How to Get Even More From 8% Annual Interest?
Quarterly interest payments, with no administrative fees, allow users of crowdfunding platforms to reinvest their earnings immediately. This creates the so-called compound interest effect, which has a significant impact on portfolio growth over longer periods.
Compound interest is an investment principle where earnings are not withdrawn but rather reinvested immediately or as soon as possible alongside the initial capital. This is a common practice for long-term investments, but not every investor is aware of it or utilizes it.
The effect of compound interest can be easily illustrated with a fixed capital of €1,000: if the annual investment return is, for example, 8%, €80 will be earned each year. A 8% annual return has recently been common on the "Röntgen" platform, and such return is also realistic as a long-term average return in stock markets or equity-related funds.
However, if the earned interest is reinvested annually together with the initial capital, the first year's return will be €80, the second year's return will be €86, the third year's return will be €94, the fourth year's return will be €100, and so on. This logic applies to any investment instrument with an annual return but does not account for administrative and other fees. The effect of compound interest is even stronger if regular additional investments are made, for example, monthly, quarterly, or at least yearly.
Over longer periods, the frequency of reinvestment also significantly impacts the portfolio. In other words, the ability to reinvest earnings quarterly is slightly more profitable than once a year, and even more attractive would be the ability to reinvest interest monthly.
According to Arturas Milevskis, Head of Investment Management at Synergy Finance, most experienced, conservative, and especially long-term Lithuanian investors tend to reinvest their earnings.
"I would say that reinvestment is the standard, but there are certainly people who are interested solely in the interest flow, which can be used for living expenses or daily needs. Older, retirement-age investors are also more likely to seek additional income streams. Perhaps among the younger generation, you would find more people who prefer to invest directly in stocks, speculate, and try to 'catch' a 100% or 1000% price increase, although I personally do not recommend this to anyone. However, the majority of investors reinvest their interest or dividends. Even the so-called 'textbook' historical equity returns, say 8-10%, typically include the effect of compound interest, i.e., these figures account for both value growth and dividends, and reinvestment," comments A. Milevskis.
How Does This Work on Platforms?
Investing through crowdfunding platforms with real estate collateral allows investors to take full advantage of the compound interest effect. This is facilitated by quarterly interest payments without administrative fees and a fixed return.
According to Greta Zarembiene, Head of Investor Relations at the crowdfunding platform "Röntgen", the short investment terms of 6-18 months offered by platforms, the fixed 8-10% annual return, primary asset collateral as a security measure for investors, zero administrative fees, and quarterly interest payments are an attractive combination for many types of investors. This gives investors a freedom of choice: they can decide annually at the end of the term whether to invest in new projects or keep the money. Thus, platforms cater to both short-term and long-term investor needs. This applies to both those investing the minimum possible €100 and large, professional investors.
"And speaking of long-term investors, crowdfunding platforms have another not immediately visible advantage of compound interest. When investing in stocks or related funds, returns are not known in advance, not every company pays dividends, and frequent buying or selling transactions, especially with small amounts, are limited by administrative fees. In contrast, in crowdfunding, investors receive a known return quarterly, making it convenient for long-term investors to reinvest each time and consistently grow their portfolio," comments G. Zarembiene.
She notes, however, that in exceptional cases, stocks can generate double or even triple-digit returns in a short period. However, in unfavorable circumstances, stocks can also lead to significant losses. Moreover, stock returns depend on the economic context, i.e., the specific period and circumstances when they are sold. Finally, trading individual stocks often requires specific knowledge and more active involvement, and most investors' daily activities are not related to financial markets.
"Of course, incredible success stories in stocks are possible and often publicized. But failures are equally possible, and the average long-term annual return from a quality stock portfolio after considerable effort is 5-10% - essentially the same as what crowdfunding platforms like 'Röntgen' offer. Only here, the return is fixed and known in advance, interest is paid quarterly, and there are no administrative, transaction, holding, or other fees. It is crucial that in platforms, the asset collateral is always much more valuable than the loan itself – this is a particularly relevant investment protection measure in uncertain times. Additionally, the earnings obtained on platforms are convenient to reinvest immediately – many long-term investors do just that," says G. Zarembiene.
However, A. Milevskis, the representative of Synergy Finance, who specializes more in stocks, points out that platform investors need to consider factors such as potential loan delays and the realization of collateral in case of project failure, as well as the longer or shorter periods when the investor's money is not working. He also notes that in stocks or funds, there are various tax advantages – for example, it is more beneficial to reinvest dividends, but when in need of cash, it is better to sell part of the fund units. Additionally, some companies, especially in the US, prefer to buy back their shares, thus increasing their value and the final return for the investor.
