Useful suggestions on how to invest and earn

Saving takes discipline. With each salary increase, spending also tends to adjust quickly. We are sure of one thing - the earlier you think up and implement your savings formula, the better. Below are some practical ways to build your savings:

1. From the salary supplement
Set aside, for example, half of each increase in income. Respectively, if the monthly income increases by 100 euros, then 50 euros will be allocated to savings. Bonuses, dividends or other unexpected income can also be diverted to savings.

2. Deposit in another account
Set aside a certain amount every month (for example, 10-15% of salary), which you transfer to another bank account that is not linked to a payment card, so that there is no temptation to spend this money on daily needs (or non-needs).

3. Do not make unnecessary purchases
Sometimes a large portion of the daily income is spent on large purchases that are more in the "want" category than the "need" category. At this point, you can hold on and postpone the purchase amount in a savings account.

4. Reduce costs
Many small things often make up the majority of your monthly expenses, rather than a couple of big purchases. Average your bank statement or record your monthly expenses and identify which are the expenses that you could do without and transfer that amount to your savings account.

Many people have struggled with saving, and as a result, there are a large number of resources out there that offer advice or help with saving. A couple of the most interesting ones are the Facebook group FMU.lv (Financial Peace University) and the Swedbank budget planner (in the internet bank). SEB Banka also offers an interesting product – Digitālo krājkasi, which allows you to round up the amount when making every purchase with a card, transferring the amount of the rounding to the savings account.

Good investing is boring

Before starting any investment activity, it is important to prepare for it. Preparation is everyone's own homework, for which we will try to provide the necessary information and advice with the help of this investment guide. The preparatory stage includes reflection and decision-making on the following topics:

• Defining the goal - why am I investing? Am I building long-term savings, a short-term reserve, saving for a bigger purchase or protecting against inflation? Setting a goal will greatly influence your future choices. For example, if you want to invest for old age and you are now 30 years old, then your choices in investment instruments would be radically different if you were saving for the purchase of a house, which you would like to do in three years;

• Understand your risk tolerance and interests - know yourself. Understand, first of all, how cautious you are - are you afraid of risk or are you on the contrary - go for it. Investment risk arises both from the possibility of losing an investment and from rapid fluctuations in its value. The formula always works - the higher the risk, the higher the potential profit. Also, define how much time you would like to spend creating your investment portfolio, as well as whether there is an area of investment that particularly excites you. For example, if you are interested in technology and technology companies, investing in shares of such companies could be not only an investment, but also an extension of your interests and hobbies. An interesting tool for determining your investment risk profile is offered by the Wealthfront robo-consultant (questionnaire in English);

• Create your own investment plan - prepare a strategy. In accordance with your goals, interests and risk tolerance, develop a plan in which investment assets you will invest your funds. Also think about how you would like to make these investments - gradually/regularly or by accumulating a larger amount and making investments at the same time. Developing an investment plan and strategy is a broad topic, and we describe it in a separate article;

• Understand taxes and form - will you invest as a private person or a legal entity? Think about how the income from your chosen investment plan is taxed. Do you have to declare them yourself or are they withheld before payment? Can I write off the loss when my personal tax is calculated? A tax-efficient investment vehicle for purchasing public financial instruments (bonds and stocks) is an investment account. This simplifies the declaration of income and allows you to effectively postpone the payment of personal tax. But keep in mind that from an investment account (at least at the moment) you can't invest in, for example, crowdfunding platforms. For investments over EUR 100,000, investments can be made more conveniently through a separately established company in Latvia. This allows the payment of taxes to be deferred until the profits are paid out in dividends. Unlike an investment account, this tax deferral will apply to all types of investments (not just public financial instruments). Minus – in order to purchase financial securities, you need to purchase an LEI code, and additionally cover accounting and other administrative costs.

• Provide infrastructure - prepare yourself technically. To start investing, depending on the chosen investment strategy, it may be necessary to open securities accounts, secure remittance limits and perform other preparations.

You can think of answers to these questions, write them down or discuss them with someone ( including us ). In our opinion, the main thing is to do this homework before starting the investment, in order to reduce unpleasant conclusions and lessons during the investment process.

This article will be prepared soon.

"Don't put all your eggs in one basket" is one of the most frequently heard pieces of advice for investors, which in other words means diversifying your investments. This is important so that when some of the invested capital loses value at some point, another investment may be profitable. Diversification allows you to maintain the profitability of the target and reduces the risk of suffering losses in the event of failure of an individual company. In addition, investment diversification is important not only when investing in stocks, but also in bonds, venture capital and personal loans .

A well-diversified stock or loan portfolio should have at least 20 investments with companies representing different industries. This conclusion is also confirmed by Capitalia's research on investment returns for investors who invest in Baltic companies using Capitalia's financing platform.

Accordingly, since 2017, when Capitalia was the first to offer investors to co-finance loans for various companies in the Baltic States on a specially created financing platform, the average return on loans during these years on the Capitalia platform has been 12.3%. Loan losses in annual terms have been below 0.05%. Taking into account provisions for bad loans, only three of the 293 investors surveyed had a negative return. All investors who had invested in 10 or more loans showed a positive return. Only one-third of investors with fewer than 25 loans in their portfolio have been able to show better than average returns. Two-thirds had a worse return.



This confirms - the greater the number of loans of the investor, the smaller is the fluctuation of its monthly return (the risk of investment return decreases accordingly), while the return approaches the average. Investors who have a smart loan portfolio with more than 25 companies, but whose returns are noticeably below average, have financed a deal with a significantly higher than average amount.

Therefore, for successful investments in both financial markets and loans, we recommend dividing the investment amount into equal-sized investments in at least 20 companies, preferably more.

A securities account is required to start investing in stocks. Therefore, the question of where to open it is relevant. A securities account can be opened not only in banks, but also in specialized brokerage companies. Choosing an account in favor of one institution or another can be helped by the ease of creation (it is easier to open a securities account in your bank), the functions of securities purchase services (available information, ease of use, reports), as well as the range of offered securities (it can be significantly different). However, for a number of investors, the most careful attention should be paid to the brokers' price list page.

In order to demonstrate the influence of brokerage commissions on the return on investment, I have compared the amount of securities transaction commissions in 3 banks in Latvia and 2 international brokers. At the beginning, I summarized in the table the brokerage transaction commission used in this research for the purchase of shares, based on the data on the websites of these companies (January 25, 2024). I have simplified the price list information as much as possible:

For the sake of simplicity, let's assume that I buy shares of two companies from each broker - one company listed on the US stock exchange and one Latvian company. I would then sell this investment after 1, 5 or 10 years, again applying the commissions of the paper transaction. Also, I assume that every year the share I bought would increase in value by 10%.

My first investment of EUR 100 is in the US listed company Coca-Cola. I have been lucky and managed to buy 2 shares exactly for the planned investment amount. I have summarized the commissions I paid to the brokers for this transaction and how they affect the total return on my investment in the following table:


The first conclusion that can be drawn is that the amount of commissions has a very large impact on the return if I sell the stock relatively soon after buying it. Thus, when selling after a year, my investment would have brought me losses in all three Latvian banks as a result of the Coca-Cola brokerage commissions. Also, in the long term, share purchase commissions leave a very significant impression. The difference between the return on investment when buying a security from the most cost-effective broker (Interactive Brokers) versus the most expensive (Luminor) over a 10-year period is almost 30%.

