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:

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.

AUTOMATIC ACCUMULATIONS
Creates an automatic payment that, for example, transfers 10% of the salary every month to another bank account that is not linked to a payment card. An alternative is to save for the 3rd pension level.

THINK ABOUT BIG 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 put the "saved" purchase amount into a savings account.

REPORTING 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 have encountered difficulties in starting to build savings. Fortunately, there are a large number of resources and tools 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 the card, transferring the rounding amount to the savings account. Digital payment institutions such as Revolut also offer similar services.

I have decided that I need to save and invest. I have sold real estate or a business and want to invest the money wisely. We cover how to start thinking about investments in this article.

WHERE IS YOUR PENSION
The first step is to make sure that the existing savings of the second pension plan is in the right place. That is, at the manager who invests in index funds. Historical data clearly demonstrates that other pension fund managers cannot consistently outperform index funds. If the second level is the only savings and you plan to retire soon, you can choose Vairo's adaptive investment plan. Otherwise, the rational choice is to choose the cheapest index fund currently offered by CBL (Citadel) Index Plan.

STORAGE WITH STATE SUPPORT
In order to encourage citizens' savings, the state provides support. By investing in the third pension plan (or buying accumulative life insurance) up to 10% of the gross salary but no more than EUR 4,000 per year, 20% of the personal income tax paid can be recovered from the state for the amount of savings. Basically, this means that investing in a third pension plan gives you a 20% return in the first year, regardless of where you invested. When saving like this, it is again wise to choose the cheapest index fund provider. In this area, the offer of managers is similar and you can choose the most convenient one (for example, in your bank).

MONEY IN THE ACCOUNT MUST ALSO WORK
The next step is to make sure that the money in the current account is also working. The largest Latvian banks have been slow to pay interest on account balances, but now they have finally started offering them. Some banks do this automatically by calculating interest on the bank account balance. For others, separate products have been introduced, using which you can freely add and withdraw funds, earning interest. It is important to note that smaller banks usually offer much better rates. Despite the differences in the interest rates offered, all banks have the same state guarantee for funds up to EUR 100,000. Alternative payment institutions such as Revolut and Wise also offer high interest on account balances, which are also subject to the investment insurance principles of the European Union.

DEPOSIT IN THE BEST PLACE
If it is clear that the money will not be needed for daily expenses for a while, then in terms of security it is difficult to beat an investment deposit. Again, it is important to remember that in all banks the deposit up to EUR 100,000 is guaranteed by the state and it is a rational choice to deposit money in the bank that offers the highest interest (even if this bank is not used on a daily basis). Banks automatically withhold personal income tax on interest earned on deposits. On the other hand, this tax can be avoided by purchasing savings bonds of the Republic of Latvia. This offer of savings bonds can be compared with bank deposit rates, whose interest rate must be multiplied by 0.8 to take into account the personal income tax effect.

STOCKS, INDEXES AND ROBOTS
The next step in saving is to invest in stocks. There are a couple of golden rules of investing that you should always keep in mind. The first - investments must be scattered (diversified) and not held in one or a couple of company shares. The simplest principle (as with pension funds) is to invest in index funds. So that you don't have to choose these funds yourself, the offer includes very elegant tools, such as SEB banka's Roboinvestors or Mintos ETF investments. On the other hand, an even simpler solution is to increase the amount of your contributions to the 3rd pension plan savings (or accumulating life insurance), which is hopefully chosen to invest in index funds. If you still want to buy index funds yourself, then we recommend starting with these two: iShares MSCI World (stock code IWDA) and iShares MSCI Emerging Markets (stock code IEMA), which will effectively cover investment in shares of the world's largest companies. On top of these index funds, others can be added, as we describe in this article.

The second golden principle is not to invest a large amount in one go, but gradually and systematically. Stock markets are constantly swinging from over-ecstasy to deep depression. It is not worth trying to guess yourself whether the shares will soon fall or rise. Create your own system for investing, for example, buy shares every month on the last business day. If you buy stocks yourself, depending on the amount of these regular purchases, it may be important to pay attention to stock purchase commissions.

