Investment opportunities in Latvia are quite wide – from simple conservative investments in banks, which have recently become more and more profitable and with their return may soon even outpace inflation, as well as succumbing to the lure of stock exchanges. The latter promise to yield more in the long term than simple conservative investments, but such investments are significantly more risky. Therefore, for those who have money but no investment experience yet, it would be safer to start with either conservative investments that provide a fixed yield, such as bank deposits, or bonds. Riskier strategies can also be tried through investment professionals. It could save more in the long run than with conservative methods.
Deposits and savings bonds
In financial markets and economics, probably only the rare process can be unambiguously assessed. This is definitely not the case with the rise in interest rates by central banks. It both takes and gives from the population. Moreover, it is even difficult to judge which side the scales are on. For example, do the residents of Latvia gain more financially with their more than 10 billion worth of bank deposits than they lose with six billion euros worth of loans from credit institutions at the expense of more expensive loan rates. Since deposits, unlike loans, do not have variable rates, initially the residents were clear losers. At the moment, it can no longer be said with certainty, as bank deposit contracts are being switched to higher yield rates. In any case, it is clear that for those with money left over, the yield becomes more and more attractive. In some commercial banks, the yield of the deposit rate can reach and even exceed the 4% limit.
However, government bonds with similar yields can be more financially beneficial because there is no income tax to be paid on the gains made. The easiest way to take advantage of this type of investment is to buy Latvian government savings bonds, which can be done relatively easily on a website specially dedicated to this purpose. In the offer published on Saturday, the yield of government savings bonds for 12 and 36 months reached 4% per annum. The good news is that even in the long term, you can get a very solid return. For example, 10-year savings bonds have a yield of 3.95% per year. On the one hand, it is frozen money for a long time. On the other hand, this is a good way to save money for various children’s future projects, such as studies, or to build your own miniature retirement fund.
Outpace inflation
It is important to emphasize that, in the long term, the return on this investment could outpace the inflation rate, perhaps even twice. At the moment, it also seems that a 12-month investment with a 4% return per year could be sufficient for the value of the investment to grow faster than consumer prices, as inflation continues to fall rapidly at the moment and even a temporary deflation cannot be ruled out sometime in the next year.
In the long term, it is probably worth allocating funds for investments in pension level 3. This investment allows you to recover part of the personal income tax (IIN) paid. For example, if someone finds an opportunity to pay 1,000 euros a year into a pension at the 3rd level, next year he will receive back from the state a portion of the personal income tax worth 20%, or 200 euros. In their advertisements, banks mention VAT refund as an advantage, but do not say that this tax will have to be paid in full when receiving a pension. However, the benefit of the saver is also unquestionable, because the 200 euros that will be received next year will have a completely different level of purchasing power than the same 200 euros in 20 years. Thus, by receiving a tax refund now, but then paying it off from the pension savings decades later, the saver is undoubtedly a winner at the expense of the potential increase in the cost of living in the future. In reality, the potential saver has the option of using the compound benefit method of pension level 3, especially if there are still decades until retirement. For example, you can invest a few tens of euros every month in pension plans with a relatively higher risk profile, where 70% or even all 100% of pension plan assets are invested in the stock market. In the long term, the value of the stock market grows faster than conservative financial instruments. Consequently, more will accumulate over the decades. In addition, as practice shows, listed companies also benefit from inflation, as their profits increase, higher dividends are paid, and the share prices also receive an additional growth stimulus. Thus, in the stock market-oriented financial instrument, risking small investments, you can accumulate a lot in the long term, and get additional profit at the expense of VAT refund.
The yield of 12-month savings bonds of the Latvian government
The date
Yield per year, %
9/2/2022
1,35
10/3/2022
2,65
11/7/2022
2,85
12/5/2022
2,9
1/2/2023
3,25
2/6/2023
3,4
3/6/2023
3,75
4/3/2023
3,55
5/2/2023
3,85
6/5/2023
3,95
7/3/2023
4,1
8/7/2023
4
9/2/2023
4
Source: Savings bonds.lv
2023-09-04 02:15:28
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