What if, instead of Coca-Cola, I bought EUR 100 Virši-A shares, which are traded on the NASDAQ Baltic exchange (I would get 23 shares:

It is difficult to rationally recommend investing in individual stocks. In any case, it is not worth doing with the main goal of beating the average market return, because it is likely (statistically) to fail. Roughly speaking, only 1/6 of professional investors who choose individual stocks can outperform index funds over the long term. On the other hand, more than 50% of private investors lose money by investing in individual stocks. Unfortunately, we have also experienced this statistical probability on our own skin. However, buying stocks is more interesting and intellectually challenging than buying, say, index funds, which is probably why many investors (yes, sometimes us too) choose to do so.

It should be taken into account that when buying and selling individual shares, you may have to pay a lot in commissions for the execution of transactions, which will reduce the return, so it is especially important to carefully and thoughtfully choose a broker. When trading shares regularly, the biggest earners are brokers, so the only recommended scenario is to buy these securities with the aim of holding them for a long term (10 years and more). When investing in individual shares, it is very important to create a portfolio with at least 20 companies so that it is sufficiently diversified. This will mean that the failure of one or even several investments will not have too negative an impact on the overall investment return.

PLUSES:

• Investment can be started with very small amounts
• The investment is very liquid and can be realized quickly and without significant costs
• Investing in stocks is a gamble
• There is potential for big profits if you are lucky with your stock selection

MINUSES:

• In the long run, you can get better returns by investing in index funds than in individual stocks
• You should do your own research on each company
• It is more difficult to create a diversified portfolio and, as a result, the risk of investment loss is greater

When investing in shares, we have come to the following principles, which we try to follow: (1) buy shares when others mostly want to sell them; (2) not to invest more than 5-10% of your savings in individual shares (instead choosing index investment funds); (3) invest only in those companies whose operations we can understand and evaluate ourselves, and (4) invest only with a long-term (10-year) perspective. Also, we definitely avoid companies with questionable corporate governance standards, which unfortunately disqualifies some companies listed in Latvia.

Every time you make a decision to buy shares of a company, you also have to make an assumption about whether the price of this share is "good". There are a number of different stock price valuation models, from the simple to the complex to the absurd. However, unlike a math problem, there is no right answer for a stock price. Therefore, there can be many different and even contradictory opinions among experts about the true value of each share.

The easiest way to start thinking about the value of the company is to calculate how quickly such an investment would pay off (in English, this indicator is called "price earnings ratio" or PE ratio). To estimate it, simply divide the company's stock value by the last year's earnings. If it is assumed that the profit of the company will not change in the future, this indicator shows how many years the company will recoup the amount that has been used to buy these shares.

For example, the fuel and other energy resources trader Virši, listed on the NASDAQ Baltic exchange, worked with a profit of EUR 0.69 per one company share in 2022. On the other hand, the share price on February 28, 2023 was EUR 4.45. Dividing both values, it follows that Virši investors, who would buy the company's shares now, would recoup their investment in 6.45 years. But is the payback in 6.45 years good or not? For comparison, at the beginning, you can calculate what the following rate of return is for some other stocks traded on the stock exchanges of the Baltic countries:


According to this calculation, the investment of Madara Cosmetics will pay off for investors in more than 50 years, while HansaMatrix will "eat" the loss of the entire investment in 7 years. On the other hand, the energy company Ignitis Grupe, which formally works in the same sector, offers a twice shorter payback period than Enefit Green. If you do not want to calculate this indicator yourself, then this value is calculated as "Price/Earnings" on the NASDAQ Baltic website for each company in the Fact sheet section. If the ratio is marked TTM (trailing twelve months), it means that the company's profit in the last 12 months, not the calendar year, has been taken into account.

By comparison, the average payback period of companies included in the Standard&Poors index of the 500 largest companies of the US stock exchange is about 20 years, while the average payback period of the largest companies of the NASDAQ technology companies is around 25 years.

Payback Years, S&P 500 Index, US (Last 10 Years)


The payback ratio can be a useful tool to quickly determine how a company is valued compared to its more direct competitors or the industry as a whole. Average returns for each sector are easy to find for the US stock market. For example, as of January 2023, the average score for biotech companies in the US was 81, while for woodworking companies it was 9. Payback years within the same industry usually do not differ much, and therefore this indicator is usually used to determine how a company is valued compared to other players in the industry. The main advantage of this ratio is its ease of calculation and convenience in order to use it as a benchmark for comparison with other similar companies.

In turn, these are some of the main limitations of the payback period ratio:

• Subjective interpretation. It does not calculate the value of the business, but indicates what other investors are willing to pay for the business right now. How to evaluate it, whether the calculated indicator indicates a good company price or a bad one, is again up to each individual investor;
• Limited view. Not suitable for loss-making businesses. Does not take into account dividends, financial obligations of the company, actual cash flow, historical or future growth prospects of earnings and many other financial factors;
• May lead to false conclusions. Just as no two people are identical, no two businesses are exactly the same. There may be very good reasons why companies in the same industry may have completely different payback rates.

Accordingly, the payback years indicator has its advantages and a number of disadvantages, so it is worth using it for purely indicative and generally comparative purposes. Why are there such differences between the payback years of industries and companies and what are they justified by? Why is it better to buy Madara Cosmetics shares with a 53-year payback period than a rental apartment? More on this in the next article, where we will look at how the share value is affected by the company's profit growth.

* The picture of the article is from the publicity materials of Madara Cosmetics, SIA

Mutual funds pool investors' money and invest in stocks and bonds. The main advantage of mutual funds is the diversification of investments, which means that possible problems with an individual investment do not leave a significant impact on the overall return. The investment baskets created by the funds can have different specializations - by type of securities (shares, bonds), geography (USA, Europe, worldwide), industry (technology, banking, real estate) and many others. For almost all investors, investing in mutual funds is a much simpler and smarter way to invest than building a portfolio of individual stocks or bonds.

The main thing worth remembering is that mutual funds can be divided into two broad categories:

1. Index funds. These funds closely replicate a selected stock or bond index, such as the S&P 500 stock index in the US. The manager of such a fund does not make any individual investment decisions;


2. Active funds. These funds are managed by financiers, actively evaluating investment opportunities, investment decisions and otherwise actively managing the investment portfolio.

Because index funds do not need to research or manage investments, they are able to offer significantly lower management fees. Annual management commissions for actively managed funds are usually in the range of 0.5%-1%, compared to 0.07%-0.4% for index funds. Despite (or because of) higher management fees, in terms of returns, based on a series of studies, only about 10% of active funds have been able to deliver better returns than comparable index funds over the long term.

As a result, in our opinion, it is obvious that it is more appropriate for a rational investor to invest in index funds, including making sure that the 2nd level pension savings is also invested in the most profitable index fund plan. Since it's easy to get lost in choosing index funds, we've also created an article on how to easily build your own index fund portfolio.

Since there is no good offer for the Baltic countries index fund, the easiest alternative is to create it yourself. Swedbank offers commission-free trading for all shares of the Baltic Stock Exchange. This means that every investor can easily build a stock portfolio ignoring brokerage costs. Likewise, the holding of securities up to EUR 100,000 is now free of charge.

As a first step, a table of all traded companies can be compiled on the exchange's website. For example, Google Sheets allows you to insert a formula (=googlefinance([ticker],"marketcap") into a table that calculates the market cap of each company. Companies can then be sorted by their market capitalization and calculate their proportion in their index based on each company's capitalization (value ).If you don't particularly like a company, you can simply not include it in your index.

This is how, for example, an unadjusted index fund with the Top 10 most valuable companies on the Baltic Stock Exchange would look like. The smallest company, Coop Banka, would have a 3.9% share of the total portfolio, while the largest, Ignitis Group, would have 21.1%. To make it easier for other investors to build their portfolio, we also offer to get acquainted with the Google Sheets table we created, which allows you to familiarize yourself with the calculations made.

