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In this low interest rate environment, managing your wealth is becoming increasingly complex. The current low returns on savings products seem set for the long term. How can you make the right choices for managing your wealth?
Low interest rates, low yields: a gloomy context?
Interest rates are persistently low in many parts of the world. While this may be good news for people wanting credit, it is not helpful for investments. It is becoming increasingly difficult to find risk-free financial returns. And this trend looks set to continue.
What are the best type of investments?
When not zero or even negative, returns on savings products are now historically low. There is also considerable doubt as to whether interest rates will rise in the short or medium term. The majority of economists are not expecting interest rates in the eurozone to rise before 2023. But despite these uncertainties weighing on the markets, there are real opportunities for investors to grow their assets over the longer term. It is more important than ever to opt for an approach with a priority on risk control by entrusting your assets to a specialist. Discretionary management exemplifies this approach.
Over an entire stock market cycle (2005-2020), an investor who invested €100,000 in a discretionary management portfolio (Banque de Luxembourg fund management – balanced profile 1) in 2005 would have seen their capital almost double to €198,800 by the end of December 2020.
Discretionary management: what are the advantages for the investor?
First of all, you get the benefit of experienced active management, which focuses on preserving and enhancing capital and generating consistent performance over time. Over the long term, unlike investments in a savings account, the return will be significantly higher than inflation. With help from your adviser, you define the level of risk most appropriate for you, from the most prudent to the most dynamic. This ensures that your portfolio will be perfectly tailored to your investor profile. Discretionary management frees you from all the hassles of daily portfolio monitoring.
Investors often focus too much – sometimes exclusively – on the prospects for returns, overlooking the key component of risk. The notion of risk is reflected in volatility. Volatility measures the fluctuation in a portfolio’s performance. The higher the volatility, the greater the risk for the portfolio. During periods of market euphoria, investors often disregard the inherent risk in their investments, favouring trendy, speculative or lower quality stocks. Unfortunately, it is only when the market crashes that they become aware of the risk as they see the low resilience of this type of portfolio – and watch its value plummet or even incur permanent loss of capital.
How can you offset a capital loss?
When an investment (or whole portfolio) loses 50% of its value, it needs to grow back not by 50% but by 100% to regain its initial value. In other words, the investment has to double in value to erase the loss.
As the chart below shows, the heavier the loss in value, the greater the rebound needed to recover from the fall. This is why, within our various discretionary management solutions, our objective is to generate the most favourable risk/return trade-off for our clients.
This objective, which combines the search for a good return with the desire to limit risk, guides us in managing our portfolios. By focusing on quality assets, our portfolios have demonstrated significant resilience during the major market crises of the past decades.
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