CONTINUE IN THE BALTIC STATES
If all of the above has already been done and there is a desire to expand your investment field of vision, we recommend starting with opportunities to invest in Baltic companies (of course, remembering the principles of diversification). By investing in the local market, your capital will not only earn extra, but will also help the companies of our region to develop. The most prudent way would be to start with corporate loans by building a portfolio of loans on crowdfunding platforms such as Capitalia. The historical returns of such loan platforms are 8-12% per year. On the other hand, long-term investments in the stock index of the Baltic countries have provided a return of more than 10%. Unfortunately, there is no such convenient way to buy the Baltic stock index as you can buy global stock funds, however, thanks to Swedbank's commission-free securities account, such an index can also be replicated by everyone.

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, 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 you to defer paying taxes until the profits are paid out as 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 invest in loans to 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, where they have built a portfolio of loans 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 facilitated 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), and 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). As much as possible, I have simplified the price list information:


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:

	Commission, EUR	Return after 1 year	Payback after 5 years	Payback after 10 years
Without commission	0	10.0%	61.1%	159.4%
Swedbank	0	10.0%	61.1%	159.4%
Luminor	5.7	-1.3%	47.0%	140.0%
SEB	1	7.9%	58.5%	155.8%
Interactive Brokers	1.25	7.4%	57.8%	154.9%
Lightyear	does not offer

Since securities brokerage commissions for transactions on the Latvian Stock Exchange are much lower than when buying shares of a US company, the differences in investment returns are much smaller. However, it is clearly visible that the broker with the highest commission (Luminor) has significantly worse results than the others.

In the next step, I want to demonstrate how the previously made observations would change if I made share purchase transactions for a larger amount - EUR 1,000. In such a situation, the impact of commissions on the return on investment would be as follows:

	Commission, EUR	Return after 1 year	Payback after 5 years	Payback after 10 years
Without commission	0	10.0%	61.1%	159.4%
Swedbank	10	7.9%	59.5%	156.8%
Luminor	12.85	7.3%	59.0%	156.1%
SEB	10	7.9%	59.5%	156.8%
Interactive Brokers	0.32	9.9%	61.0%	159.3%
Lightyear	1	9.8%	60.9%	159.1%

With investments and their return, it is simple: if you want to aim for a higher return, you will have to take a greater risk of losing the investment (or that the value of the investment will decrease). Low return, in turn, means low risk. There are a couple of exceptions, for example, accumulative life insurance can provide decent returns with low risk thanks to a generous government subsidy. When talking about low or high returns, be aware that we are currently living in a period of low interest rates. Whatever our desired return, real profit opportunities are determined by the market. At the time of writing this guide, German government bonds, the safest asset available in the euro, are delivering a negative return (and that's before the costs associated with holding these bonds in your account). Therefore, low return can now be considered 0-2% per year, medium 2-6% per year and high is more than 6% per year. Each investment instrument also has a wide range of potential risk and return. For example, one can buy German government bonds (very safe) with practically 0% return or non-bank lender (high risk) bonds with 12% rate.

Another important point to consider is that only investments in companies (and lending to countries) are asset value-added (this money is used to create something new). Collecting, buying gold, cryptocurrencies and other similar asset investments are speculation or protection of value. Accordingly, if you have purchased a gold bar - this bar will not add any "value" to the safe - it will just sit there and make you worry about its safety. On the other hand, if you have bought a company bond (or loaned it to the company), the company invests this money to create and develop something. Real estate is an interesting "hybrid" investment, which is both a stable asset on the one hand, and can also be developed and create new value. The choice is in the hands of the owner. When it comes to investing in companies, it can be done in two ways: either by lending or investing in equity. The loan to companies provides a fixed return, so it has a certain "ceiling" on the yield. Investing in a company's equity (for example, buying their shares) allows for unlimited growth in value (the so-called "upside"), but this type of investment also carries a higher risk (possibility of not receiving all or part of your invested money) than loans. It should be mentioned that in both variants it is possible to lose the entire amount of the investment.

