The concept of being in “crisis” has been present for quite a while now. At least, the past 14 years (since 2008). With more or less economic activity or growth, the word “crisis” (and the threat of it) has become part of our daily lives.

Every once in a while we hear about it sparked by some unfortunate event — giant financial institutions going bankrupt, worldwide epidemics, war — talk of a looming “crisis” emerges and so do the forecasts of disgrace which, quite probably, help speed the whole “crisis” up.

We’re at the start of new one, just after we apparently overcame another (Covid-19), this time sparked by the Russian invasion of Ukraine, it’s consequences on fuel costs and the snowball effect on literally every product on supermarket shelves.

(Note: I’m deliberately not mentioning the climate, environmental and social crisis which add up to our challenges as humankind…).

One lesson that we have also learnt from all the previous ups and downs is that: predictions fail. Sometimes they don’t but nothing is as sure as hindsight bias will come. The problem is it won’t help us now.

With record inflation heights and the threat of economic downturn, can we make sure our money stays valuable while still having a positive impact in the world?

‍

How to invest informed, safely and sustainably?

Investing informed, safely and sustainably is always at the top of our agenda at Goparity.

These principles become even more important amid all the talks and threat of financial crisis and the ongoing social and environmental crisis.

On the one hand, we need to be cautious and keep risks low, on the other hand, with the ongoing record inflation rates, the more idle money you have, the more your losing.

Below I’m sharing a few principles of how to aim for that perfect combination between risk, return and impact through investing in times of crisis:

‍

1. Diversify to mitigate risk - when choosing the projects you’ll invest in please remember the “don’t place all the eggs in the same basket” precept. The more diversified your portfolio is, the more reduced its risk is. Why? Should one project have any problem it will affect you less the smaller its relative weight is in your portfolio.

How to do it: set up an investment strategy to automatically invest in a diversified manner. Or just invest manually but make sure to keep diversification in mind. Don’t know how many investments “diverse” means? Think at least 50 different projects but make sure they’re all according to your preferences and you invest aware.

‍

2. Think long term: better return for you and the planet - we’re often led to think short term investments are better because they provide a faster return on investment. That doesn’t mean they also provide a better return.

Almost all Goparity’s loans are monthly amortized loans. This means borrowers pay principal and interest in every installment, thus reducing their debt every month.

The longer the loan term, the smaller the monthly installment, which means the borrower is more likely to be able to pay the monthly installments from the project’s profit, also reducing the lenders’ (i.e. your) risk.

E.g.: In a 5-year solar power loan it is much more likely that the company can pay its installments from the savings it gets by reducing its own electricity bill than if they borrowed the same money in a 2-year loan. In the example below, the company can pay its loan in 5-year and still save 500€/month from day 1.

How to do it: Look for a healthy combination of short and long term loans. Remember the diversification principle and apply it also to the term of your investments: patience over hurry. As Ray Dalio once said “slow money wins the race”. He probably knows what his talking about 😅

‍

3. Reinvest for better returns - whereas short term investment doesn’t mean better investments or higher returns, what really does mean so is reinvesting and the concept of compound interest. By reinvesting the principal and the interest you get paid every month, not only will you keep diversifying your portfolio as will you also generate significantly higher returns from the same initial investment.

The example below shows the accumulated profit made monthly with our average interest rate (5,3%) on 10.000€ initial investment: it’s a 6,17% vs 5,3% difference between reinvesting or not. And more than twice the profit!

‍

How to do it: set-up an auto-investment strategy that will automatically reinvest your principal paid back and interest. Let time do it’s work and watch your earnings grow.

‍

4. Save, save and compound - if reinvesting principal and interest means higher returns, what to say about combining it with a little saving every month?

Little by little, with very small effort and still operating on a diversified low-risk strategy, saving and compounding combined are what makes your profit curves go exponential.

The example below shows the evolution of gains made on the same investment as the previous example and two more lines with 100€ and 200€ monthly top-ups.

‍

The profit (excluding starting principal and savings added) made from these investments is 850€ and 1700€ higher respectively.

How to do it: create your ow savings and investment strategy in your app. Start by choosing how and how much you’ll top up monthly and then define broad investment criteria, so you’re sure to be applying the diversification and risk mitigation principles.

‍

5. Keep your investment expenses low (or at Zero) – this one is a no-brainer for Goparity users but it’s still worth mentioning because of other investment options you may have. Very often hidden or even transparent fees may impact your returns more than you know.

Wherever you make your investments, be wary of the commissions you’re paying. A small percentage might feel like a small amount but on the long term it can make a huge difference.

E.g.: Let’s take a 100.000€ lump sum investment for 10 years:

- Case 1 — low expenses: 5.3% gross interest rate minus 0.3% fees on interest made = 5% real interest rate.

- Case 2 — high expenses: 5.3% gross interest rate minus 1.3% fees on interest made = 4% real interest rate.

- Case 1 — total profit made goes up to 64.700€ over the 10 years

- Case 2 — total profit made goes up to 49.000€ over the 10 years.

The difference is over 15.000€.

At Goparity we take no commissions or fees from our investors, and this applies to both investment and profit. As we usually say: “investing is free and always will be”.

‍

6. Define a % of your wealth to invest

This final topic is as tricky as it is important. There is literature to defend many different types of approaches with the most commonly found advocating you should only invest between 10% to 20% of you total income.

Deciding the amount to invest necessarily needs some thinking and cannot only be indexed to income, it also needs to consider your fixed expenses (or “needs”) and your other expenses (or “wants”).

The most famous strategy to manage your own budget is likely the 50/30/20 rule — 50% “needs” (such as housing, groceries, utilities, etc), 30% “wants” (leisure, hobbies, vacation, etc.) and 20% for savings and investment.

This said, every person, household and even country is a different case and we all need to plan for ourselves, this type of framework just provides a good starting point (and benchmark).

Wrapping up: saving (even if just a little) and investing informed and recurrently in a diversified project portfolio is the most cautious way to keep your wallet safe in times of turmoil and still contribute to a healthier society and environment.

‍

Disclaimer: none of the points above is advisory or should be taken as a recommendation of investment. It is merely a collection of different principles found in financial literature.