This blog post examines how the sequence of moving funds between deposits, bonds, real estate, and stocks changes with interest rate shifts using Kostolany’s Egg Model, while also highlighting the difference in choices between the wealthy and ordinary people.

Kostolany’s Egg Model

Andre Kostolany, a legendary investor from Hungary, created the ‘Egg Model’ theory. This theory explains the relationship between interest rates, deposits, stocks, bonds, and real estate, and identifies the optimal timing for investment. While his explanation appears highly convincing theoretically, from the perspective of someone without significant wealth, there is little that can be practically applied. The primary reason lies in the difference in the size of available funds. The scale of capital available for investment between Kostolany, who created this theory, and ordinary people like us is fundamentally different.
It’s difficult to generate meaningful returns with funds in the range of $10,000 or even $1,000. Even if you diligently manage your money to earn a 1-2% return, the actual amount is likely to be around $1,000. Nevertheless, the reason for introducing this theory is for your future self, when you have accumulated a certain amount of capital.

Interest rates are the benchmark for everything

In Kostolany’s theory, the key factor determining investment decisions is interest rates. When interest rates fall, people tend to spend money more readily and in greater amounts, leading to an economic upturn. Conversely, when interest rates rise, consumption and investment shrink, causing an economic downturn. On the other hand, interest rates are also adjusted according to economic conditions. When the economy is sluggish, governments deliberately lower interest rates. This encourages people to spend more, thereby reviving the economy. Conversely, when the economy overheats excessively, interest rates are raised to draw funds back into banks.
In Korea, the government and the market determine the benchmark interest rate, with the Bank of Korea handling the practical implementation. The Bank of Korea raises or lowers the benchmark interest rate to stabilize prices and maintain financial stability, thereby regulating economic trends.
The ultimate purpose of mastering the egg model is to increase ‘investment returns’. This is because investment returns must exceed the inflation rate to actually grow assets in real terms. Conversely, if investment returns are low, the assets eroded by inflation will exceed the assets gained through investment, ultimately resulting in a loss. If prices remained stable, depositing money in a bank and earning interest would be the simplest choice. However, in reality, prices fluctuate continuously. Therefore, one must select appropriate investment methods aligned with interest rate changes to generate stable returns sufficient to offset the impact of inflation.

What are ‘bonds’?

Individuals rarely invest directly in bonds. In the past, some savings banks sold ‘subordinated bonds’ to elderly customers lacking financial knowledge, presenting them as high-interest deposit products, which became a social issue. Beyond this, opportunities to encounter bonds are rare, except through indirect means like CMA accounts (financial products where customer deposits are invested in bills or bonds, with returns distributed based on performance) or subscribing to bond funds.
A bond is a certificate promising that the issuer, having borrowed funds, will pay a fixed interest rate at specified intervals. The name varies depending on the issuer: bonds issued by the government or public corporations are called government bonds or public bonds, while those issued by private companies are called corporate bonds. It’s easier to understand if you think of them as a kind of deposit certificate issued by a company or the state.
The key difference between bonds and deposits is that, in the case of bonds, there is no guarantor responsible for ensuring the return of principal and interest if the issuer goes bankrupt. Even bonds issued by large corporations are no exception. Bondholders who lent funds based on trust in the issuer’s creditworthiness may not recover their principal if the issuing company goes bankrupt. Therefore, bonds issued by entities deemed highly likely to repay the money tend to have lower interest rates.
Conversely, bonds issued by entities with relatively higher repayment risk carry higher interest rates. For instance, the interest rate on government bonds is very low because the likelihood of a country defaulting is extremely low. Corporate bonds issued by large companies also offer relatively low interest rates, but they generally pay higher interest than regular savings accounts. This is because compensation must follow the risk taken.
Another important difference is that bonds can be bought and sold in the market. Deposits cannot be sold to others, but bonds are tradable. The price of a bond varies depending on the interest rate it offers and the time remaining until maturity. When interest rates rise, the price of existing bonds falls; when interest rates fall, bond prices rise. When interest rates are high, safe deposits appear relatively more attractive than risky bonds. Conversely, when interest rates fall, bonds—which offer relatively higher returns despite the risk—gain attention. To avoid overcomplicating the discussion, let’s stop here with these basic concepts.