Many people are attracted to investing in individual stocks. Finding, evaluating, and following these companies can be exciting and great earning opportunities, but it's also risky and can result in a loss of investment value. Instead, investing in index funds is a safer and more reliable way to grow your wealth over the long term. Index funds are designed to replicate the performance of a specific market index, such as the S&P 500 or the Dow Jones Industrial Average. As a result, when you invest in an index fund, you are investing in a diversified portfolio of stocks that reflects the overall market, rather than relying on the success of any individual company. In the long term, world stock indices tend to rise (on average around 8% per year), even if in the short term individual stocks may fall sharply in price.

Indices are baskets of companies that are included in that basket and distributed according to some specific algorithm. Generally, larger and more valuable companies are "overloaded", meaning the more valuable a company is, the more weight it gets in the index. The market capitalization or company weighted value method is the basic principle of the world's most popular indexes. There is also an alternative method where every company in the index has the same weight, regardless of the size or value of that company. In such an index, there is a greater emphasis on smaller companies, which can often grow faster than large businesses. Research shows that in some market conditions, such as times of high market uncertainty, equal weight indexes can perform better than traditional indexes.

Annual returns for various popular global corporate stock indices*

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 shares. 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 noted 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 stocks, 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 stocks (by choosing index investment funds instead); (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 earn back 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 for quickly determining 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 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 have 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 (spreads) 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 return investment (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, by 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 returns of funds. This situation has created an environment in which many pension fund managers can safely charge high commissions, which significantly reduce the fund's profitability in the long term. It is possible to change the pension manager once a year, but it is not recommended to do so 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 at 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's. 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 the 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 personal income tax refund 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 mean 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 the passive investor: transfer money automatically every month and forget
• Cost effective, because you don't 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 according to 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).

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:

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 (for example, mobile operators) and very low (wholesale companies).

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.


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 the company's liabilities and are an important measure to ensure that the 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.

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.

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.

If a company's accounts receivable days are above the industry average, it potentially indicates poor customer payment discipline or that the company is offering customers more favorable terms than competitors. A high number of accounts receivable days can also indicate that the company is not writing off bad debts.

Alternatively and more accurately, it would be better to count inventory turnover days not against the company's turnover, 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).

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.

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 United States. 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 earned 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, which, in addition to a fixed rate, also have a variable rate, which 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 variable 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 the 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 an investor buys this bond on the stock exchange at a price of 95% of the nominal value, or 950 EUR, then the investor's return (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 rely 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 supplementary 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 cost 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, the purchase of international bonds (for example, buying bonds of a Lithuanian company with a Latvian stock paper account) 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 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 availability 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 financing from investors (or the crowd) is collected, the loan is financed. 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 recovery 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 unified 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 are essentially financing (giving out a loan to) the very 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, usage functions, 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 affiliates. 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, because 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 poor - your investment depends entirely 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 the loan you own 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 rising rapidly, deposit offers from banks have mostly not kept up with such an 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 a 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 you do not even need a securities account. 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 basically equal. For example, Bigbank offers a 12-month time 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 the deposit platform Raisin is popular 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 producers (such as Valcambi, Credit Suisse, Perth Mint and Royal Mint) are widely recognized around the world, which means that they can be more easily sold 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, 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.

The events of the last six months in the stock markets could be described as a roller coaster ride, where excessive investor optimism alternates with concerns and fears. A significant impact on such investor sentiment has been the decisions of Donald Trump and his new administration, which have fundamentally shaken diplomatic ties, the global economy and the previously generally accepted order of things. Moreover, the four-year presidential term is only at the starting line. Therefore, the question of investors, including in Latvia, is justified - where to invest now with the lowest risk and the highest profit opportunities?

