When it comes to investing, Slovaks are characterized by the fact that the majority are used to holding cash in their accounts and therefore do not invest. Since most Slovaks keep their money in their accounts, in 2023, they lost at least 15% of their savings due to inflation.
In 2004, up to 70% of people in Slovakia held money in term deposits or current accounts. There are several reasons for this, such as the fact that everything they earn goes towards consumption. Many people who lived under communism used to live from paycheck to paycheck.
Opening financial markets
The situation began to change after year 1989, after the fall of communism. At that time, various companies offering investment insurance were very popular. The financial literacy and education of Slovaks were not sufficient even then. During communism, which was uninterrupted in power from the 1950s, people didn't know what investing was. Therefore, during this period, it was very easy to come up with various products promising 30% appreciation, which eventually turned out to be pyramid schemes.
Various insurance companies also operated in Slovakia, charging disproportionately high fees, and most of the money invested in this way either ended up as fees in the market or as fees.
When intending to invest any funds, it is crucial to thoroughly study the fee structures and familiarize oneself with what the trader profits from. It is not enough to blindly follow a friend's recommendation for one investment product or another, one must look at the average returns on that product. It is also necessary to demand the presentation of the long-term results of the given product and how much of it goes towards fees, so that in the end, it is not tens of percent.
Investing in stocks vs. funds
Investing is also a suitable tool for creating a financial reserve in case of unemployment or disability. Given that unemployment in Slovakia is extremely low at 4 - 6%, while 15 years ago it ranged from 8 - 10%, finding a job shouldn't be a problem at this moment. However, it's always good to have a financial reserve prepared for a transitional period of 3 to 6 months. Additional money you have saved can also help cover the monthly costs of a mortgage.
In 2013 in Slovakia, the political party Smer made a political decision to "protect savers" and decided that all money from the second pillar, which is mandatory, should be transferred to conservative bond funds. This caused that compared to Denmark, where young people invested in equity funds, their appreciation hovered around zero. As a result of this step, people in Slovakia from 2013 to the present have had appreciation levels around 1 - 2%.
In stark contrast in Denmark, people who invested in equity funds tripled their money. From this comparison, it follows that one must be extremely cautious and interested in how the state deals with one's money. When deciding where to place your funds in the 2nd and 3rd pillars, it is necessary to really consider what is advantageous in the long term: having money in bond funds, or holding them in equity funds, which have a significantly higher appreciation in the long term.
And How do ordinary US citizens invest, as their country is a real investment Mecca?
Read about it in the next part of our educational series. This contribution was created as part of professional support for the prestigious non-profit organization JA Slovakia within the Ozios Investment Literacy program.
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Source: https://www.ecb.europa.eu/stats/html/index.sk.html
Disclaimer! This marketing material is not and should not be construed as investment advice. Past performance data is not a guarantee of future returns. Investing in foreign currency can affect returns due to fluctuations. All securities trading can lead to both profits and losses.
