How do you find the right investment? There are many good reasons to save money, as well as many options, products and strategies. The following three steps will help you to find your personal investment strategy.
Step 1: First clarify what type of investment you are
When you invest money, your investment must suit you. Is safety your top priority? Or do you take risks because you want a high return? Decide for yourself which group you belong to. The following table shows suitable investment options for both security-oriented and risk-taking investment types.
Useful investments for different investment types
|high security, no fluctuations
|per diem fixed deposit buy bonds buy gold
|high return, fluctuations very likely
|Shares P2P Lending cryptocurrencies crowdfunding invest in collectibles
In the following we show you an example of the portfolio of a security-oriented investor (left) and a return-oriented investor (right). The portfolio of an investor who balances risk and return can be found in the middle.
The magic triangle when investing money
The magic triangle helps to clarify the connection between risk and profit. It connects the three important goals of an investment and puts them in relation:
These factors are in conflict with each other. It is not possible to achieve all three goals at the same time – no matter what you invest in. There is no such thing as an ideal investment without risk, with constant availability and with maximum returns.
The magic triangle shows that only two of these three goals can be achieved with serious capital investments. For example, you can count on high returns and liquidity with shares and securities, but you have to take an increased risk into account. Overnight money , on the other hand, is a very safe investment due to the deposit guarantee of up to € 100,000. At the same time, the yield is currently low.
Step 2: What do you want to invest the money in?
Before you put together a portfolio and decide on certain investment opportunities, you should set your investment goal. Your individual strategy is derived from this. Clarify the following questions for yourself:
- How much money do I need when and for what?
- How much loss can I take?
- How long can I do without the money I have invested?
Two examples should make this clearer: You are still at the beginning of your professional career and you want to invest your money for the time of your retirement. So you still have decades before you access the money. In this case, the following are available as investments:
- fixed deposit
- crowd investing
On the other hand, if you only want to invest a certain amount of money for a short period of time, e.g. B. €10,000 for 2 years, other investments are possible:
- per diem
- Fixed-term deposit with a short term
- crowd investing
The options mentioned have the advantage that you can access your money quickly.
Step 3: Decide how much money to invest
Another decisive criterion for choosing the right investment is the amount of savings available. Because whether you want to invest €10,000, €50,000 or €100,000 makes a big difference in your approach. It is also important whether you want to invest a large amount once or invest a fixed, smaller sum monthly with a savings plan.
How much money should I save and how much money should I invest?
The 50-30-20 rule easily divides your income into three expense categories:
- 50% should be enough for basic needs such as housing, transport and food.
- 30% is allowed for personal desires, holidays and entertainment.
- And 20% should be saved.
If you can pull it off and achieve a higher savings rate, all the better. If you can’t put anything aside at the moment, check where your fixed costs and variable expenses can be reduced, or turn the income screw.
What investment options are there?
Once you’ve followed the three steps above, you’ll know how risky you are, how much money you want to invest, and what your goals are. Now you can start choosing the right investment. Investments are roughly divided into different asset classes, which are also called assets.
Invest money in securities
You need a securities account to buy and manage your securities. This can be associated with custody costs that reduce the return on your investment. Therefore, look for a custody account without account management fees.
Investment tip 1
Avoid depot costs
Use a depot without account management fees.
Invest money in stocks
When you buy stocks, you buy a stake in a company. If the value of the company on the stock market increases, then the value of your shares will also increase. As a shareholder, you also receive an annual bonus from some companies, the dividend. However, no one can guarantee that a company’s value will increase. It may just as well go down and your stock may lose value. A total loss can also occur if the company becomes insolvent. Trading in shares requires detailed knowledge of both the company and the environment and involves a high level of risk.
Benefits of Stocks
- high return possible
- constant availability of your assets
- Shares are protected as special assets in the event of a bank insolvency
Disadvantages of stocks
- high risk of loss
- strong fluctuations
- high effort for the company analysis
- Depot required
- a sale does not make sense at every point in time
Investment tip 2
diversify stocks widely
Don’t rely on a single company or just a few stocks, instead set up your stock portfolio broadly. Consider different industries and countries. If you find it too difficult to deal intensively with individual companies, consider switching to ETFs with many stocks. This reduces the risk. This principle of diversification applies to all of your investments.
Invest in funds
Equity funds are traded on the stock exchange and combine many individual stocks. As a result, funds reduce the risk of loss compared to individual stocks. After all, it is unlikely that all companies represented in the fund will lose their value at the same time. A fund manager manages the fund and organizes the various investments. For this, investors pay permanent fees of around 1-2.5% per year and a front-end load of up to 3%. Some funds also charge a performance fee if the price increases by more than 5%.
Benefits of Funds
- spread of risk
- small effort
- Equity funds are protected as special assets in the event of bank or fund company insolvency
Disadvantages of funds
- Depot required
- Initial Charge and Administrative Expenses
- long investment horizon recommended
- exchange rate fluctuations
In addition to equity funds, there are also real estate funds that invest in offices, shopping centers or residential properties. There are also money market funds and commodity funds. Bond funds focus on fixed income securities such as government or corporate bonds. Balanced funds combine different asset classes such as stocks and bonds.