It is interesting to see how different investment categories have performed over the past five years, from more conservative deposits to investments in stock markets. The following table summarizes the annual returns from seven different investment instruments, including not only investments in financial markets, but also real estate and loans to companies. The sources for investment returns in global stocks, bonds, real estate and deposits are the most popular index funds in these investment categories.



As can be seen, the best return over the past five years has been provided by investments in global stocks (with an average return of 12.48% per year), but the Baltic stock index is not far behind, showing a high return of 9.44%. However, it should be noted that the return on investments in stocks has been very volatile (17.31%). A large range of return fluctuations means higher risk for financiers. In this regard, the largest price range has been for Baltic stocks (20.03%), followed by the fluctuation of income from investments in real estate (18.8%) and global stocks (17.31%).

In general, real estate, which is traditionally considered a safe long-term investment, has been quite unpredictable during this period with an average return of only 0.46% and large fluctuations. In turn, bonds, which have historically been a safe haven for investors, have even shown a negative average return in this five-year period (-4.09% for investment-grade bonds and 2.28% for speculative bonds), but small fluctuations (around 10%). Therefore, it can be said that bonds are a safer investment solution than stocks, but at the same time these small fluctuations have yielded around 0 or negative returns.

It should be noted that investments in financial markets are not the only investment option, so this review also includes corporate loans through the Capitalia crowdfunding platform. Interestingly, such loans have brought investors the second best return (10.97%), following global stocks, and have provided the lowest return volatility (1.52%). Corporate loans do not have daily stock prices and constant value fluctuations, so investing in such an instrument could be suitable for an investor who does not want stress, but a good and predictable result.


Given the variation in performance across investment categories, it is interesting to see how investment choices affect the overall amount of savings. The graph below shows how the value of a EUR 1,000 investment in each investment would change over the past five years.

It can be seen that investing in shares has provided investors with very good returns, although they also have to accept quite significant fluctuations in the value of the investment. On the other hand, for investors who want to maintain a calmer mind but ensure almost as good a return, it is worth evaluating the opportunities offered by crowdfunding platforms to lend to small and medium-sized enterprises in the Baltic States.

In response to the question posed at the beginning of the article - where to invest right now with the lowest risk and the highest profit potential? If the goal is to maximize profits and are not afraid of higher risk, then the stock market is still the main path to high profitability. However, if stability with attractive returns is the priority, corporate loans can be a great alternative to traditional investments.

With the beginning of Russia's attack on Ukraine, people in Latvia are increasingly interested in how to geographically diversify their investments. In addition, investors think about such diversification in a purely practical sense - how to create a safety buffer for themselves, which is completely isolated from possible war risks in the Baltics. In this article, we summarize our practices and observation on how to implement such a project.

EVERYTHING STARTS WITH AN ACCOUNT
The first step to creating safety reserves is to create the ability to receive, withdraw and pay money outside the financial system of the Baltic States. Respectively - open an account in a foreign bank or payment institution. The easiest way to do this is to use the newly minted payment institutions, which have convenient online options for opening and managing an account, as well as low account servicing costs. Revolut and Paysera are already popular among such payment institutions - but both of them are located in Lithuania and are therefore not at all suitable for the purpose of keeping money geographically further from Latvia. Therefore, a good alternative is Wise, a payment institution licensed in Belgium. The company (formerly called Transferwise) with its roots in Estonia is now listed on the English Stock Exchange and a stable earner. Opening and maintaining an account is free of charge. Opening an account in banks of other European countries is possible by visiting foreign banks in person. We have heard good reviews, for example, about the Spanish banks Hola, Santander and ING.

SECURITIES
Investing in financial bulls is the easiest way to invest money for both good long-term returns and excellent immediate liquidity. A number of international brokerage companies offer opening of securities accounts to Latvian individuals or companies, of which we have checked and can recommend Interactive Brokers (account in Ireland or elsewhere in Europe) and Saxo Bank (Denmark).