"There is less flexibility in platforms and business loans. But it's also true that you can't choose the return in stocks. However, I tell all the investors that the most important thing is to start. Once you start, you can control the frequency of investing, the amounts, and the duration, as well as the discipline. All of this will undoubtedly yield positive and very tangible results over a long period, regardless of what you specifically invest in. The key is simply to start," says Milevskis.
The Best Strategy: Invest and Reinvest Continuously
Overall, Lithuanians are becoming increasingly aware of the importance of investing. The Bank of Lithuania recently announced that the number of retail investors in the country increased by nearly 10% to 54,000 in 2022, although this statistic only considers those investing in stocks, funds, or bonds.
Recently, record inflation has also encouraged people to explore investing. Although an 8% annual return may not seem significant at first glance, by developing an investment habit, investing continuously, and reinvesting returns over longer periods, impressive results can be achieved.
According to G. Zarembiene, another invisible advantage of investing is that each year, the ratio of earnings to own funds changes more rapidly. In other words, the investment return may not seem impressive in the first few years, but its share compared to the invested capital will grow faster each year than in previous years. Thus, before the 20th year of investing, the investment return will exceed the own capital, but this requires continuous investment and reinvestment of earnings.
"Of course, all investments carry risks, so we always recommend that investors diversify their portfolios across different instruments, asset classes, or geographies. The most important thing is to invest in general – to develop the habit, maintain discipline and consistency. In such a case, even investments considered more conservative can bring impressive results over a decade or two," says G. Zarembiene.
The "Röntgen" platform currently unites over 15,000 investors. Last year, investors raised a total of €24.1 million through the platform, a 70% increase compared to 2021. "Röntgen" specializes in larger and unique real estate projects in their class and stands out in the market with a more conservative approach to financing: this makes "Röntgen" one of the few in the market with no delayed or non-performing loans.
"Synergy Finance" is an expert in liquid investment based on research and statistical modeling, managing the largest portfolio of collective investment undertakings (CIUs) established in Lithuania. The company's assets under management exceed €100 million. It is the only non-bank investment management company in the Baltics that can offer its investors investment across all major asset classes starting from €50.
How to Get Even More From 8% Annual Interest?
Quarterly interest payments, with no administrative fees, allow users of crowdfunding platforms to reinvest their earnings immediately. This creates the so-called compound interest effect, which has a significant impact on portfolio growth over longer periods.
Compound interest is an investment principle where earnings are not withdrawn but rather reinvested immediately or as soon as possible alongside the initial capital. This is a common practice for long-term investments, but not every investor is aware of it or utilizes it.
The effect of compound interest can be easily illustrated with a fixed capital of €1,000: if the annual investment return is, for example, 8%, €80 will be earned each year. A 8% annual return has recently been common on the "Röntgen" platform, and such return is also realistic as a long-term average return in stock markets or equity-related funds.
However, if the earned interest is reinvested annually together with the initial capital, the first year's return will be €80, the second year's return will be €86, the third year's return will be €94, the fourth year's return will be €100, and so on. This logic applies to any investment instrument with an annual return but does not account for administrative and other fees. The effect of compound interest is even stronger if regular additional investments are made, for example, monthly, quarterly, or at least yearly.
Over longer periods, the frequency of reinvestment also significantly impacts the portfolio. In other words, the ability to reinvest earnings quarterly is slightly more profitable than once a year, and even more attractive would be the ability to reinvest interest monthly.
According to Arturas Milevskis, Head of Investment Management at Synergy Finance, most experienced, conservative, and especially long-term Lithuanian investors tend to reinvest their earnings.
"I would say that reinvestment is the standard, but there are certainly people who are interested solely in the interest flow, which can be used for living expenses or daily needs. Older, retirement-age investors are also more likely to seek additional income streams. Perhaps among the younger generation, you would find more people who prefer to invest directly in stocks, speculate, and try to 'catch' a 100% or 1000% price increase, although I personally do not recommend this to anyone. However, the majority of investors reinvest their interest or dividends. Even the so-called 'textbook' historical equity returns, say 8-10%, typically include the effect of compound interest, i.e., these figures account for both value growth and dividends, and reinvestment," comments A. Milevskis.
How Does This Work on Platforms?
Investing through crowdfunding platforms with real estate collateral allows investors to take full advantage of the compound interest effect. This is facilitated by quarterly interest payments without administrative fees and a fixed return.