The easiest way is to create an equal weight portfolio. For example, if an investor wants to invest 10 thousand euros, he can buy shares of each issuer in the amount of one thousand each. In order to maintain the same weight of each company, this portfolio will need to be rebalanced from time to time. Rebalancing means buying or selling shares of a portfolio company to return to the originally decided proportion of shares in the portfolio. In an equal weight portfolio, this would mean selling the shares of companies that have remained more valuable and buying those whose price has fallen.

On the other hand, if your portfolio is based on market capitalization weights, it will not need to be balanced, as the weights will change automatically. Rebalancing in such a case will be relevant only if a company leaves the list of selected, for example, Top10 most valuable companies. In such a situation, it will be necessary to sell the "departure" and buy a share of another company. How often should the portfolio be rebalanced? We would recommend that this should be done at least once a year, but it is hardly worth returning to rebalancing more often than once a quarter. Alternatively, if the investor periodically makes additional investments in his portfolio, new investments should be made in such a way as to return to the selected portfolio weights.

Yes, although this process is not as simple as buying one index fund on the stock exchange, but if there are no good alternatives, then in our opinion, this is a purely feasible solution.

In other articles, we have explained why we think it is better to invest in an index than in actively managed mutual funds. Here we will provide practical insight and advice on how to build your own stock index fund portfolio. Of course, everything described here is our own opinion and is not a recommendation to buy any specific securities.

There are many index funds and you can get lost in choosing them. Therefore, it is useful to develop your own approach to filter the wide range of funds. First of all, it should be taken into account that only UCITS-type index funds can be purchased in Latvia. UCITS means that the fund is registered and available to investors in Europe. Index funds are created by many investment companies and many of the funds they offer are virtually identical. The largest providers of index funds (ETFs) in the world are Blackrock (iShares), Vanguard and Invesco. Both Vanguard and iShares have so much to choose from that our recommendation is to pick one of these (we pick iShares ourselves) and ditch the others for simplicity's sake. Both of these investment company index funds also have very similar fees.

Once these choices have been narrowed down, one can begin to turn their attention to the investment strategy itself. The idea is simple and at the same time complicated - the investment strategy should be created based on your belief in where the world economy is going in the long term (think 10-30 years). Respectively, which sectors, which regions and countries could develop faster and more successfully than others. However, especially in the beginning, we recommend that you don't go head-to-head in this direction and start building your investment portfolio with two basic index funds: (1) Developed country company stocks, such as iShares MSCI World, and (2) Emerging market stock index, such as iShares MSCI Emerging Markets. Both of these index funds will cover the most valuable companies on the global stock market, including Apple, Microsoft, Tesla, Tencent, Alibaba and many others.

Annual returns of indices over different maturities

Developed countries (USA, Germany, Great Britain, Australia, Japan, etc.) account for about 65% of the world economy (although this proportion is gradually decreasing), as opposed to 35% of developing countries (China, India, Brazil, Mexico, etc.). This could also be a good initial allocation for the proportions of these two index funds in the portfolio.

In order to practically buy index funds, you first need to find on which stock exchange and with which stock symbol these securities are traded. For example, in euro terms, both iShares MSCI World and iShares MSCI Emerging Markets are traded on the Amsterdam Stock Exchange under the symbols IWDA and IEMA, respectively. The exchanges where each index fund is listed are usually found in the product description on the home page (in the case of iShares at the very bottom of the page under "Listings"). Once this step is completed, the relevant symbols are entered into the locator of your stock broker so that the security can be purchased.

When the investment portfolio becomes larger (in our opinion above EUR 100,000), additional funds with an emphasis on a separate geography or industry can be added to these two basic index funds. Here is a series of stock index funds that we find interesting ourselves:

When comparing different index funds, it is worth paying attention to the following aspects:

1. Management costs (expense ratio). For the most popular and largest funds, these costs should be 0.1% to 0.25% per year. For various more specialized funds, management commissions can be 0.4% to 0.6% per year. There are relatively few index funds whose costs will exceed this amount;


2. Liquidity. The larger and, accordingly, the more popular the fund, the more active it is traded on the stock exchange. More exotic and less liquid index funds may have a situation where the difference between the buying and selling price (spread) on the exchange is disproportionately high;


3. Currency . It is easier to buy funds in the same currency as your savings. This saves, for example, commissions for currency conversion;


4. Dividends. Index funds either pay dividends received (distributing) or reinvest (accumulating). Almost every index fund has the ability to choose between these fund sub-types. We basically choose index funds with the accumulating principle, so that we don't have to think about reinvesting dividends.

In summary, in our opinion, index funds are a simple and affordable way for any investor to start accumulating stocks. Investing can be started gradually by investing in one or two index funds. On the other hand, gradually getting to know the world of index funds in more detail, you can supplement your investments with already more nuanced and specialized funds.

Each month, 6% of our gross salary goes into our Tier 2 pension savings. This money is managed by licensed pension fund managers - mainly subsidiaries of commercial banks. Money is invested in different securities around the world, with different success rates and commissions (most often unreasonably high). Pension fund managers have three basic investment strategies: active (invests more in stocks, less in bonds), conservative (invests more in bonds) and in the middle (balanced).

Most people choose to entrust their retirement savings to their bank rather than carefully comparing investment principles, commissions and historical fund returns. This situation has created an environment in which many pension fund managers can safely charge high commissions, which in the long term significantly reduce the fund's profitability. You can change your pension manager once a year, but it is not recommended to do this every year based only on the historical performance of each fund, as these tend to be volatile in the short term. The key is to choose an investment strategy that is appropriate for your age and choose a pension plan with low costs, as these are the main factors that determine the long-term profitability of the plan.

Until the age of 50, our recommendation would be to choose the active plan (100% investments in shares), from 50-60 years the active plan with 50% investments in shares, while after 60 years - the conservative plan.

PLUSES:

• It is not a voluntary saving, you make this saving whether you want to or not. Let's call it a plus
• You can easily change pension fund managers and follow the results manapensija.lv
• The savings can be inherited if a person makes such a choice on the latvija.lv portal
• No additional involvement required other than choosing your pension plan (which is worth reviewing once a year)

MINUSES:

• In addition to the management fees paid to pension fund managers, each fund in which that manager invests also charges a commission
• You can influence the investment strategy yourself just by changing the manager or the pension plans they offer

The most comprehensive information on the operation of the second pension fund, as well as basic information on the operation and commissions of each pension fund manager, is available on the Manapensija portal, in the current data section. As we describe in more detail in the section on investment funds, none of the Latvian managers has been able to regularly show a better result than passive investment funds (index funds) and with a high probability will not be able to in the future either. That's why it's a smart choice to entrust your pension to a manager that only invests in index funds. Among index funds, on the other hand, it is rational to choose the manager with the cheapest management commissions (similarly to how we choose OCTA insurance). Index funds are essentially the same for all managers - therefore the cheapest should be taken.

A certain revolution in the Latvian pension administration market was caused by Indexo, which introduced and actively popularized the accumulation of pension funds in index funds. At the beginning of its operation, Indexo also offered the lowest pension fund management costs, which were often twice as cheap as those offered by commercial banks at the time. Over time, the banks have also followed suit and almost each has introduced its own index fund pension plan offer. As a result, Indexo's offer is no longer the best manager choice on the market, as the management commission they offer has remained significantly higher than the bank. For example, for an active pension plan (100% shares), Indexo's annual management fee is 0.53%, Luminor - 0.32%, SEB - 0.3% and Swedbank - 0.3%. Our recommendation (as of early 2023) for the best index pension fund is the Citadele (CBL) index plan, which has a fee of just 0.08% per annum.