When private individuals create a securities account outside of Latvia, it is important to remember to notify the SRS (notification in free form) by the end of the current year, so that this security is classified as an investment account for income tax calculation. Transfers to this foreign securities account should be made immediately through your foreign payment account. This will ensure that if you want to withdraw money from the securities account, you will be able to transfer it to your payment account abroad immediately without additional bureaucracy.

There is already enough material and information about making the investments themselves. Our encouragement would be to invest in index funds and do so regularly, without trying to guess the highs and lows of a stock price. A simple portfolio of index stock funds can be created, for example, with the help of these 3 funds:

• Xtrackers MSCI World (stocks of developed countries), Exchange: XDWD
• Xtrackers S&P 500 (U.S. Largest Companies Stocks), Exchange: XDPU
• Xtrackers Nasdaq 100 (US technology stocks), Exchange: XNAS

REAL ESTATE
It is often heard that investors buy a property in a country where they themselves like to relax (for example, Spain) and try to rent it out when they are not there. Yes, it can be done, but you have to take into account that often the necessary time consumption in such a project is higher than you thought, while the yield is lower. When considering such an investment, do not forget about the costs of buying an apartment (broker, fees) and maintenance costs (income taxes, broker or administrator commission, downtime, repairs and regular renewal between tenants). After all, after calculating all costs, instead of the 6-8% annual return usually expected, investors earn 2-4% and that's not including their time investment. And besides, such an investment is hardly liquid. As a result, it may be easier to keep money in a deposit or government securities and get a similar return without the added stress.

GOLD AND CRYPTOCURRENCIES
Gold and cryptocurrencies offer forms of savings that have no geographical boundaries. For emergency reserves, gold is often preferred for a number of reasons. Above all, it is already quite valuable for its size and weight (compared to, for example, silver) - accordingly, it is easier to store and transport. When choosing between coins and bars, in our opinion, preference should be given to the one with the lowest spread (the difference between the buying and selling price of the precious metal) and produced by an internationally recognized mint. As a result, Valcambi one troy ounce bars are one of the best options (and can also be purchased at Tavex exchange points in Latvia).

Cryptocurrencies, on the other hand, have neither geographical boundaries nor the need for physical storage. That's why Bitcoin is also called modern gold. The problem (as with gold) is that cryptocurrency also needs to be able to be converted into EUR or another currency in order to make daily payments if needed. Accordingly, it is necessary to link a cryptocurrency exchange (a place where cryptocurrency is bought and sold) with your current account. It should be noted that many banks do not allow you to withdraw or receive money from any cryptocurrency exchanges. Also, it is a good practice not to keep your cryptocurrency savings on an exchange, but in a self-controlled wallet such as Ledger offers.

WHAT CAPITALIA OFFERS
Although Capitalia's competence is to finance companies in the Baltic States, Capitalia can also provide ways to allocate security reserves outside of Latvia. Through its payment institution partner Capitalia, it opens a current account in French banks for all its investors. On the other hand, through its loan platform, Capitalia also offers to invest in fixed-yield and well-secured projects outside the Baltics, for example in Spain. In our opinion, such investments are a much simpler and more profitable way to build an emergency safety buffer compared to, for example, buying an apartment in Alicante.

Previously, we reviewed the investment products offered by Swedbank, but this time we will review what Citadele offers to investors. By the way, you can enjoy an attractive guide to the bank's investment products through the Citadele Finotherapy tool. It will ask you about your existing investment approach and savings goals in an interesting way, and as a result offer you the most suitable products from the bank.

