Why are you investing without collateral?
Greta Zarembiene, Partner and Head of Investor Relations at the real estate crowdfunding platform Röntgen
Recently, a well-educated investor told me with excitement that he had made a "very good investment" in bonds with an annual return of 6% + Euribor. But when I asked whether this investment had any collateral, the person became confused. We soon discovered that only the company’s shares were pledged, while the company's most valuable asset – real estate – was already heavily mortgaged to other creditors. This made me wonder why people invest primarily in trust, expectations, and reputation rather than in assets backed by valuable collateral.
This investor’s story has positive aspects: it shows that we are living well and that people have confidence in a financial ecosystem that has not had significant shocks for many years. On the other hand, when even financially literate people invest without too much scrutiny and just trust, trouble is bound to come sooner or later.
But back to investing without collateral. Historically, Lithuanians have had a twofold relationship with collateral. In the first decade of independence, deposits were very popular in Lithuania but were completely uninsured, and the current maximum of 100,000 EUR, guaranteed by the state for depositors, was only reached during the great 2009 crisis. In the case of deposit insurance, people trust the state’s reputation, and it must be admitted that such a guarantee seems very solid even without pledging any assets. Of course, deposits should be considered more as a saving tool rather than an investment. And while the 3-4% interest rates recently offered by banks are quite noticeable, this is not the instrument that will significantly grow your capital in the long run.
Another popular investment in Lithuania has always been and remains real estate for rental income and value appreciation. In this case, it is the physical object itself that is attractive to many investors, essentially acting as collateral. "Whatever the crisis, the apartment will be mine, and people will always need a place to live," think many buyers of investment property. Although the mathematics of returns from rental real estate have not looked optimal for some time, especially for non-professional investors, I fully understand and justify this psychological aspect and the need for security. Of course, the dynamics are entirely different when buying investment property with a bank loan rather than cash – in this case, the physical asset is pledged not in favour of the investor but the bank.
In individual stocks or funds linked to them, there are generally no collateral mechanisms, and any drop in value translates directly into losses for the investor. On the other hand, there is no limit on potential profit in stocks, as this instrument is not fixed-return, so investors don’t expect collateral but have high expectations for potential returns. Still, diversified investments in the stocks of major, time-tested companies are considered sustainable and, arguably, classic investments that generate returns of 7-9% or even more in the long term. A major advantage of stocks is their liquidity, i.e., the ability to exit an investment position almost anytime, although selling during economic or business downturns can result in significant losses. And finally, as investors, we have no control over how specific companies manage their business when we invest in their stocks through funds or directly.
But what’s puzzling in the story of the aforementioned investor is the enthusiasm for bonds, or more precisely, such great confidence without fully understanding the instrument or the specific investment offer. A bond is primarily a fixed-return instrument, which in some but not all cases can offer various types of asset collateral as security.
The problem is that the term "bond" is often used incorrectly in public, and sometimes even dangerously, by mixing together government and private debt, i.e., corporate bonds. And these are far from the same in terms of risk. In the case of government bonds, especially for developed economies, they are indeed "protected" solely by the government’s reputation, but, for instance, the bankruptcy of Germany or another strong state is highly unlikely. Government bonds are considered safe, even "boring" investments, used even by pension funds. But when it comes to corporate bonds, the returns are significantly higher, often double-digit, and the situation is much more varied. There are cases where investors have no collateral, sometimes only company shares are pledged, and although the company may have assets, these are already significantly mortgaged to other creditors. This means just one thing – in the event of default, investors will be closer to the end of the creditor line. A bond can be an excellent investment in itself, but this conversation reminded me of how important it is to be informed, analyse, and periodically update one’s investment beliefs.
Representing a crowdfunding platform, it would sound naive to praise this instrument, which always offers a fixed return and the primary collateral of assets valued tens of percent higher than the loan. So just a brief story – one of our investors recently mentioned that banks started paying better interest on deposits, so he moved part of his portfolio to a specific bank. And within less than a month, that same bank became our client, making an investment with 10-11% annual interest and asset collateral. High-quality asset collateral is important to any bank, so why aren’t individuals always interested in it?
If an investor consciously chooses a non-fixed return instrument – stocks, currencies, crypto assets, or commodities – perhaps they do not actually expect collateral or treat the investment itself as collateral. In the case of commodities, such an investment theoretically has a physical form, but it’s doubtful that real physical oil or metals are of interest to the investor. But when people invest in a fixed-return instrument, where they do not claim the borrower’s profit, both the collateral and a serious analysis of its quality seem very important to me.
Of course, collateral or pledged assets do not automatically guarantee success. Due to previously somewhat slower housing sales and more expensive borrowing across the market, we see an increase in delayed loans. Speaking of real estate crowdfunding, when developers are unable to quickly settle with investors, foreclosure procedures may begin, which will "cost" investors months of time. However, the mere fact that these investments involve real, physical, and in many cases, completed, liquid assets with value reserves is incomparably more solid than "chasing the wind": direct losses from stock value declines, pledged vague company shares, or worse, pledged "reputation".
