What do we do with the money we save? This is a question that has no easy answer for many people. Given that inflation has returned to the path of normality (the European Central Bank’s inflation target is around 2%), just saving money would gradually impoverish us, given that inflation will gradually reduce the purchasing power of our money.
This is where we see the big difference between saving (the act of accumulating money) and investing (looking for the best possible yield on the money we accumulate, within certain parameters regarding periods, risk profile, etc).
To determine the best places to invest our money, we are going to analyze the main constituents in any financial planning process.
The time horizon is a variable of maximum importance when determining how we place our investments.
If the savings objective is close in terms of time to make the investment, we have to avoid opting for risk assets with short-term volatility and, moreover, choose high-liquidity vehicles. In this case, it’s advisable to choose products such as deposits or investment funds.
If, on the other hand, we are planning a long-term or very-long-term investment, such planning for retirement, we can choose products that incur greater risks but offer higher returns. Furthermore, in this case, liquidity is a less critical variable, as we are not planning to access the capital for a long period of time. In this case, we can choose savings insurance, pension plans, insured employee pension plans or a direct investment via the stock exchange.
The risk profile is closely linked to the timescale of the investment, but there is also a more subjective component that is important to consider: There are people who are more risk averse than others in the same circumstances. There is a principle in the investment process that aspiring to greater returns always involves exposure to greater risks. We can define three risk profiles:
- Conservative investor: Ensure that capital is preserved whilst receiving modest returns. They invest in deposits, treasury bonds, and investment plans, or fixed-income pension plans.
- Moderate investor: These investors are able to assume controlled risks by trying to beat returns on the asset free of risk. They invest in funds and mixed pension plans and moderately accept direct investment through the stock exchange.
- Aggressive investor: These investors aim to maximize returns, and do not mind accepting potential losses, especially over the short term. They invest in funds and pension equity plans, stocks, ETFs and derived products.
The financial-fiscal return refers to the ultimate profitability of an investment once all the financial obligations it involves have been complied with. This can mean that two investments with equal financial profitability result in a very different net result, due to fiscal advantages or disadvantages over the other.
Every product has its specificities, which are important to take into account. These include:
Pension plans and guaranteed employee pension plans have tax benefits for contributions. They allow you to reduce your personal income tax base for contributions up to a maximum of 8,000 euros a year and thus reduce the amount of tax you pay.
Transfers between investment funds have no fiscal impact whatsoever, this being deferred until the shares are reimbursed. This makes it possible to change strategy indeterminately, without having to pay taxes on capital gains.
Life annuities offer considerable fiscal advantages when they are redeemed. Depending on the age of the policyholder at the time of redemption, and provided at least 5 years have elapsed since its constitution, it will be taxed as capital gains for a percentage of the income received. Insured persons over the age of 70 only pay 8% tax on this income.
Two investment tips that apply in all cases:
- Diversification: The principle of ‘not putting all your eggs in one basket’. Diversification exponentially reduces the risk by spreading the investment across different assets and minimizing the impact of the potential negative behavior of any one of them.
- Invest regularly: This is another way to reduce risk. Do you make contributions to a pension plan or investment fund? Do it with small contributions month to month, instead of one annual contribution. This way you will avoid the risk of buying shares at a single price that might be unusually high, and you will instead get the average price over 12 monthly contributions. losses.