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What exactly is investing?

What exactly is investing?

"You're standing in the shade today because someone else planted a tree" - Warren Buffett

Investing is a form of saving in which we set aside an amount and instead of spending it today, we invest it to get more in the future. Investments can vary in form, but it is important to study them carefully and remember that risk and return go hand in hand - the higher the potential return on an investment, the higher the risk associated with and vice versa - the lower the investment risk, the lower the return we should expect. Let's see some of the most popular solutions:

Deposit. One of the most popular investments in Bulgaria in the past two decades, but in recent years with zero or even negative returns due to the deposit fees introduced by banks. Zero to negative return combined with inflation make the deposit an inefficient solution in the new normal.

Bonds are a form of debt in which by 2020 more than 130 trillion US dollars have been invested. The two most common forms are government (issued by countries around the world) and corporative (issued by companies). Government bonds are considered one of the safest investment assets. The problem is that bond yields have historically been about or slightly above inflation in Bulgaria, and to invest in bonds an investor must have a fairly large amount, often over one million. Even on this scale, one investor would find it difficult to invest in a sufficient number of different bonds to spread the risk of the total amount invested (portfolio).

Shares. Generally speaking, owning shares from one company, we become co-owners in it, which means that we are entitled to part of the profits each year. Part of this profit we receive most often as a sum of money (bank transfer), which is called dividend. The company usually invests the rest of it in new business ventures, expanding its activities, increasing its efficiency and more. This reinvested part, if successful, leads to the increasing in future profits, which makes the shares more expensive. It sounds attractive, but to be successful investors in shares we need a lot of time to find promising companies, as well as knowledge and experience on how to prepare our analysis and decide whether to buy shares in this company or not. In addition, when investing, we will owe brokerage commissions and in order to distribute the risk well enough in a larger number of companies, we will need a considerable amount.

The mutual fund is actually a ready basket mainly of stocks and bonds and is managed by financial experts who monitor the markets on a daily basis and have the necessary knowledge and experience. Mutual funds follow different strategies, for example, some invest only in stocks in Europe, others can invest mainly in bonds, and thirds maintain both stocks and bonds, and these funds are often called balanced funds. Although with lower potential returns, bonds are needed to balance the risk. Thus, in practice, this type of funds solves not one but several of the problems investors face - we do not need to have in-depth knowledge about the markets, we do not have to do our own analysis and monitor them and we can distribute the risk well enough through this managed by professional "basket" even with a small investment. Investors themselves use protection from the Investor Compensation Fund and the legal framework, which requires that the assets in the mutual fund are isolated from the assets of the company managing them. All these advantages come at a price - mutual funds withhold a management fee. On account of this, the return on mutual funds in Bulgaria is exempt from tax.

Investment insurance. A popular choice in which we conclude Life Insurance, to which a mutual fund is attached. Thus, we invest in the mutual fund and at the same time receive coverage in case of adverse events, which add additional protection for us and our loved ones. In this way we ensure our peace of mind in the short and long term. We must keep in mind that in Life Insurance a part of our money will go to cover risks, such as disability or loss of life. This means that the amount invested in the fund will be lower than the total amount we contribute. In addition, this type of decision is of a long-term nature and upon termination in the first years, penalties and commissions may be deducted. The amounts we pay under Life Insurance can be used to reduce our taxable income.

Real Estate. Also a popular investment in Bulgaria, but with varying success in Western Europe and the United States. The Bulgarian real estate market is among the best performing ones in the EU and articles about its growth are often published in various media. This attracts the interest of people looking for an alternative to deposits. Like in other investments, there are pitfalls to consider. For example, according to official data, over the past 15 years, the growth in real estate prices on national level grew with inflation. This means that we must provide a good opportunity for rental income, but also time to service it, as well as to maintain the property in good condition. Also, we must take into account the much higher taxes on real estate for investment purposes, the requirement to declare rental income and to pay the relevant tax and especially the relatively large amount that we will need to make the investment.

Precious metals. Also among the popular investments on a global scale, when we talk about precious metals, we mainly think of gold. According to data by 2020, almost 46% of world gold has been invested. Gold is considered as a lifeboat in times of crisis, and when indicators show that we are entering such a crisis, gold price rises. However, when economies come out of the crisis, investors start looking for more traditional assets (mainly shares and, to a lesser extent, bonds), and the sale of the gold held often leads to a drop in its prices. It is important to take into account the difference between the buy rate and the sell rate - exchange traded gold has a minimal difference, while very often the purchase of gold in its physical form (for example gold bar) has more significant differences between buy rate and sell rate, which eats up returns. In addition, we must provide sufficiently secure storage.

When to start?

The correct answer is that it is never too late. The earlier we start - the higher the potential return can be and the easier it is to achieve our goal.

What is a risk profile?

The risk profile is an excellent tool for determining how much risk an investor is willing to take. In mutual funds, this usually means to what extent it is reasonable to change the value of the investment.

We want our customers to always feel relaxed and in their comfort zone. For this purpose, our distributor UBB Bank, in the process of consulting, prepares a risk profile of the client through several questions. Thus, each of our clients receives a portfolio, which fits his individual risk profile and expectations, while fully maintaining the comfort of the client.

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