Invest money in ETFs
Exchange-traded funds (ETFs) are exchange-traded index funds. ETFs stubbornly track an index, e.g. B. the MSCI World Industrial Nations Index or the MSCI ACWI World Index and are not actively managed. That saves costs. With them you can invest passively, particularly cheaply and widely in equities. With an ETF, you are investing in hundreds or thousands of companies at the same time, which greatly reduces your risk compared to individual stocks.
Studies have shown that index funds typically deliver higher returns than actively managed funds. Investors can make one-time investments in ETFs or set up an automated savings plan. ETF savings plans are available from as little as €1.
Benefits of ETFs
- low costs
- small effort
- broad diversification allows you to spread the risk as much as possible
- ETFs are protected as special funds in the event of bank or fund company insolvency
- high availability
Disadvantages of ETFs
- Depot required
- exchange rate fluctuations
- long investment horizon of at least 15 years recommended
- a sale does not make sense at every point in time
Stiftung Warentest recommends an ETF on a world stock index for a savings plan, for example an MSCI World or an MSCI ACWI ETF. Anyone who invests €300 every month in this way for 25 years, with a cautious assumption of a return of 6%, will end up with a final amount of around €200,000 per year.
Investment tip 3
Choose an inexpensive ETF
Pay attention to the ETF costs and not only compare the performance, but also the total expense ratio TER and the tracking difference. In addition to MSCI, there are also other, often cheaper index providers. ETFs that track these indices are often a bargain in comparison. Check out the Amundi Prime Global ETF for an alternative to an MSCI World ETF and the Vanguard FTSE All World ETF for an MSCI ACWI ETF.
Invest in bonds
Bonds are considered by many to be one of the best investments with almost no risk. Bonds are securities with which a company or a state borrows money, which is why they are also called government bonds. As the buyer of these bonds, you grant the company or the state a loan and receive interest on it. The risk is that the state or the company may go bankrupt. Since this is unlikely in most cases, interest rates are low. However, as a result of the uncertainty on the financial markets since the beginning of the year, interest rates have been raised significantly in some countries.
A special form of bond is the Pfandbrief. This is a bond that is issued by a Pfandbrief bank. They often pay better interest than bonds. Another special form are green bonds. You invest your money in projects that are particularly sustainable and climate-friendly. This can be the construction of wind turbines, for example. However, there are no regulations that define exactly when a project is particularly ecological.
Benefits of Bonds
- high security
- high liquidity, tradable on the stock exchange
Disadvantages of Bonds
- low return
Invest in derivatives
Derivatives take you far into the realm of speculation. Because these are bets on the future development of stocks, commodities or foreign exchange. Although large profits can be achieved quickly with derivatives, the risk for you as an investor of suffering significant losses is also very high. In addition, you bear the risk of losing the capital you have invested if the issuer of the securities becomes insolvent.
The generic term derivatives includes warrants and certificates, options as well as futures and contracts for difference, so-called CFDs. These financial instruments can be used to bet on both rising and falling prices. These are usually not long-term investments, but speculation and short-term trading.
Advantages of Derivatives
- high profits possible
- little equity required
Disadvantages of Derivatives
- high risk, including issuer risk
- extremely high profit and loss fluctuations
- complex product – risk of additional payments
- experience and expertise required
Invest money in real estate
If you invest your money in concrete gold, you are investing in real estate. One possibility is to buy a house or an apartment. If it is not an owner-occupied property, but you are planning the property as a capital investment and want to rent it out profitably, you will enjoy tax advantages. However, the purchase process is complex and associated with high costs for brokers and notaries as well as property tax.
Advantages of rental properties
- permanent rental income
- tax benefits
- long-term inflation protection through property
Disadvantages of rental properties
- expertise necessary
- high investment costs
- complex buying process
- High additional acquisition costs (agent, notary, property tax)
- permanent additional costs (administration, maintenance, operation)
Invest money in crowd funding
You don’t necessarily have to finance an entire property on your own. An alternative is crowd investing in real estate . With crowd investing, companies are looking for many individual financiers to contribute small amounts. Private investors can start from €100 or €500. You will get back the paid-in capital after a fixed period of time with interest. But beware: These are subordinated loans in which the investors bear a high risk. Therefore, invest only a small sum per project.
Advantages of crowd investing in real estate
- simple process
- good expected return
- Opportunity to diversify your portfolio
Disadvantages of crowd investing in real estate
- high risk including total failure
Read also: Investing in football stocks: Is it for you?
Invest money in tangible assets
Invest in gold
Gold has been considered a stable investment opportunity for decades. The precious metal is often used as a hedge, especially in times of crisis. An advantage is the tax exemption that you get when you buy gold, hold it for more than 1 year and then sell it. There is then no withholding tax . One downside is storage. A safety deposit box or secure safe is required, which comes at a cost that reduces your profits. However, physical gold will never become completely worthless.