In addition to the mandatory 2nd pension level, it is possible to voluntarily make additional savings in the 3rd pension level. This savings would supplement pension level 2 and state pension payments (pension level 1). Pension level 3 savings can be received from the age of 55, and this savings is also inheritable. Similar to the 2nd pension level, in this case too, you cannot manage the savings yourself, but pension fund managers will do it for you. In order to motivate citizens to make such savings, the state (similarly to life insurance) offers a subsidy. Such a subsidy takes the form of a refund of personal income taxes for contributions that do not exceed 10% of the gross salary. Despite state support, the historically low returns provided by pension fund managers combined with high commissions means that this has historically only been a good product for the banks themselves. The situation has changed since several managers (Indexo and SEB Banka) have started to offer third pension level investments in index funds as well.

PLUSES:

• Suitable for a passive investor: transfer money automatically every month and forget
• Cost-effective, because you do not have to pay brokerage fees if you would make regular monthly savings yourself
• Available from the age of 55 all at once or in installments of your choice
• Now also with offers in index funds
• State subsidized investment with strict regulation

MINUSES:

• A small selection of pension plans
• Historically low returns due to high commissions and active management
• High commissions even now

The third level of pensions is worth considering as you approach retirement age. Then it can become more profitable to choose the cheapest and most conservative pension fund manager, regularly receive a state subsidy (refund of personal income tax) and, upon reaching retirement, immediately withdraw the savings, investing it cheaper and with a better return (as described later in this guide).

9 important financial indicators for the prudent investor
Before investing in shares, it is worth doing a financial analysis of the company, both to better understand the history of the company itself and to assess whether the company is sustainable and well-valued. It is important to add that the company's financial indicators give the best picture compared to other companies in the industry. We have summarized the average financial indicators of various Latvian companies in the industry in the following table, while the average indicators of US companies can be found, for example, in this source from Aswath Damodaran. The already calculated indicators of individual companies listed on the stock exchange of the Baltic States can be found on the Nasdaq Baltic website under the Factsheet section, while data for international companies can be found, for example, on the Macrotrends website.

Profitability indicators
Profitability ratios are the first indicator of business success or failure:
Net Profitability = Net Profit / Turnover
Basically, it indicates how profitable the company is. A good amount of profit depends on the specific industry in which the company operates. These are areas where companies operate with very high net profitability (eg mobile operators) and very low (wholesale companies).
Return on capital = Net profit / Company's equity
The amount of return on equity indicates how much, in percentage terms, the company is able to earn on the capital invested in the business. For successful companies, this return should be at least 10%, but preferably 15-20%. For example, for LHV bank this figure is 16.4, while for Virši - 17.7.
Liquidity indicators
Liquidity ratios are indicators of a company's ability to meet its short-term financial obligations.
Amount of liquidity = Current assets / current liabilities
The amount of liquidity (or working capital ratio) indicates whether the company has sufficient assets to cover short-term liabilities. Current assets are those assets that can be easily converted into cash within a maximum of 1 year, while short-term liabilities are all claims that the business has to pay within the next year. A good amount of liquidity for the company is in the amount of 1.2-2. As with profitability indicators, each industry may have its own norm and therefore it is important to compare the calculation of your company's indicators with similar companies. For example, in the food retail industry, the liquidity ratio is almost always below 1.
Indicators of the amount of liabilities
These ratios measure the extent of a company's liabilities and are an important measure to ensure that a business does not expose itself to unnecessary risk by taking on too much liability. Also, these indicators are used by financiers, evaluating the company's ability to attract additional money for business.
Amount of equity / Amount of assets
The amount of equity ratio indicates how much of the company's assets are financed by the owners' funds. The closer this indicator is to 100%, the more the company finances with equity capital. Since equity is usually more expensive (investors expect a higher return on it) than debt financing, it is rare for a company to operate without debt.
Amount of liabilities / Amount of equity
This ratio indicates how much the company relies on liabilities for its financing. Again, it is important to compare this indicator with the average size among companies in your field. A low amount of the indicator may indicate that the company is not using the growth opportunities that would be provided by additional credit financing. On the other hand, a high indicator (compared to the industry average) may indicate that the business is exposed to additional risk due to excessive loans. Typically, a good loan-to-equity ratio is in the 1-3 range.
Performance indicators
Efficiency indicators indicate how well the company uses its resources to generate turnover and profit. Each industry may have a different indicator that is most important for evaluating efficiency. For example, in retail, inventory circulation would be relevant, while in a consulting company - income per employee. On the other hand, for example, the calculation of debtor days can indicate how effectively the company ensures that the goods/services it provides are paid on time.
Debtors days = Amount of debtors times 365 / Turnover
If a company's accounts receivable days are above the industry average, this potentially indicates poor customer payment discipline or that the company offers more favorable terms to customers than competitors. A high number of accounts receivable days can also indicate that the company is not writing off bad debts.
Inventory turnover days = Inventory amount times 365 / Turnover
Alternatively and more accurately, it would be better to count inventory turnover days not against the turnover of the company, but against the cost of purchased goods. A high inventory turnover rate (especially relative to the industry average) indicates that the company does not need to hold large inventories (and therefore invest in working capital) to ensure sales.

Market value indicators
Market value indicators calculate the value of a company against their financial performance. More commonly used ratios would be enterprise value to earnings (PE ratio) and price to book value (PB ratio).
PE ratio = Company's share price / earnings per share
This ratio (also called payback years) essentially shows how many years an investment in a company's stock will pay for itself (assuming earnings remain constant). A higher P/E ratio compared to other similar companies may indicate that the stock is overvalued, while a lower P/E ratio may indicate that it is undervalued. The faster the company and the economy it operates in grow, the higher the PE ratio usually is. For example, the average PE ratio of companies traded on the US stock exchange is 21, while in Latvia it is 16 and in Greece it is 6.5.
PB ratio = Company share price / amount of equity per share
The P/B ratio is calculated by dividing the share price by its book value per share. The PB ratio is used to compare individual companies in the industry, but most often - banks. If the PB ratio is below 1, it means that basically investors do not see a great perspective for the company's operation and the company's share can be bought at a discount from its accounting value. For example, western countries, especially European banks, can be bought for a long time at a price below the book value of these shares. For the largest European bank HSBC, this ratio is 0.83, for BNP Paribas - 0.57, and for Deutsche Bank - 0.29. For comparison - LHV bank's PB ratio is 2.47 and Coop bank's - 1.55 (data of October 2, 2023)

Summary
It is important to note again that financial ratios should not be used in isolation. When evaluating the financial performance of each business, the company's industry, competitive landscape and management team should also be taken into account. It is also important to look at the trends of the company's financial indicators over time. This can help identify potential red flags for an investment, such as identifying a company that is starting to sink due to the burden of liabilities it has taken on. It is also important to remember that the analysis of financial ratios is only one of the methods and facets. The investor should evaluate a number of other aspects, including the management team, business model, competitive environment and other conditions.

Buying bonds is the same as entering into a standardized loan agreement. Instead of entering into a loan agreement with the borrower, the investor can simply buy the bonds either from the borrower (known as issuers in the financial world) or on the stock exchange from other investors. You can lend by buying bonds to states, municipalities, and companies. Typically, bonds are issued by relatively large companies and most bond issues are additionally regulated (controlled) by state authorities. Also, bonds can have independent and regularly updated risk assessments, which facilitate and allow standardization of the analysis of these securities. The most popular of such analytical companies are Moody's and Fitch - these agencies also regularly evaluate bonds issued by the Latvian state .