Why are you investing without collateral?
Greta Zarembiene, Partner and Head of Investor Relations at the real estate crowdfunding platform Röntgen
Recently, a well-educated investor told me with excitement that he had made a "very good investment" in bonds with an annual return of 6% + Euribor. But when I asked whether this investment had any collateral, the person became confused. We soon discovered that only the company’s shares were pledged, while the company's most valuable asset – real estate – was already heavily mortgaged to other creditors. This made me wonder why people invest primarily in trust, expectations, and reputation rather than in assets backed by valuable collateral.
This investor’s story has positive aspects: it shows that we are living well and that people have confidence in a financial ecosystem that has not had significant shocks for many years. On the other hand, when even financially literate people invest without too much scrutiny and just trust, trouble is bound to come sooner or later.
But back to investing without collateral. Historically, Lithuanians have had a twofold relationship with collateral. In the first decade of independence, deposits were very popular in Lithuania but were completely uninsured, and the current maximum of 100,000 EUR, guaranteed by the state for depositors, was only reached during the great 2009 crisis. In the case of deposit insurance, people trust the state’s reputation, and it must be admitted that such a guarantee seems very solid even without pledging any assets. Of course, deposits should be considered more as a saving tool rather than an investment. And while the 3-4% interest rates recently offered by banks are quite noticeable, this is not the instrument that will significantly grow your capital in the long run.
Another popular investment in Lithuania has always been and remains real estate for rental income and value appreciation. In this case, it is the physical object itself that is attractive to many investors, essentially acting as collateral. "Whatever the crisis, the apartment will be mine, and people will always need a place to live," think many buyers of investment property. Although the mathematics of returns from rental real estate have not looked optimal for some time, especially for non-professional investors, I fully understand and justify this psychological aspect and the need for security. Of course, the dynamics are entirely different when buying investment property with a bank loan rather than cash – in this case, the physical asset is pledged not in favour of the investor but the bank.
In individual stocks or funds linked to them, there are generally no collateral mechanisms, and any drop in value translates directly into losses for the investor. On the other hand, there is no limit on potential profit in stocks, as this instrument is not fixed-return, so investors don’t expect collateral but have high expectations for potential returns. Still, diversified investments in the stocks of major, time-tested companies are considered sustainable and, arguably, classic investments that generate returns of 7-9% or even more in the long term. A major advantage of stocks is their liquidity, i.e., the ability to exit an investment position almost anytime, although selling during economic or business downturns can result in significant losses. And finally, as investors, we have no control over how specific companies manage their business when we invest in their stocks through funds or directly.
But what’s puzzling in the story of the aforementioned investor is the enthusiasm for bonds, or more precisely, such great confidence without fully understanding the instrument or the specific investment offer. A bond is primarily a fixed-return instrument, which in some but not all cases can offer various types of asset collateral as security.
The problem is that the term "bond" is often used incorrectly in public, and sometimes even dangerously, by mixing together government and private debt, i.e., corporate bonds. And these are far from the same in terms of risk. In the case of government bonds, especially for developed economies, they are indeed "protected" solely by the government’s reputation, but, for instance, the bankruptcy of Germany or another strong state is highly unlikely. Government bonds are considered safe, even "boring" investments, used even by pension funds. But when it comes to corporate bonds, the returns are significantly higher, often double-digit, and the situation is much more varied. There are cases where investors have no collateral, sometimes only company shares are pledged, and although the company may have assets, these are already significantly mortgaged to other creditors. This means just one thing – in the event of default, investors will be closer to the end of the creditor line. A bond can be an excellent investment in itself, but this conversation reminded me of how important it is to be informed, analyse, and periodically update one’s investment beliefs.
Representing a crowdfunding platform, it would sound naive to praise this instrument, which always offers a fixed return and the primary collateral of assets valued tens of percent higher than the loan. So just a brief story – one of our investors recently mentioned that banks started paying better interest on deposits, so he moved part of his portfolio to a specific bank. And within less than a month, that same bank became our client, making an investment with 10-11% annual interest and asset collateral. High-quality asset collateral is important to any bank, so why aren’t individuals always interested in it?
If an investor consciously chooses a non-fixed return instrument – stocks, currencies, crypto assets, or commodities – perhaps they do not actually expect collateral or treat the investment itself as collateral. In the case of commodities, such an investment theoretically has a physical form, but it’s doubtful that real physical oil or metals are of interest to the investor. But when people invest in a fixed-return instrument, where they do not claim the borrower’s profit, both the collateral and a serious analysis of its quality seem very important to me.
Of course, collateral or pledged assets do not automatically guarantee success. Due to previously somewhat slower housing sales and more expensive borrowing across the market, we see an increase in delayed loans. Speaking of real estate crowdfunding, when developers are unable to quickly settle with investors, foreclosure procedures may begin, which will "cost" investors months of time. However, the mere fact that these investments involve real, physical, and in many cases, completed, liquid assets with value reserves is incomparably more solid than "chasing the wind": direct losses from stock value declines, pledged vague company shares, or worse, pledged "reputation".
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