. My answer is that it is definitely a risk, but not a certainty like it is the case with your cash. Plus, as it was the cash with stocks and the businesses you invest, the question is whether you are investing in real estate like a speculation, expecting it to go up, or you are investing in it for the cash flow it will bring you.
Real estate yields in Europe are still much higher than what bonds offer and rents are usually adjusted up for inflation.
Europe real estate investing yields – Source: Global Property Guide
On top of the yield, given the ECB is printing money hand over fist and it is impossible for it to stop printing because the European economy, European governments and even the population is desperately in need of free money, it is likely that the money supply will continue to grow and that inflation will continue to be present within financial assets. So, owning real estate is also a form of inflationary protection.
ECB bond purchases – Source: ECB
The money the ECB produces through bond purchases and negative interest rates flows towards a higher yield – thus into real estate and financial instruments like stocks.
The result of the above is that home prices in the Netherlands have increased 35% in just four years while prices in Amsterdam surged much more as there is limited supply within the canals and high demand thanks to demographics and tourism.
Real Estate Prices Netherlands – Source: CBS
Perhaps there will be some temporary downturns, but given the “whatever it takes” monetary policy, it is more likely to see real estate prices double in the next 10 to 20 years than to see them fall. So, real estate is a way to protect your wealth and get a yield.
I made a rational mistake of selling my real estate in the Netherlands in 2019, but that was mostly for personal reasons as we took the equity out to buy something new as we moved out of the Netherlands. More about that in my real estate video. We still have the cash, but it will hopefully be deployed during this year.
Just a warning here, investing in real estate has its risks and you really need to do it properly. If you do it properly, you treat it as an investment and you don’t speculate. Thus, you focus on the yield from the property and you are happy with it, over the long-term, you’ll probably do very well. Also, keep in mind the three core rules when it comes to investing in real estate: location, location and location. Add demographics, supply and demand analysis, tourism, students etc. and you’ll get the picture of where to and where not to invest.
And, real estate investing has another little perk.
4) Mortgages or loans (for whom do you think those low interest rates are?)
Central banks are forced to keep interest rates extremely low because governments and corporations are extremely indebted, especially in old fashioned industries or countries where they try to do whatever to keep up with growth stocks or emerging markets.
My brother is looking to buy his first home in the Netherlands and the bank offers him an interest rate of 1.2% variable or a 1.47% fixed for 20 years. Those yields are insanely low where a fixed rate mortgage might give you another hedge against possible inflation given that your payments remain always fixed. If there is inflation of 5% to 10% in the future due to loose monetary policies, imagine how would you feel owning a 20-year fixed mortgage of 1.47%? (unfortunately, available only is some countries).
If you can borrow at 3% while the rental yield is 4% where the rental yield will only go up while your payment remains fixed forever, to me, that is a good risk versus reward investment opportunity.
Keep in mind there is always risk and you never know what can go wrong. The key to lower your personal financial and investment risk is to be diversified. Another way to diversify is to take a look at commodities.
Commodities are resources where many are of limited supply while demand keeps on growing due to global economic growth. Global consumption of materials just hit 100 billion tonnes and there is not a sign that demand will stop growing in the future.
Global material consumption – Source: Guardian
Also, commodities should give you protection against inflation. Many immediately think of gold, an asset class with special characteristics but there are many other commodities you can invest in from copper, palladium, nickel to fertilizers or salt.
Whatever might be the commodity that best fits your portfolio, the key to understand is that commodities will always be volatile and therefore one has to have a clear strategy before exposing a portfolio to commodities.
If I take the example of gold, it has been extremely volatile over the past 10 years, going from below $1,000 per ounce, getting close to $2,000 in 2011, falling down to $1,000 and going up to above $1,500 now.
Gold price – Source: FRED
Perhaps the best strategy when it comes to commodities portfolio exposure is a constant balancing strategy. Let’s say you put 10% of your portfolio in gold, for example, and when it becomes 12%, you sell 2%. In case it falls to 8% you bring it back up to 10%, etc. Given the volatility of the commodity, you’ll constantly get a return from trading and give balance to your portfolio. In case gold is expensive while stocks are cheap, you might want to use the proceeds from one to add to the other.
In any case, it is likely that over the long term, a commodity will do better than cash by just preserving its value.
I personally don’t have gold or other commodities, but I have businesses that produce them which is a way to combine being hedged with commodities and owning a business. Here is a discussion about investing in copper.
Investing from Europe – diversify and always mind the fundamentals
You cannot know what will happen, so you must always analyse the risk and reward of each of your actions. It is highly likely the euro will continue to lose its value due to political issues, constant money printing, the historical power of the dollar, the growth in other economies while Europe’s demographics stagnate at best and most importantly negative interest rates and constant money printing.
We can only imagine how will European politicians and monetary policy makers react when the first real economic issues hit the global economy and push the European economy into a recession – I assume there is going to be a lot of money printing. The best way is to be prepared where if it happens you are ready, if it doesn’t happen, you are still ok as you own good investments in the form of good real estate, good businesses and good commodities.
Now, don’t diversify just to diversify and buy whatever in Emerging markets. Learn about your options and then invest in what you understand that is better compared to what you have now in Europe and in case Europe gets into a crisis, could be much better. Buying something, without a margin of safety or without good fundamentals just for the sake of diversification might be a costly thing to do. Remember, wherever you are, you have to apply common sense to investing.
For those that prefer watching, here is the video discussing the above.
For more insights into how to invest, how to take advantage of the situation and not be taken advantage of – please subscribe!
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.