Almost all bonds pay regular interest (called coupons in the financial world). The regularity may vary, but most often the interest is paid quarterly, less often once a month or once a year. The lowest interest rates (and also the risk that this loan will not be returned or partially returned) are for large developing countries, such as Germany and the USA. In turn, high interest rates can be lent to developing countries, especially those with bad credit history, such as Argentina.

In addition to the interest rate, bonds can have a number of other important parameters, some of which we have summarized in the list below:

DUE DATE	Bonds, like loans, have a maturity date when the nominal value of the bonds (principal amount of the loan) must be repaid. Generally, companies sell their bonds with maturities of 3 to 5 years, but there are a number of exceptions. For example, banks such as Citadele, Bigbank and LHV have also issued securities with a maturity of 10 years. When the bonds mature, the company cancels or returns the bonds to the investors. An important question is where the company will get the funds to provide such repayment. Usually the answer to this question is that the company hopes to issue new bonds to cover the old ones. However, such an approach will only work if the company continues to operate successfully and if the financial market is in a positive development cycle at the time when the business issues the new bonds. For example, in the second half of 2022, both stock and bond prices in the world and in the Baltic countries decreased significantly. Investor sentiment was apprehensive in anticipation of the impact of inflation and the energy crisis on the economy. In such circumstances, the Estonian company Plusplus Capital was unable to sell a new tranche of its bonds to investors and use these funds to refinance the securities due in the fall of 2022. As a result, despite stable financial performance, the company entered a default situation and was forced to look for an alternative repayment solution with bond investors. Therefore, it is important to make sure what and whether the companies have an alternative plan for repaying the bonds at the end of the term, if re-financing by issuing new bonds does not happen. Countries issue bonds both for very short periods of a few months and even over 10 or even 20 years
REFUND	Almost all bonds provide for their repayment at the end of the term. This means that the bond issuer will have the money to repay the loan at the end of the term or expects to get the money to repay the bonds from the sale of new bonds. This can create a situation where the issuer "hits" with bond repayment in a situation when it is very difficult to attract financing (for example, in March 2020) and default (or get into debt collection). Sometimes, however, companies sell bonds that have a gradual repayment schedule, similar to personal mortgage loans.
INTEREST OR COUPON	Bonds usually have a fixed interest rate that remains constant during the term of the bond. In the second half of 2022, in conditions of high inflation, when national central banks also increase the rates at which they lend to banks, companies in Europe increasingly began to issue bonds that, in addition to a fixed rate, also have a variable rate that is tied to the Euribor 3- or 6-month rate. Euribor is the rate at which banks in Europe lend to each other. For example, the Latvian waste management company CleanR offered investors its bonds with a fixed interest rate of 6.5% plus 3-month Euribor. At the time of bond release at the end of 2022, such an offer provided an annual return of 8.5%. It is important to remember that a floating rate can be "tied" to both market interest rates and other variables such as inflation.
SECURITY	Bonds, like loans, can be secured or unsecured (or partially secured). Collateral quality (liquidity, value, longevity) is an important factor in assessing bond risk. In the event of bond default, in the interest of the bondholders, the collateral may be sold to cover the liability. Most of the Baltic issuers do not offer bonds with collateral, as all the available collateral is already with the financing commercial banks. However, there are exceptions. For example, the bonds of the Lithuanian agricultural company Auga are secured by a pledge on agricultural land. On the other hand, the bonds of the Latvian lending company DelfinGroup are secured by a pledge on the consumer loan portfolio.
PUBLIC OR CLOSED	Not all bonds that are issued can be bought and sold publicly. Often, companies choose to make closed bond issues, which are offered to a limited group of investors. In such situations, higher minimum investment thresholds are also often set (usually from EUR 100,000). It is administratively easier for a company to issue closed bonds, because when selling bonds publicly, a series of additional requirements set by financial market supervisors must be met. It should also be noted that even bonds are listed on the stock exchange, this does not mean that they can be freely bought and sold. Regular daily transactions with bonds are only rare for bonds issued by Baltic companies. In any case, it is important to remember that investments in bonds are significantly less liquid than investments in stocks.
PRICE AND RETURN	Companies usually sell their bonds at par. This means that if the nominal value of 1 bond is, for example, EUR 1000, then the investor must pay EUR 1000 to buy this bond. However, often the bond price (especially if it is subsequently bought or sold on the stock exchange) may differ from the nominal value. In fact, this means that if the bond price is above par, the % return is less than the bond's coupon rate, while if it is below par, the return exceeds the coupon rate. For example, the bonds of the computer equipment wholesale company Elko Grupa offer investors a fixed annual return of 6%. If the investor buys this bond on the stock exchange at a price of 95% of the nominal value, or 950 EUR, then the return of this investor (in English, the term is called yield) from such an investment will be higher than the 6% annual rate. Selling bonds below or above par is a way for the price of these securities to adjust to the surrounding market conditions.

Buying bonds of large and safe countries (such as Germany) provides returns very similar to bank deposit rates. On the other hand, bonds of poorly managed countries (such as Greece) offer annual returns of 5% and more. In terms of yield on corporate bonds, non-bank consumer lenders are the most generous, offering investors annual interest of 10-12%.

PLUSES

• A simpler and safer way of investment is to provide a direct loan to the company
• Expected income in the form of regular interest/coupons
• Semi-liquid and the investment can be sold before the bonds mature (but don't count on it)
• Does not require high involvement from the investor, as much as at the time of evaluating the transaction (and if the bonds default)
• The value of bonds does not fluctuate rapidly compared to, for example, stock prices

MINUSES

• Bonds often have a nominal value of EUR 1,000 or more and often have high minimum purchase terms, typically (EUR 100,000)
• Compared to shares, high purchase commissions
• Buying individual bonds makes it difficult to build a diversified portfolio
• Compared to stocks, it is more difficult to find resources and independent opinions to evaluate the investment

In our investment guide, we have collected a series of practical recommendations on how and why to invest in bonds in separate articles. We especially invite you to familiarize yourself with the recommendations on how to buy Baltic bonds

In general, investing in bonds, in our opinion, is a very promising form of investment, but we would advise you to be cautious about this financial instrument, because it has a number of technical nuances, as a result of which it becomes more complicated than investing in company shares. For the sake of simplicity, we have compiled 4 approaches to investing in bonds:

1. Bond ETFs. Exchange-traded bond funds can be bought as easily as stocks and have high liquidity. The funds immediately offer a diversified portfolio of bonds, both with government and corporate securities. It is important to remember that the price of bond funds can change both up and down. For example, in situations where interest rates are rising rapidly in the market, the value of bond funds decreases (as happened in 2022). Among interesting bond ETFs, we recommend evaluating iShares Global Corporations Bonds UCITS ETF, iShares JP Morgan $ EM Corp Bond UCITS ETF and iShares Core Global Aggregate Bond UCITS ETF


2. Short-term savings bonds. Buying short-term government bonds can be a very easy and more profitable alternative to bank deposits. Savings bonds are also offered by the Republic of Latvia. We have collected more extensive and practical information about this investment option in the article - How to invest in the short term and with low risk - alternatives to a deposit


3. Bond investment funds. Closed-end mutual funds may invest in bonds that are not highly liquid or not traded at all. Such bonds offer higher yields, but require additional due diligence in researching the investment. Closed-end investment funds provide investors with investment diversification and access to investments that are difficult for private investors to access on their own. Closed bond funds in Latvia are managed, for example, by A3E (investments in bonds of developing countries) and Capitalia (investments in bonds of Baltic companies).