Egg Model Stages: The Rich vs. Ordinary People

Now, let’s delve into Kostolany’s Egg Model. Simply put, this model has a cyclical structure: it starts at Stage A, progresses through Stage D, and then returns to Stage A. Interest rates differ at each stage, and accordingly, the suitable investment methods also vary. As mentioned earlier, the wealthy and ordinary people have fundamentally different scales of capital available to them. Therefore, even if they find themselves in the same stage, their response methods must inevitably differ. The following explanation is based on the perspective of ‘us,’ the ordinary people.

Stage A: Interest Rates Reach Their Peak

Situation
Articles flood in stating the economy is stagnating and countermeasures are needed. The government considers lowering interest rates to stimulate the economy, and forecasts that the Bank of Korea will cut its benchmark rate frequently appear.
The Wealthy
Anticipating the possibility of falling interest rates, they begin preparing to shift funds from deposits to other assets.
Us
We lack spare funds for deposits. Merely paying loan interest is already a struggle (see Phase F).

Phase B: Interest Rates Have Fallen

Wealthy
We begin shifting assets from deposits to bonds. This is because deposit rates have fallen. While riskier than deposits, investing in relatively high-quality bonds can yield a certain level of return.
We
Lowered benchmark rates mean lower loan rates, giving us some breathing room. We scrape together every last penny and put it into a ‘fixed-term deposit’ with a relatively high interest rate – perhaps our last chance.

Stage C: Interest Rates Head Toward Bottom

Situation
Lower loan rates make real estate purchases more accessible. Funds shift from bonds to real estate, sparking the formation of a bubble in the property market.
The Wealthy
They switch from bonds to real estate. Rental income from property has become more advantageous than capital gains from bonds.
Us
Rumors circulate that real estate prices are rising, but we still bear the burden of loan interest. To buy real estate, more loans are needed, so people wait for interest rates to fall further. Simultaneously, they hope the government will implement policies to lower housing prices.

Stage D: Interest Rates Reach Their Lowest Point

Situation
Talk begins that the economy is overheating, and concerns about inflation grow. Articles frequently report that interest rates must be raised, and real estate prices peak.
Stage E: Interest Rates Begin to Rise
The Wealthy
sell their real estate and move into the stock market, accepting relatively higher risk. They primarily invest in blue-chip stocks or dividend stocks with proven stability and profitability. During this period, blue-chip stocks begin to rise in price first.
We
As wealthy individuals put their real estate on the market, the supply of properties increases. Driven by expectations that real estate prices will rise further and the emergence of new listings, they judge now to be the optimal time to buy. Since loan interest rates are still low, they proceed with real estate purchases.

Phase F: Interest Rates Peak

The Wealthy
Gradually withdraw from the stock market. With interest rates rising, they shift funds to stable deposits. Amid an active economy, the stock market, centered on blue-chip stocks, has already entered an overheated phase.
Us
Contrary to expectations, real estate prices fall. Instead, stock prices rise. To recoup losses from real estate investments, they move into the stock market. As many people flood into the stock market simultaneously, demand surges sharply, causing stock prices to reverse and fall.

Back to Stage A: Interest rates peak

The wealthy
They pay no attention to the stock market, now in a downturn. They manage stable deposits and watch for signs that interest rates might fall again.
We
We ponder whether to invest more in stocks. Interest rates have risen, and the burden of loan interest from real estate purchases makes life even tighter. Savings are out of the question. We agonize over whether to dump our property before prices fall further, and some actually start selling. Ultimately, the investment fails.

The Core of the Egg Model: Prepare Early or Jump on the Bandwagon

The essence of the Egg Model isn’t simply about the rate of return. Its true value lies in showing whether one prepares and responds proactively to interest rate changes or scrambles to follow late. In reality, few people perfectly manage all their assets step-by-step according to this model. Real estate, in particular, isn’t an asset easily bought or sold based solely on interest rate changes. In reality, it’s more common to manage assets by combining stock investments with bonds, or by adjusting the weighting between real estate and stocks. In other words, it’s preferable to understand the Egg Model as a framework for adjusting asset structure.
The egg model is less a rule to strictly follow and more like a recipe that can be applied in various ways based on its underlying concept. If the egg model is the recipe for creating the dish called investment success, then economic news articles are the ingredients needed to properly utilize that recipe.
Viewed from this perspective, economic news articles become much more interesting. If you perceive economic news as something detached from your life, it will simply be boring. However, the situation changes if you develop the habit of connecting the theories or policies in the articles to yourself, even if your asset size isn’t large. Economics is not a field where someone else can inform or instruct you. You must observe it based on your own capabilities, standards, and perspective, and learn it directly. Only then can you ‘thrive’ in a capitalist society.