Historically, the wealth of Spanish households has been heavily concentrated in bank deposits (and other types of deposits), life insurance, and property, with financial markets and shares playing only a marginal role for the average saver, compared to data from neighbouring countries. Moreover, investment activity is usually carried out sporadically, with little or no advice, and with no clear strategy or objective. This approach has lead to generally poor results, causing frustration and, over time, discouragement in these types of products.
This elevated concentration in deposits means that, generally speaking, these Spanish households are highly exposed to inflation’s erosion of the purchasing power of savings and somewhat removed from the type of investments that deliver higher returns on capital in the long term. This situation has become even more acute in recent years due to central bank policies of financial repression and zero rates, which have absorbed the range of traditional “risk-free” assets for investors, who are forced to assume greater risk for the same returns, a trend that has been further accelerated by the pandemic. This scenario forces many savers to somehow become equity investors, a process that requires significant reflection in order to make the transition with the right guarantees.
The first of these reflections entails the need to view investment as a permanent, long-term activity. This means approaching investment in the stock market with the understanding that underlying each security is a business and that the return on our investment rests on the ability of these businesses to increase profits in the future. We are, therefore, talking about a business approach to the market, one that avoids speculating on short-term fluctuations driven by circumstances that are impossible to anticipate.
A second reflection involves tempering the importance of volatility. Volatility is the biggest deterrent from equity investment, and yet an understanding of the nature of the assets in which you invest reveals it to be the most innocuous of risk factors. Investment risk lies in the strength of a company’s equity and future profits. Investing wisely involves the effective management of solvency risk through a selection of solid, quality companies, bought at suitable prices, and avoiding permanent capital losses. Volatility is simply the short-term fluctuation of prices, which rarely change due to shifts in business development but routinely change on investor sentiment, often fixated on the short term.
To manage investment activity in the long term by setting up a quality investment portfolio that guarantees good results over time, adjusted to the needs and objectives of the investor, a trusted, independent manager can serve as an irreplaceable source of support.