4. Individual bonds. Investors can also buy bonds issued by individual companies or countries themselves. Here, however, we want to draw attention to the need to create a diversified portfolio with preferably 20 securities. In the Baltic States alone, there are approximately 50 available bonds of various companies, while internationally this offer is even wider. It should be warned right away that in practice, buying bonds that are issued in a different country than your securities account is quite tricky.

To purchase bonds or bond funds, all you need is a securities account in a bank, which most commercial banks offer free of charge. You can buy and sell bonds either through the stock exchange or by making a transfer, which is very similar to making a money transfer through an Internet bank. In practice, however, we immediately recommend finding the broker's telephone contacts, as it is likely to be needed for the formation of the bond purchase transaction.

For investors looking for a stable and predictable stream of income/interest, bonds provide a more profitable, but also riskier, alternative to bank deposits. At a time when the deposit rates of Latvia's leading banks fluctuate around 1%, bonds issued by Baltic companies offer an average yield of 8-10%. Companies issue bonds as a supplement to bank financing or sometimes in situations where banks do not want to finance these companies. This complementary and alternative financing to bank loans has been used for a long time and widely in Western countries, while in the Baltic countries only relatively recently companies have begun to realize how to use such securities to finance the growth of their business. Such Latvian companies as AirBaltic, Elko Grupa, Grenardi, Eco Baltia and a number of others have sold their bonds to investors.

Our observations show that Baltic bonds often offer 1-2% higher yields than similarly risk-rated bond securities in Western Europe and significantly higher returns than bond index funds. On the other hand, investments in the securities of one's region have the advantage of information availability - the issuer's financial and operational performance can be more easily understood, analyzed and monitored. Likewise, the capital market in the Baltics is in a stage of rapid development, and an investor who learns to navigate it in time can have a number of advantages in the future.

Publicly traded bonds are well summarized on the website of the NASDAQ Baltic exchange. However, not all bonds issued by Baltic companies are on this list. For example, AirBaltic bonds are traded on the Frankfurt Stock Exchange. Unfortunately, the liquidity (ability to buy and sell freely on the stock exchange) of corporate bonds in the Baltic States is very low. There are only a couple of companies (for example, IuteCredit) whose bonds are regularly traded on the stock exchange. As a result, when buying bonds, it is better to plan that you can hold them until maturity and not count on the possibility of selling them on the stock exchange. Due to the low liquidity of Baltic bonds, it is better for an investor to buy bonds when the company initially offers them to investors or issues them. Information about such public issues is usually available in the press and on the stock exchange's website.

However, an important nuance is that most companies in the Baltic countries do not choose to issue public bonds, but closed bonds. This means that the purchase of bonds is offered to a limited range of investors. Also, closed issues usually have a relatively high minimum investment threshold of EUR 100,000. Companies choose closed issues because it is cheaper and does not have to fulfill a series of additional requirements set by financial market supervisors. Regular contact with brokers is required to receive offers for closed bond issues. The most active bond brokers in the Baltic States are Signet Bank, Šiauliu Bankas, Luminor, Redgate Capital and LHV.

To purchase Baltic bonds, you only need a securities account, for example, in one of the banks such as Swedbank or Signet Bank. Publicly traded bonds qualify as a financial instrument and can also be purchased in investment accounts that are subject to more favorable tax legislation in Latvia. The costs of buying bonds can differ significantly, but it should be calculated that they are at least 2-3 times higher than for buying shares. Unfortunately, buying international bonds (for example, using a Latvian stock paper account to buy bonds of a Lithuanian company) is not too easy and it is rarely possible to do it in an Internet bank. That's why it's good to arm yourself with the broker's phone number in advance.

A very important factor for investors investing in bonds is to ensure the diversification of these investments. A well-diversified portfolio consists of 20 bonds or more. Such diversification is important to avoid a situation where the failure of an individual issuer can have a significant impact on the overall return of your investment portfolio. If you are already aware from the beginning that you will not be able to create a well-diversified portfolio, our recommendation would be to either avoid such investments altogether or invest in bond funds. For example, both A3E Capital and Capitalia offer professionally managed funds that invest in Baltic corporate bonds. Also, unfortunately, independent analytical reports and opinions on bond investments are not widely available. Therefore, if you do not have faith in your own financial analysis, it is worth turning to a financier (but not a broker who offers to buy bonds) for help. Other financial institutions, including Capitalia, regularly offer their perspective on bond issues to their circle of investors. For example, among the companies whose bonds we have purchased in our fund are Elko Group, DelfinGroup, Clean R and Baltic Horizon.

In summary, in our opinion, investing in Baltic corporate bonds is a very promising and attractive way to build your passive income portfolio. Choosing individual bonds can be a relatively cumbersome and time-consuming process, which would be suitable for those investors who can afford to allocate a rather significant amount measured in millions for such investments. For the rest, it is worth looking at the offers of bond funds , but following the development of this industry in the background, because it is facing significant changes and development.

For a wide range of investors, readily available investments such as deposits and savings bonds offer safe but low returns. Due to its accessibility and convenience, a new type of investment has gained great popularity among investors in recent years - loan platforms that offer significantly higher interest rates as well as risk.

What are loan platforms
Lending platforms allow many investors to co-own a single loan issued to an individual or company. On the other hand, for borrowers, the platforms provide an alternative source of financing, which can be especially useful in situations where bank financing is not suitable or available for them. The platform ensures the offering of these loans to investors, as well as administers settlements between the borrower and the lenders or investors. There are two types of lending platforms, each with a slightly different operating principle and also different regulation from the financial industry supervisors.

Crowdfunding platforms
A classic peer-to-peer lending platform evaluates, standardizes and publishes information about a potential borrower to investors, while investors vote with their money on whether to invest in that loan or not. If the necessary funding from investors (or the crowd) is collected, the loan is funded. Next, the platform ensures the issuance of the loan, as well as follows up on the receipt of payments and distribution to investors. The platform, according to its procedures, takes care of the protection of investors' interests, including, if necessary, providing loan collection work. Bondora (loans for private individuals), Capitalia (loans for companies) and Estateguru (loans for real estate financiers) operate according to this principle in the Baltic States. In the European Union, a new and uniform regulation will enter into force for all crowdfunding platforms from the fall of 2023, ensuring that their operation meets certain standards and requirements.

Broker platforms
Broker loan platforms sell loans previously issued by other financial companies to investors, indicating relatively little information about the recipient of the loan itself, but offering to buy back the loan in case of default. For the most part, brokerage platforms sell loans issued by so-called sms-lenders in different geographies of the world. Some of these platforms (such as Mintos) aggregate loans from many different lenders, but most sell loans from related companies (such as Twino). The peculiarity of brokerage platforms is that the investor only indirectly finances a specific borrower, individual or company. Due to the loan repurchase rule, investors essentially finance (give a loan) to the financial company that issues these loans. Therefore, in order to be sure of the risk of the investment, the investor must evaluate not the borrower himself, but the company that gives a guarantee for the redemption of the loan. To some extent, investing in brokerage platforms is similar to buying bonds of lenders. According to this principle, brokerage platforms are also regulated by the state - as traders of financial instruments (bonds).

Historical performance of platforms
Since loan platforms mainly issue loans to companies and individuals who cannot get financing from a bank for various reasons, these loans are more risky. This additional risk should also be justified in the additional return that the investor can expect from such investments. In recent years, historical average interest rates offered to investors on Baltic loan platforms have been between 10 and 15%. However, the return of the final investors depends on how big are the losses due to bad or doubtful loans. Unfortunately, these statistics are often calculated differently for each platform and are difficult to compare, and the loan platforms lack data for a sufficiently long period for a full analysis. However, as the following table indicates, at least in terms of immediate returns, lending platforms outperform high-risk bonds and are comparable to the long-term average return of stock investments. This is, of course, if the investor has chosen a reliable platform and invests diversifiedly on this platform.