Second pension level
The second level pension investment is offered by Citadele Bank's subsidiary CBL Asset Management. In total, customers can choose between five pension investment plans. Four of these plans are actively managed and differ in how much of their investments are in bonds and how much in stocks. Each of the actively managed funds also invests in the Baltic markets by purchasing bonds, shares or investing in alternative investment funds. The commissions of all actively managed funds are 0.48% per year, which is relatively high compared to, for example, the active plans offered by Swedbank and SEB.
The main trump card of Citadele is the CBL Index plan, which offers the lowest (0.08% per year!) management commissions among Latvian pension plans. Unsurprisingly, this is also the plan that has provided investors with the best historical returns (in close competition with the SEB Index plan).

Third pension level
Similar to the second range of pension plan products, the third Citadel has an index plan and two actively managed plans. To understand the commission price list of actively managed funds, you need a magnifying glass (explanatory references in the price list are in very small letters), as well as a substantial dose of patience. Explanations about the amounts of commissions are very complicated written with various disclaimers and hard to understand sentence constructions. The only thing that remains clear is that the costs of this administration are not small and can range from 0.6 to 3% per year. Again, the savior is one of the best index plan offers on the market - CBL Index Plan commissions are 0.53% per annum. This is also one of the few investment plans that invests in both NASDAQ technology companies and emerging market stock indexes.

Life insurance
Unlike Swedbank, which categorizes accumulative life insurance as one of the types of savings products, in Citadel this product can be found under the Insurance section. The information about this product found on the website is quite scanty and, in my opinion, opaque, not giving a good insight into which funds you can invest in. Instead, a lot of space is devoted to information about personal income tax refund options. Hopefully that's not the main selling point of the product. On the other hand, the price list again likes to refer to various disclaimers and campaigns, which are detailed in the fine print. As far as we understand, the basic commission is 1% per year of the investment amount and a one-time commission of 1-3.5% for each contribution. It is not very cheap. In summary, the life insurance product in Citadel can only be fully understood by going to a bank consultation. On the other hand, based only on the website information, there are no good arguments for this service to stand out among other life insurance providers.

Savings accounts and deposits
Citadele offers three products for term deposits and savings accounts. The first of them is a savings account - a separate account where money is deposited and the interest rate is calculated. This savings account solution is in no way comparable to the offer of other banks; moreover, the displayed interest rate is relatively low (on November 11, 2024 it is 1.5%, while Indexo offers 2.75%). The term deposit product is also very standard, but perhaps there is no need to invent anything new here either. The annual interest rates offered are again on the relatively low end compared to other banks.

On the other hand, the third product - the Green Savings Account - is the most interesting. The green concept itself seems a bit far-fetched and it is not unequivocally clear how these deposits finance a friendly environment. But that's okay - "green" is trendy. The savings product itself is designed in such a way that the money can be demanded back from the bank with a 60-day notice. Meanwhile, this savings earns a higher (compared to other Citadele offers) interest rate. On the other hand, if you want to withdraw money without this warning period, the bank does not apply interest to the savings. In this way, the saver can perhaps be better disciplined and not give in to spending impulses.

Actions
We can only evaluate Citadele's offers in the field of share trading based on the (relatively meager) information provided on the website, as we do not have an account that would allow us to see for ourselves how easily and transparently share trading can be carried out. On the other hand, the review of the price list of brokerage services is not entirely satisfactory. For example, the minimum commission for transactions with shares (and index funds) of European (including Baltic) countries is 20 EUR; while for transactions with US shares - 25 USD. Comparing both the offers of other banks (such as Swedbank) and the level of commissions of brokerage companies (Interactive Brokers, Lightyear or Revolut), it would be very difficult to find the motivation to go to a branch to get to know more about what the Citadele share investment platform itself looks like and what it offers a range of investments.

