Whether it is for a trip or for the dream home, saving is always good and right: a virtuous habit that, thanks to planning and perseverance, allows you to realize small and large projects without sacrifice. Gimme5 – the digital solution for money management that allows you to set aside small sums, starting from 5 euros per month, via smartphone and invest them in a mutual fund – shows through three simulations the right approach to choose the solution to invest in based on the characteristics of your goal. Only investment, in fact, ensures that money does not lose value due to inflation and the costs associated with current accounts; important figures are not needed, but the prerequisite to generate value over time and define, for each objective,
For the correct choice, a series of characteristics must be considered: 1) time is the investor’s best ally. Under the compound interest rule, thanks to the accumulation of interest on interest, wealth grows more rapidly over time; 2) risk is an intrinsic characteristic of every investment and is determined by volatility, or by the movements that the price of a security shows over time; 3) the risk-return ratio establishes that, as the risk that one is willing to bear increases, the return that can be obtained will also increase.
To find out how much could be obtained by investing in a mutual fund, the average annualized returns are taken into consideration, expressed in real terms (i.e. net of inflation, equal to 2% per annum), which three underlying types have achieved in the last 120 years (1900 to 2020): 0.8% for short-term government bonds, 2.1% for bonds and 5.3% for global equities (Data from “Credit Suisse Global Investment Returns Yearbook 2020”, Credit Suisse, London Business School). The returns considered are clearly the result of the trend of that particular period (a long term of 120 years), moreover it is not possible to predict whether past results will recur in the future, however we are faced with good indicators of how these investments could behave.
You want to save for the trip of your dreams, the cost of which is 6,000 euros, a goal to be achieved in 5 years. When the time frame is relatively short, an investment solution with low levels of volatility is more suitable, as could be a fund composed mainly of short-term government securities and bonds. Therefore, based on these data, it turns out that, if we had limited ourselves to setting aside 100 euros per month for 5 years, at the end of the period, due to inflation, the 6,000 euros set aside would have a real value of 5,807 euro (with a loss of 3.2%). Conversely, if this periodic sum had been invested in a fund made up equally of government bonds and bonds, at the end of the period it would have been possible to obtain as much as 6,225 euros:
You want to save for an advance of 18,000 euros on the purchase of a house, a goal to be achieved in 15 years. Given the longer time span, it will be possible to choose a higher risk profile, in order to obtain a higher return. An example would be a fund made up in a small part of government bonds (25%), a major part of bonds (35%) and the rest of equities (40%). The latter are riskier instruments, but the medium-long term horizon allows to reduce the sensitivity to temporary moments of volatility. Resuming the above study, it turns out that, if we had set aside 100 euros per month for 15 years, instead of reaching the hoped for 18,000 euros, due to inflation we would have a real value of 15,556 euros (with a loss of 14 %). If instead,
The third goal is to set aside a more important figure: 36,000 euros to be used in 30 years, once retired. In this case, the choice of the fund can exploit even more the possibility of obtaining higher returns thanks to the equity investment: you could opt for a fund composed in small part by bonds (20%) and by shares for the remainder (80 %). Based on the above estimates, if you had set aside 100 euros a month for 30 years, due to inflation, at the time of retirement the sum of 36,000 euros would have a real value of 27,109 euros (with a loss in value of 25 %). If, on the other hand, this periodic sum had been invested in a fund with the aforementioned characteristics, at the end of the period, the amount of 77,110 euros would have been reached:
It is clear that choosing the right tool is fundamental to concretely reach one’s goal. Time plays a central role, for two reasons: if for a short period inflation can cause a limited loss, with increasing years it can lead to a significantly greater loss; as the available time frame increases and with the right type of investment, better and better results can be obtained (from + 4% to + 184%). It is not necessary to have a large sum immediately available, but also by investing a little at a time (in the examples cited it is about € 3 per day), excellent results can be achieved.