Annual return on investment over different time periods
1 MSCI World stock index data for the period ending September 2021
2 Baltic Benchmark index for the period ending in March 2023
3 SPDR Barclays High Yield Bond ETF for the period ending April 2023
4 Data for the period 2008-2022

Accordingly, lending platforms can serve as a good addition to an investor's overall investment portfolio. However, in order to avoid losses, it is important to carefully choose an investment platform and always remember the need for diversification. We have collected thoughts on how to compare some platforms and choose the most suitable for you in a separate article.

Although investing in lending platforms offers relatively high returns, there are a number of risks that careful investors should be aware of. The historical lack of oversight by state regulators for the platform industry has attracted both a number of fraudsters and inexperienced platform managers. As a result, the history of recent years in the Baltic States is littered with scandals, where local and international investors have lost significant funds due to bankrupt platforms.

Also, each of the platforms operates on a slightly different principle, with its own legal documentation, user features, reporting and ethical standards. To help you navigate this jungle, below are some experience-based tips for choosing which crowdfunding platform to invest in.

Experience of Platform Managers
The platform can call itself fintech or tell how artificial intelligence helps in decision-making. However, at the end of the day, lending is a very old and conservative business - an experienced and cautious businessman is successful in it. Therefore, the first step in choosing a platform is to evaluate its founders. Check that they include someone with significant credit experience, while the founders have an impeccable historical reputation (searching Google and business register data). Since the operation of the platforms is regulated by the state, it is important to make sure that the platform has received the necessary permission - this can be checked on the website of the license issuer (for example, the Bank of Latvia).

Common interests or conflicts of interest
For the most part, platforms act as bulletin boards from a legal point of view, leaving all the risk and responsibility for making an investment decision on the shoulders of investors. The platform's basic income is made up of the commission from the loan issuance, which it withholds from the loan recipient. As a result, platforms earn depending on the amount of financed loans, not their quality, creating different motivations with investors. In order to unite the interests of the platform and its investors, some of the platforms, including Capitalia, co-invest their own funds in each financed loan.

Another aspect that is important to pay attention to is whether the platform finances or sells loans issued by affiliated companies. If there will be problems with the repayment of the financed loan or the loan buyback request, what side will the platform take in such a case? Will it really monitor the loans that the platform owners or related parties receive as strictly? Several brokerage platforms only sell financing issued by their affiliates. In such situations, the investor should be aware that in case of problems, the platform will most likely represent the interests of its affiliated company rather than the investors. This is not a disqualifying circumstance for investment, but certainly food for thought.

Statistics presented by the platforms
Platforms much prefer to show the average interest rate of financed loans, the total amount of interest paid or the amount of historically issued financing, which is not exactly the main indicator that an investor would like to see. What matters most to an investor is the historical return, which takes into account provisions for bad loans and credit losses (net return). At the European level, uniform regulation of platforms helps that platforms are obliged to calculate returns and credit losses in the same way - which has been a significant obstacle to comparing different platforms until now. Track the platform's historical returns, bad credit and savings in separate statistics sections. Unfortunately, we must admit that much of the data presented is still difficult to interpret or compare with other platforms. A good standard for the calculation of historical yield is presented, for example, by Mintos.

Diversification opportunities
Despite the best intentions of the platform managers and the most careful project analysis, loans are a statistical business - some part of the loans will definitely not be able to repay on time or will stop paying completely. It is important that in such a situation one or a couple of bad loans do not have a significant impact on the return of the investor's portfolio. Therefore, investment diversification is important, which means that you should have at least 20-25 loans of a similar amount in your portfolio. In the case of loan companies, it would also be important to diversify the portfolio with companies from different industries. This, for example, is the advantage of the Capitalia platform, as investors can invest in it in the field of production, trade, agriculture or real estate. On the other hand, for example, the activity profile of Estateguru or Mintos is only related to the financing of companies of one sector.

Diversification is easier to implement in crowdfunding platforms, while more difficult in broker-type platforms. In broker platforms, it is important to remember that diversification occurs only when loans are purchased from different credit issuers. For example, if the brokerage platform trades only loans issued by related company/s, then even if you buy 20 different loans even in different countries, your risk diversification will be very weak - your investment is completely dependent on the ability of one financial company to fulfill its obligations.

Automatic investments
Almost all platforms offer tools to create and maintain a portfolio automatically. Almost all investors should use it as well. This not only saves time that should be spent investing or buying individual loans, but also provides the all-important diversification. If a platform does not have an automatic investment function, it is a significant disadvantage.

Investing by choosing individual loans on platforms is only worthwhile if you are able to understand and evaluate the financial data of companies. The need to analyze financial data becomes obvious in a situation where companies are funded through a crowdfunding platform. But remember, if you plan to finance consumer loans with a buy-back guarantee on brokerage platforms, you should carefully analyze who offers this buy-back guarantee. That is, how strong is the balance sheet and financial indicators of this guarantor, so that the repurchase guarantee can be fulfilled if necessary.

Other functions
Among other important features that are important when comparing platforms, the existence of a secondary market can be highlighted. The secondary market means that you can sell your own loan to another investor and, accordingly, if necessary, get your money back sooner than the particular loan's maturity date. Other important features to pay attention to are the preparation of tax and return reports, the ease of use of the platform and the responsiveness or availability of customer service.

List of lending platforms
For your convenience, we have collected the platforms we know, as well as their type and specialization:
Carefully selected lending platforms are a great new addition to any investor's investment portfolio. Although this industry in its beginnings was suitable only for the most hardened and risk-tolerant investors due to the many risks, now clear and uniform national regulation has sifted out the most successful platform companies, making this investment class much more accessible to a wide range of investors.

At a time when variable rates on mortgage loans are increasing rapidly, deposit offers from banks have mostly not kept up with this increase. Therefore, despite the fact that the 3-month Euribor already exceeds 2.5% per year (here and in the article, the data is for February 15, 2023), the average deposit rate, for example, in Swedbank is still below 1% per year. Therefore, we would like to outline a couple of simple alternatives where you can invest with low risk and short term to earn more than in Scandinavian bank deposits:

1. Savings bonds . Savings bonds (only available to private individuals) are a simple way to lend money to the Latvian state. On the krajobligacijas.lv website, you can apply and simply make an investment starting from EUR 50 and buy savings bonds for a term of 12 months, 5 years or 10 years. On February 14, 2023, the annual loan rate was 3.4% - significantly higher than deposits. An additional benefit - there is no personal income tax to be paid on the interest income, the purchase is commission-free, and even a securities account is not required. By the way, it is possible to withdraw money from savings bonds faster, but then you will lose all interest calculated on them.


2. Deposit in another bank . If your bank offers a low deposit rate, you can see what it is in other banks both in Latvia and elsewhere in Europe. In all countries of the European Union, deposit guarantees apply to investments up to EUR 100,000 in each bank. Accordingly, if the bank cannot repay the deposit, the state will. Deposit rates can differ significantly between banks, but due to the state guarantee - the risk of all deposits is essentially equal. For example, Bigbank offers a 12-month term deposit with a return of 2.5%, while Swedbanka - 0.7%. Outside of Latvia, you can also find banks that offer even better conditions, for example, the Lithuanian PayRay bank now offers an annual deposit rate of 3.05%. Gudriem.lv portal gathers part of Latvian banks' offers, while Raisin is a popular deposit platform in Europe. It should be noted that nowadays opening an account in another bank is not an easy task and it may not pay off in the case of a relatively small amount of investment.