Investment funds
Citadele offers a range of funds managed by CBL Asset Management, in which you can invest without additional commission. There are two actively managed investment funds that invest only in corporate stocks - one in the European market, and the other in the US market. Judging by the description of the funds, the managers aim to select the most promising companies in these regions with different algorithms. Based on historical returns and monthly reports, it appears that this task has not been done very well: over the past three years, both European and US stock indices have performed significantly better in terms of returns and risk/return ratio (Sharpe ratio). The relatively high annual management fee of 1.4% certainly does not help the return of investors. A similar conclusion (high commissions and weak indicators) can be made about the two most conservative funds - CBL Prudent Opportunities and CBL Optimal Opportunities - which also invest in bonds.

The Eastern European (including the Baltic) bond fund offered by CBL Asset Management, which selects and invests in debt securities issued by companies in this region, seems more interesting and unique. This fund has been operating since 2003 and can show very extensive historical profitability statistics - an average of 4.8% per year in US dollar terms. On the other hand, the last two years have been particularly successful, providing investors with more than 10% return per year. Perhaps we (and ChatGPT) are a little surprised by the fact that Turkey and Uzbekistan - whose corporate bonds the fund invests in - are also located in the Eastern European region. A management fee of 1% per year also seems reasonable for such an investment strategy. On the other hand, the second bond fund - which invests in the bonds of companies of developing countries - is, in my opinion, difficult to justify its uniqueness, because there are a number of similar ETFs with significantly lower commissions and freer availability.

Summary
In summary: Citadele offers some very interesting investment products, but more that don't really stand out. Among the products that appealed to us are the second and third pension level index plans - in our opinion, the best offers on the Latvian market. On the other hand, among the investment funds, the Eastern European bond fund seems interesting but nuanced. Unfortunately, as attractive as these three (especially the second pension plan index fund) are; the rest of Citadele's savings tools compare very poorly with the offers of other banks and other market participants. Perhaps savings products are not a priority area for the bank; therefore, they are left quite uncompetitive.

Everyone has a bank account and therefore banks are often the first and natural stop to build up their savings. We give our insight into the investment products offered by banks with the aim of helping clients navigate them. As the first, we have chosen Swedbank, which has the largest number of users in Latvia.

Second pension level
A good first stop when starting to think about saving is to make sure you have a good second retirement fund plan in place. In total, Swedbanka currently offers six second-level plans - three that match the saver's year of birth, one index and two active plans. Among active plans, "Dinamika" has not been very dynamic in its returns, providing among the lowest returns of active plans. On the other hand, "Stability" has unfortunately earned money only for Swedbanka itself and not for savers over the last 10 years. The reason has already been the unique conditions with close to zero interest rates in the economies of western countries in the last decade. However, such low returns also point to the risk of switching to conservative pension plans too early before retirement.

On the other hand, the index plan "Dinamika index" is both the cheapest and also provides the best returns among all pension plans offered by Swedbanka. With a management commission of 0.3% per year, it is significantly cheaper than, for example, the Indexo index plan Jauda 16-50 (0.48% per year), but more expensive than the Citadele CBL Index plan (0.07% per year). All Swedbank index plan investments have been made in socially responsible companies. As a result, in our opinion, Swedbank's pension plan "Dynamic Index" is a good and competitive product that we would definitely choose from this range of offers for anyone who still has 5 or more years until retirement age.

Third pension level
Swedbank offers four choices of third level pension plans. We have previously written that, in our opinion, the third level of pensions is a very simple and convenient way to build your savings in financial securities. In addition, the state subsidy (both for the employee and the employer) should give an additional impetus to the use of such a savings product. Similar to the second pension plan, the third also offers funds with different allocations between stocks and bonds. Accordingly, the cold-term (10-year) yield of these funds has been very significantly different: Stability +25 (most investments in bonds) - 0.55% per year, while Dynamics +100 (investments only in shares) - 7.1%. On the other hand, the most attractive to us is again the index plans Dinamika Indeks, whose investments are very similar to the Dinamika +100 fund, but offers a significantly lower management commission - 0.57% per year (the other Swedbank plans have 0.69%). In terms of pension fund management costs, Swedbank Dinamika Index is comparable to index funds offered by other managers.

