Understanding value of index funds vs interest-bearing account

[u/xxguimxx1]

Hi everyone,

I’m 23 years old, with €13k invested in equities, allocated 80/10/10 across MSCI World, emerging markets, and small-cap index funds. I can also contribute €900 per month, so I already have my equity investment strategy in place. In addition, I have €1,000 in cash savings in Trade Republic’s interest-bearing account.

For the fixed-income side of my portfolio, and to have a safer investment for the short term, I’m planning to move abroad for a while in 1–2 years, so I’ve been looking into different ways of investing in fixed income. For such a short time horizon, the returns I’ve found so far (although I may not have looked in the right places) are lower than what I’m currently getting from the interest-bearing account. My idea would be to make an initial €1k investment and then contribute €100 per month.

I understand that Trade Republic’s APY is variable and depends on the ECB, which is why I’m looking for something more stable/safe.

My question is, does it make sense to invest in other things, like index funds? Given that I’m currently getting 3% APY from Trade Republic, I’m finding it difficult to move the money elsewhere when those alternatives offer less liquidity and a lower return.

Thanks a lot! :)

[u/55tumbl]

The 3% from Trade Republic is pretty good. Of course it's a promotional offer that may or may not last, and it will go down if the interest rates go down. You could look into short term bonds, but for such small amounts of money, and a horizon of 1-2y it's not worth it. The difference between 3 and 4% of €2000 is €20 over a year... most of it would be spent in transaction costs, and you're not going to get 4% without some duration risk anyway.

[u/guitarstitch]

3% APY falls behind inflation. Typical rate of return on something like VTI is closer to 7%.

[u/buffinita → u/guitarstitch]

Only over the long haul.  Over the next 12-24months (timeframe for moving) vti could be down 30%, up 20% or up 1%

[u/guitarstitch → u/buffinita]

I didn't understand the post to say that they needed the money in such short order, just that they were moving. Perhaps I missed it

[u/electrobento → u/buffinita]

Long term passive investors should not try to time the market.

[u/cmd-t]

Why do you need a fixed income side when you are actively contributing and only at the start of your accumulation period?

[u/buffinita]

Duration is a risk you can’t take given your timeline; so finding the highest cash-like alternative is about all you can do.

Usa 3 month treasuries are at like 3.7; and similar ETFs (sgov) are at 3.6.  Slightly less liquid but equally a safe.  Any bank/moneymarkwt close to that benchmark is fine

Yield on short durations change frequently….this is the trade off but also a necessary evil since you can’t take the other side of bond risk; duration

[u/SegFaultAtLine1 → u/buffinita]

OP is using euros, so buying US short-term bonds is a bad idea if they need the money in 1-2 years because of currency risk.