Finanztest’s flip-flop portfolio comes in three mixed variants: defensive, balanced and offensive. To control risk, a global equity ETF is combined as a return component with a security component made up of interest-bearing investments. In the defensive portfolio, 75 percent of the money goes to the security component, in the balanced portfolio 50 percent and in the offensive portfolio 25 percent.
Especially for security-conscious investors, it is important to invest considerable sums in investments that are as safe as possible. That’s why our readers often ask us about ways to optimize this part of your investment.
Advantages and disadvantages of interest-bearing investments
As a security component, we generally recommend a bond ETF (also called a bond ETF), overnight cash, or a combination of both. Coming to Bond ETF First choice-ETF on euro government bonds or ETF with a combination of government and corporate bonds.
Investment forms have different advantages and disadvantages:
Bond ETF
Benefits
- Interest rates always correspond to the current interest rate level
- Can be maintained permanently, without needing to change providers
- The euro bond ETFs we recommend do not have currency risk and are unlikely to hold bonds with a good credit rating;
Disadvantages
- If interest rates rise, prices may fall and returns will be temporarily negative
daily
Benefits
- Stable, fluctuation-free system
- Performance cannot be negative (as long as investors put their money “under the cushion” when interest rates are negative)
- Deposits are protected by deposit insurance
Disadvantages
- If you want to get the best interest rate, you should monitor the interest rate environment and change providers more frequently
Bond funds: risk of falling prices
The interest rate level has increased significantly since 2022. The change in interest rates initially did not mean anything good for bond prices: the increase in interest rates lowered the prices of bonds that were already in circulation – which in turn pushed ETFs and euro area bond funds into the red. The following graph shows the evolution of the most important security indices.
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Interest rates have stabilized and bond funds are once again an attractive investment. It is unlikely that such a massive increase in interest rates will occur again in the near future. We analyzed what the effects would be for a euro government bond ETF under various interest rate scenarios. More on this in After the interest rate shock – come back now?
Tip: It is better to buy bond ETF for Euro government bonds or Euro government and corporate bonds with the premium First choice. You can find the right funds in our large fund database.
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Daily Cash and Bond ETFs in a Return-Risk Comparison
We compare the various security concepts in relation to their historical opportunities and risks. The table below shows the results. All the raids could have been prevented with daily cash. But: Not all of our readers were able to follow our recommendation to equip the security module with overnight money during the period of negative interest rates. Anyone who has invested in bond ETFs in recent years will have to wait a while for the loss to be offset by higher interest rates. One consolation: Over the very long term, bond ETFs have delivered higher average returns than overnight cash, despite recent losses. This gives hope for the future.
Investors who combined overnight cash and a bond ETF were able to limit their interim losses. The effort involved with two security components was also limited: over the past 30 years, it would only be necessary to balance the call money and the European bond ETF once.
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The following chart shows how the various security components have developed over the past 30 years. For those who want to know exactly: we recalculated the euro bond indices using German government bonds before the introduction of the euro. For daily money, we assume that the interest rate is the reference interest rate Euribor (Euro Interbank Offered Rate), and before the introduction of the euro, the interest rate is the Fibor (Frankfurt Interbank Offered Rate).
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Gold as a security component?
Readers often ask us about other alternatives to the security module. Firstly: not every idea fits into our slipper concept or is seen by us as a security component.
Fixed deposit. Fixed-term deposits often offer slightly higher interest rates than current deposits, and interest is guaranteed for the specified period. However, investors cannot access the money before the end of the investment period. This is unfavorable if money has to be transferred from the security component to the return component. Fixed-term deposits are generally suitable for the security component, but only in combination with sufficient funds in the current account or in a bond ETF to be able to be redeployed within a short space of time. The best fixed term deposit conditions are available in our fixed term deposit comparison.
Money Market ETF. A convenient alternative to overnight money is ETFs based on the overnight money market interest rate. Returns from overnight funds are generally not as high as those from the best overnight funds – but you are spared the hassle of hopping from provider to provider. Overnight ETFs reflect what is happening in the interbank market. However, in times of crisis, disruptions may occur. Unlike overnight money, the money in the funds is not protected by legal deposit insurance.
Gold. For many investors, gold has a reputation as a safe investment. But gold prices fluctuate and gold does not pay any interest – so we do not include gold as a security component. However, it is suitable as a portfolio stabilizer and has, at least in the past, been a good complement to the return component of the slipper portfolio. More on this in Add to Flip Flop Portfolio.
Donation insurance. Some readers also want to use property insurance as a security component. If they were taken out before 2005, they are tax-free when paid under certain conditions and there is often a guaranteed high interest rate. Similar to fixed-term deposits, the following applies: capital life insurance can be counted as a security component, but there must be enough money in a current account to be able to transfer funds. More on the topic: What life insurance offers.
Real estate funds. In good times, open-ended real estate funds provide good returns, but in times of crisis they can be closed because the properties cannot be sold quickly enough to get all of the client’s money out. Additionally, minimum holding periods now apply to investors. You will then be able to sell shares on the stock exchange, but usually only at a discount. Overall, real estate funds are therefore not suitable for the security component.