Life insurance
The accumulative life insurance service in Swedbank is found under the category "Savings, investments) and is hidden under the name "Private portfolio". This is a welcome attempt to remove the somewhat misleading 'life insurance' label from this product.
As part of the savings service, Swedbank offers to choose 5 different investment allocations, with differences in the investment allocations of stocks and bonds. As is historically customary, the more conservative the strategy, the poorer the return (especially as a proportion of management commissions). The conservative strategy has done the worst: 5-year yield minus 0.4%, management commission 0.39%. Accordingly, if there were no commissions, it would be zero. The active growth (equity investments only) strategy invests in US, European and a couple of other index funds (a very similar portfolio to Dinamika Index in the 3rd pension plan), but with a high management commission of 0.99% when compared to the costs of the 3rd pension plan. As a result, it is difficult for us to recommend this product when there is what we believe to be a better 3rd pension plan offer next door, which offers virtually the same product, only cheaper. The main advantage is the ability to withdraw the savings faster if necessary.

Savings accounts and deposits
For savings, Swedbank offers to conclude an agreement in the internet bank either for a fixed term or "on demand" (product "Savings Tool"). For term deposits, the bank offers deposits from 1 to 12 months. On the other hand, in terms of interest rates, Swedbank is moderately generous (neither the lowest nor the highest offer). If the amount of the desired deposit is not large, then perhaps convenience takes precedence and it is not worth looking for the best offer in the market. On the other hand, if the amount deposited in the term deposit is close to the state-guaranteed EUR 100,000, then it is important to know that (in September 2024) Swedbank's 12-month rate is 3.5%, while Bigbank's 4.4% - almost a percentage higher. Bank deposit interest rates can be easily compared on the website of the Bank of Latvia. An additional detail - the personal income tax will be deducted from the interest rate and as a result the 12-month deposit return will be 2.8%. For comparison, you can earn 3.35% for 12 months by lending to the Latvian state through krajobligacijas.lv, and no personal tax is calculated on this.
Swedbanka's "Krājrīka" product, on the other hand, allows free access to the deposit at any time, but pays a lower interest rate. In addition, it also offers an additional function when, when paying with a card, the balance of the rounded up amount is automatically credited to the savings tool. In general, it's ok, but it would be much more convenient if Swedbank simply offered an interest rate for the balance of money in the current account, as both the domestic Indexo and the international payment institution Wise (previously Transferwise) do. Accordingly, in short, there is nothing special about the savings products offered by Swedbanka.

Shares and funds
Swedbanka's shares and funds (see Index funds) investment sections have obviously been neglected for a long time and are quite old-fashioned in terms of usability. It seems that you can buy both shares and funds in a fairly wide range (for shares, there are only European and US markets, but Asia is missing), but it is neither transparent nor convenient. In terms of usage, we would set the Estonian broker Lightyear as the highest benchmark. In comparison, the usability of Swedbank's shares and funds sections is technologically light years behind. For example, securities events (supports, buybacks, de-listing announcements) can be followed by editing an excel file... Commissions for securities transactions are mediocre compared to other Latvian banks, but compared to specialized leading European brokers such as Interactive Brokers, Saxo Bank, Lightyear, Trade Republic or Revolut - extremely high. It seems that none of the Latvian banks have noticed the prevailing trend in the USA to facilitate trading with shares and introduce minimal or zero transaction commissions. The main selling point of Swedbank's shares is the free commission for transactions for the purchase of Baltic shares. This is a welcome step to promote the development of the local capital market. That's why we use this opportunity ourselves, and also invite others to close their eyes to the awkward usability and use Swedbank to create a portfolio of shares of the Baltic countries.

Summary
In general, Swedbank's investment products are normal, but not outstanding. A bank with the largest customer base may not need to put too much effort into making the best and most modern offers. Among the investment products, we could single out the 3rd pension plan index fund as well as the possibility of trading shares of Baltic companies as the most competitive.