3. German or other short-term bonds. An alternative to savings bonds is to buy government bonds. One-year German government bonds, which could be the safest investment in the euro currency, are currently yielding 2.6%. But buying bonds is not so easy. It is easy to buy, for example, the bonds issued by the countries of Latvia, Estonia and Lithuania offered in the Swedbank internet bank. For a term of less than one year, the purchase of such bonds would offer a return of 1.5-2% (including bank commissions). The minimum purchase amount is EUR 1,000. Not as good as savings bonds, but better than a deposit in the same Swedbank.

4. Bond Index Fund. Just as it is recommended to buy not individual stocks, but stock index funds (ETFs), so it is with bonds. A bond index fund provides diversification as well as very good liquidity - you can sell your investment at any time of the working day. For example, the iShares € Floating Rate Bond fund invests in low-risk short-term euro-denominated bonds and their average return is around 3% per year. The fund trades on both the London (EFRN.L) and Berne (EFRN.BN) stock exchanges. An alternative fund is iShares Ultrashort Bond (IS3M.DE or ERNE.AS), which also buys short-term European corporate bonds, or iShares Government Germany 0-1yr (EXVM), which buys short-term German government bonds.

5. Money in the account. There are some banks, payment institutions and brokers that pay for the money in the account. This fee is usually not high, but still better than nothing. For example, Wise, a payment institution created by Estonian entrepreneurs, but now based in Belgium and England, currently offers 0.69% (after income tax) for a balance in EUR currency. You don't have to do anything, you don't have to pay commissions or anything else - the interest will be credited to your account every month. In addition, money will be immediately available whenever you need it. Brokers Lightyear (1.75% for deposits in EUR), Saxo Bank and Interactive Brokers have a similar program.

In general, it can be concluded that there are alternatives for safe short-term investments and they should be used so that the deposit money does not unnecessarily feed the profits of Scandinavian banks.

Paper and electronic money is a modern phenomenon. On the other hand, mankind has already used gold as a tool for storing value for several millennia. Compared to other metals, gold does not rust, and has limited and relatively hard-to-obtain reserves (unlike, say, silver, which is a much cheaper to produce and more widely available metal). Therefore, it is impossible to rapidly increase the total amount of gold in the world.

A common reason for investing in gold is the idea that the price of gold rises in line with inflation, but this is not always the case. A statistically more unambiguous connection of gold prices is with the interest rates set by national central banks - when rates rise, the price of gold (often) falls. A secondary implication of this commitment is that gold is a good investment to protect against an economic crisis (when central banks cut interest rates). Such a connection can be clearly observed in the graph, which shows the changes in US stock and gold prices over the last 30 years - when the stock price falls significantly, the gold price is stable or rising.



As a result, even today, investors often choose gold as a crisis reserve. It is not correct to look at gold as an investment - it does not bring dividends or profits - only storage costs. Gold is rather a protection against the inflation of money issued by countries (in the long term), a means of payment for apocalypse scenarios and a way to maintain non-electronic savings (off-grid). Accordingly, if there is a desire to keep something in the safe, then gold, in our opinion, is more rational than a currency that is gradually being eaten away by inflation. On the other hand, due to the fact that the value of gold usually increases when the value of other investments (for example, shares) decreases, by holding it in your portfolio, you can "even out" your return and reduce the fluctuation of your investment values. However, at the same time, it is important to consider that in the long term the value of gold is unlikely to grow as quickly as investments in stocks or bonds, as shown in the graph of the change in the value of $100 over the past 30 years:


In this article, we will look at several ways in which you can invest in gold and what practical considerations you should face.

1. Buy physical gold bars or coins. Gold bars and coins have standardized sizes and weights. Each product also has its own manufacturer. The brands of several gold bullion manufacturers (such as Valcambi, Credit Suisse, Perth Mint and Royal Mint) are widely recognized around the world, which means that they can be sold more easily in other parts of the world. One simple way to choose a gold product to buy is to find the one with the best liquidity and the lowest bid/ask spread. Accordingly, if immediately after purchase you would like to sell your gold product, then the spread is how much in terms of percentage you would immediately lose. Generally, the smallest difference between the bid and ask price is the troy ounce (31 gram) weight of gold bars. For example, the ounce Valcambi bar offered by Tavex has a spread of 2-3%, while the 5 gram bar has a spread of 15%. For gold coins, the bid/ask spread is mostly more than 5%. Accordingly, here is also the first recommendation - buy a Tavex ounce gold bar. One ounce is also quite practical in size - slightly larger than a €2 coin. For comparison, one kilogram of gold is slightly smaller than an iPhone 14, but it is difficult to break it into pieces to, for example, sell in parts.

When buying gold, you receive a certificate of ownership in return, which is also a useful proof of tax payment to the SRS, if the precious metal is sold at a profit in the future (the state is entitled to a 20% tax on such profit). Purchased gold can be stored under the bed, in your safe (used by most hoarders) or in a bank safe. There is another solution - to buy gold in foreign stores that offer to transport the purchased product and store it in safes in different countries of the world on your behalf, for example in Singapore, the USA or New Zealand. Such a service, of course, costs extra. A few more useful facts about buying gold: (1) when taking gold out of the country worth more than EUR 10,000, it must be declared at customs; (2) when buying gold in cash for an amount up to EUR 3,000, the seller can issue a check without the buyer's data.

2. Buy funds that hold gold reserves . So that you don't have to take care of buying and storing gold yourself, a simpler option is to buy shares in funds that hold physical gold reserves for fund investors. Such an investment is also simpler from the point of view that it can be done more gradually (you do not need to buy an ounce or a 100g gold bar) and it is easier to realize or turn it into money. At the same time, of course, the feeling of having a physical safety buffer next to you disappears. Therefore, this investment is suitable depending on what you want to buy gold for. Among the funds, such a service is offered, for example, by the WisdomTree Physical Gold fund, which can be purchased in EUR currency on both the German and Italian stock exchanges. The fund's annual management fee is 0.39% per year. Cryptocurrency lovers can also invest in the cryptocurrency PAX Gold, whose value is tied to the price of an ounce of gold. According to the issuers of this cryptocurrency, all cryptocurrency released is backed by gold reserves held in a vault in London.

3. Buy shares of gold mining companies . Another promising way beyond buying physical gold is to buy shares of gold mining companies, such as the Ishares Gold Producers index fund, which aggregates investments in 59 companies. The fund's annual management costs are 0.55%. Of course, buying individual shares of gold mining companies is also an option. The largest listed companies in this area are Newmont and Barrick Gold. Both of these companies are also listed on German stock exchanges, so they can also be purchased in EUR currency. Shares in gold mining companies mostly fluctuate with gold prices, but unlike physical gold bars in a safe (resulting in storage costs), they pay dividends (yield income).

4. Buy digital (paper) gold. There are a number of platforms, including Revolut and Paysera, that offer to buy a synthetic financial instrument whose value is tied to the price of gold on the stock exchange. Usually we are talking about XAU - the price of one troy ounce. It should be remembered that in such a case no real gold is being bought and the security of the investment is as great as the security of the broker/dealer himself. Often such investments are also not protected by the national deposit guarantee scheme.

In summary, there are a number of ways to buy gold, but the main thing is to understand why you are doing it - what risk/concern such an investment eliminates. Our conclusion: gold can be useful in a "catastrophe" scenario, but if it doesn't happen - in the long term, income-bearing assets (stocks, bonds) are better.