According to Greta Zarembiene, Head of Investor Relations at the crowdfunding platform "Röntgen", the short investment terms of 6-18 months offered by platforms, the fixed 8-10% annual return, primary asset collateral as a security measure for investors, zero administrative fees, and quarterly interest payments are an attractive combination for many types of investors. This gives investors a freedom of choice: they can decide annually at the end of the term whether to invest in new projects or keep the money. Thus, platforms cater to both short-term and long-term investor needs. This applies to both those investing the minimum possible €100 and large, professional investors.
"And speaking of long-term investors, crowdfunding platforms have another not immediately visible advantage of compound interest. When investing in stocks or related funds, returns are not known in advance, not every company pays dividends, and frequent buying or selling transactions, especially with small amounts, are limited by administrative fees. In contrast, in crowdfunding, investors receive a known return quarterly, making it convenient for long-term investors to reinvest each time and consistently grow their portfolio," comments G. Zarembiene.
She notes, however, that in exceptional cases, stocks can generate double or even triple-digit returns in a short period. However, in unfavorable circumstances, stocks can also lead to significant losses. Moreover, stock returns depend on the economic context, i.e., the specific period and circumstances when they are sold. Finally, trading individual stocks often requires specific knowledge and more active involvement, and most investors' daily activities are not related to financial markets.
"Of course, incredible success stories in stocks are possible and often publicized. But failures are equally possible, and the average long-term annual return from a quality stock portfolio after considerable effort is 5-10% - essentially the same as what crowdfunding platforms like 'Röntgen' offer. Only here, the return is fixed and known in advance, interest is paid quarterly, and there are no administrative, transaction, holding, or other fees. It is crucial that in platforms, the asset collateral is always much more valuable than the loan itself – this is a particularly relevant investment protection measure in uncertain times. Additionally, the earnings obtained on platforms are convenient to reinvest immediately – many long-term investors do just that," says G. Zarembiene.
However, A. Milevskis, the representative of Synergy Finance, who specializes more in stocks, points out that platform investors need to consider factors such as potential loan delays and the realization of collateral in case of project failure, as well as the longer or shorter periods when the investor's money is not working. He also notes that in stocks or funds, there are various tax advantages – for example, it is more beneficial to reinvest dividends, but when in need of cash, it is better to sell part of the fund units. Additionally, some companies, especially in the US, prefer to buy back their shares, thus increasing their value and the final return for the investor.
"There is less flexibility in platforms and business loans. But it's also true that you can't choose the return in stocks. However, I tell all the investors that the most important thing is to start. Once you start, you can control the frequency of investing, the amounts, and the duration, as well as the discipline. All of this will undoubtedly yield positive and very tangible results over a long period, regardless of what you specifically invest in. The key is simply to start," says Milevskis.
The Best Strategy: Invest and Reinvest Continuously
Overall, Lithuanians are becoming increasingly aware of the importance of investing. The Bank of Lithuania recently announced that the number of retail investors in the country increased by nearly 10% to 54,000 in 2022, although this statistic only considers those investing in stocks, funds, or bonds.
Recently, record inflation has also encouraged people to explore investing. Although an 8% annual return may not seem significant at first glance, by developing an investment habit, investing continuously, and reinvesting returns over longer periods, impressive results can be achieved.
According to G. Zarembiene, another invisible advantage of investing is that each year, the ratio of earnings to own funds changes more rapidly. In other words, the investment return may not seem impressive in the first few years, but its share compared to the invested capital will grow faster each year than in previous years. Thus, before the 20th year of investing, the investment return will exceed the own capital, but this requires continuous investment and reinvestment of earnings.
"Of course, all investments carry risks, so we always recommend that investors diversify their portfolios across different instruments, asset classes, or geographies. The most important thing is to invest in general – to develop the habit, maintain discipline and consistency. In such a case, even investments considered more conservative can bring impressive results over a decade or two," says G. Zarembiene.
The "Röntgen" platform currently unites over 15,000 investors. Last year, investors raised a total of €24.1 million through the platform, a 70% increase compared to 2021. "Röntgen" specializes in larger and unique real estate projects in their class and stands out in the market with a more conservative approach to financing: this makes "Röntgen" one of the few in the market with no delayed or non-performing loans.
"Synergy Finance" is an expert in liquid investment based on research and statistical modeling, managing the largest portfolio of collective investment undertakings (CIUs) established in Lithuania. The company's assets under management exceed €100 million. It is the only non-bank investment management company in the Baltics that can offer its investors investment across all major asset classes starting from €50.
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