Bank deposits do not increase the purchasing power of your savings!

At the current record-low interest rates, smaller deposits, which are also the most common, actually bring losses to their depositors. Interest rates on deposits in the five largest Bulgarian banks, which control more than half of the savings of domestic depositors, are slightly above or below 0.5%.

Or for a deposit of 1000 BGN, you will receive 5 BGN after one year (according to the offers on the deposits at the moment), and by deducting, say, 2 BGN monthly fee for servicing your account, you will receive the amount of 981 BGN per year, or you lost 19 BGN!

And that's just the tip of the iceberg…

To realize how low interest rates are, I'll give you something to think about. Under Rule 72 *, at current deposit interest rates of around 0.72% on average, it will take you 100 years to double your savings (see the explanation of the financial rule below).

However, there is a much more serious problem than having to wait 100 years (and probably not live) to see your funds double. And it is - inflation.

Inflation in Bulgaria is at levels of over 3% on an annual basis in recent months (at a level of 3.5% in May on an annual basis, according to the latest data). In other words, it actually eats away at the purchasing power of your money, even after charging interest on deposits of less than 1% per year.

Going back to our example - with long-term inflation of 3% and interest rates on deposits of 1%, after 72 years - estimated savings of 10,000 BGN today will have turned into 20,000 BGN (based on the "rule 72" ). However, they will be able to buy goods and services, as much as you can buy today for only 4,000 BGN. Or you will lose about 60% of their purchasing power just because you kept them on deposit, in an environment of high inflation.

Of course, it is good for savers to keep in mind that the current state of interest rates on deposits cannot simply be extrapolated over a long period of time. It is unlikely that these interest rates will remain at record lows for decades. History has shown that deposits can sometimes be a good investment alternative, especially in difficult times for financial markets. Still, savers need to start from now and with a vision for the next few years… And given the ECB expectations to keep interest rates negative at least until the middle of next year and the record deposit raised by banks, it is unlikely to have an increase in interest rates on deposits in Bulgaria.

History also knows much more convincing examples of the negative impact of inflation on savings over longer periods of time.

If you do not believe, turn to the world's leading economy - the USA. For over 50 years, inflation in the United States has been such that 1,000$ today can buy as many products and services as 100$ could buy in the 1950s!!! And now imagine how much the wealth of an American who did not take the right action to protect his savings has melted…

Fortunately for Americans, they have long understood the key role of financial markets as a defender of inflation. Unfortunately for the Bulgarians, when they realize it in another 20 years, their money may have already melted!

In order to protect yourself from the negative effects of inflation described above, there are two options you have. Spend those 10,000 BGN today if you need any more significant purchases or invest in assets that at least you can hope will protect you from inflation.

How to protect yourself from inflation?

I accept that you have made all the major purchases you have planned, but you still have free funds. And it makes perfect sense to ask yourself “What are the assets that could best protect your hard-earned funds from inflation over the years?”

To answer this question, I will look at the historical return on the best investment assets in the long run.

Of course, first of all, investors should be aware that the historical return on an asset is by no means a guarantee of its future.

For a period of about 90 years, the best performing assets are stocks. They have brought investors a return of over 10%, which has not only protected them from inflation, but in practice has increased the purchasing power of their savings.

Note that this was a period in which many cataclysms occurred - the Great Depression from 1929 to 1932, when stocks lost more than 90% of their value; WWII; the 9/11 terrorist attacks; many other wars between World War II and the year 2000; the financial crisis of 2008, etc.

All these events took place in this period of time and yet the shares returned 10-11% per year, which makes them the asset with the highest return. Moreover, the situation becomes even better for investors if they start looking at investments in the financial markets in the long run.

According to a number of studies, if considered in a one-year plan, the shares are speculative. If you look at a period of five years - over 85% of these horizons have brought a positive return for investors. With a fifteen-year horizon, there is not a single period that has been in the red. So, contrary to many people's beliefs, investing in financial markets is not a "casino."

What are the next most profitable assets?

The next investment class, which best protects investors from inflation in the long run, is again related to financial assets. But in this case it is a balanced portfolio between stocks and bonds.

Distributed equally between the two assets, such a portfolio brought savers an average return of 8% per year for over 90 years (on US markets). Bonds alone have returned 5% purely to investors since the 1930s, which is also an excellent result in itself.

By comparison, investment in deposits in the United States and other developed markets had an average annual return of 3% or in other words just as much as inflation in those markets. That is, the savings did not capitalize and did not increase in value, but instead protected the savers from inflation during this period.

The only thing left for investors to do is to adjust their investment goals - risk and return with those products that best meet their requirements. Those targeting financial markets should also be aware that, although they have historically the highest returns, stocks are also the assets with the highest level of risk (measured by volatility) compared to other investment markets alternatives.

If you liked the material and want to look for alternatives for your savings - see how you can do it by investing in Compass Global Trends.

COMPASS INVEST JSC- Your personal Investment Advisor.

Compass Invest JSC is licensed management company by the Financial Management Commission since 2006.

Important information: You should keep in mind that the value of the shares and the income from them may decrease, profits are not guaranteed and there is a risk that you will not return the full amount of the invested funds. Past performance is not a reliable indicator of future performance, unit prices and their returns may decrease as well as increase, and investors may not receive the amount they originally invested. No profits are guaranteed. Investments are not guaranteed by a guarantee fund set up by the state or another form of guarantee. The prospectus and the document with key information about the investor can be obtained on paper and/or electronic media in Bulgarian in the office of the management company on the address: Sofia, 19 Georg Washington Str., 2nd floor every working day from 9 am to 5 pm and on the website of Compass Invest JSC.

* "Rule 72" is a financial rule used to calculate the approximate time required to double the value of an investment in an asset. The time required for this is obtained by dividing the number 72 (hence the name of the rule) by the expected annual return on the asset.