Advantages of gold as an investment
- safe investment
- Portfolio diversification
- Tax exemption after 1 year of ownership
Disadvantages of gold as an investment
- high cost of storage
- low expected returns
Investment tip 4
Gold ETCs as an alternative to gold
If you want to invest your money in gold but have concerns about storage, you should think about alternatives such as gold ETFs or gold ETCs. You can buy gold ETCs on the stock exchange in a similar way to stock ETFs. Then you do not own physical gold, but Exchange Traded Commodities (ETCs) that track the price of gold. ETCs are perpetual debt securities.
Invest in collectibles and alternative investments
Rare watches, vintage cars or limited special models from brands such as Porsche, Ferrari and Mercedes have been increasing in value for years. This also applies to rarities and memorabilia owned by actors, rock stars or athletes. Many investors buy wine or whiskey not to drink but to resell for a profit. Such tangible assets are also referred to as alternative investments.
These shouldn’t make up the bulk of your wealth to be safe, but they offer an unusual and exciting way to diversify your portfolio. This asset class is no longer only open to millionaires. The Berlin start-up Timeless Investments offers investments from €50. You can invest money in valuable collector’s items together with other interested parties. Then you don’t buy the whole collector’s item, but only parts of it. Be aware, however, that such holdings may be subordinated loans where, in the event of financial ruin, you get your money back after all other creditors.
Advantages of alternative investments
- special knowledge of individual market segments pays off
- diversification opportunity
Disadvantages of alternative investments
- Risk of total loss if e.g. B. a bottle of fine wine breaks
- possibly high effort for safe and optimal storage and care
- Participations are often subordinated loans
- sometimes high commissions and structuring costs
The company Momentum automotive * works in a similar way, specializing in exclusive cars. One of the successfully completed projects is a Ferrari Monza SP1. It is a form of crowd investing in which investors can participate with as little as €100. They get back their capital plus return if the vehicle is sold at a profit after a specified period of time.
Investing for the advanced
Invest via crowdfunding and crowdinvesting
If you invest money in crowdfunding, you become part of a group (crowd) that financially supports a young project or a company. Many ideas and projects only have a chance of success if they receive start-up financing in this way. Depending on the type of project, you will receive a profit share. Be aware that many crowdfunding projects don’t go through, or don’t go through as planned.
One example of a successful crowdfunding campaign is the Brandenburg company eROCKIT, which manufactures innovative electric motorcycles whose speed is controlled by pedals. In the start-up phase, it was financed through crowdfunding, and investors have been able to buy company shares since December 2021. Investors have the opportunity to purchase shares in the company and thus participate in the profits generated by the production and sale of the zero-emission motorcycle.
Benefits of Crowdfunding
- interesting projects
- high return possible
- Participation with small investment possible
Disadvantages of crowdfunding
- Crowdinvestments are very risky, high risk of total loss
- mostly long investment horizon necessary
Investment tip 5
Be careful when crowd investing in startups
Many start-ups that have financed themselves through crowd investing cannot pay back the capital or go bankrupt. Crowdinvestments are often subordinated loans, where you rank behind other creditors. Therefore, spread your investments and prefer to invest small sums in different projects. Only use money you can lose.
Investment in cryptocurrencies: Invest in Bitcoin & Co
Cryptocurrencies such as Bitcoin, Ethereum or Ripple open up further opportunities for investments. These coins exist exclusively digitally and are not issued by states and their central banks. Cryptocurrencies are highly speculative investments and can be traded via special crypto exchanges or decentralized marketplaces. German stock exchanges and custody account providers are also increasingly offering access to cryptocurrencies, e.g. B. the Stuttgart Stock Exchange with the BISON app and the Boerse Stuttgart Digital Exchange BSDEX offer. There you can buy bitcoins.
Be aware that such investments are highly speculative. Bitcoin lost around 55% of its value in the first 6 months of 2022. Only invest money you could lose.
Advantages of Cryptocurrencies
- high profits possible
- lower expense
- Entry possible with little capital
- Tax exemption after 1 year passive holding period
Disadvantages of cryptocurrencies
- very high risk
- strong price fluctuations
- Wallet required
With cryptocurrencies, you can also generate ongoing income after the purchase. If you lend bitcoin shares or other coins, which is possible with crypto lending, platforms like Kraken, Binance or Coinbase offer you interest-like rewards. You can also put cryptocurrencies in a special pool for a set period of time and thereby receive high yields for so-called crypto staking. Crypto owners use their coins for the purpose of securing the network and updating the blockchain.
Invest in P2P lending
As a private individual, you can give a peer-to-peer loan to another private individual. Profitable interest rates in the double-digit range are possible for this P2P loan. Online platforms such as Bondora, Mintos or Auxmoney act as intermediaries between lenders and borrowers. On these marketplaces, borrowers with poor credit ratings also have a chance of getting a loan . The higher default risk for the investor is offset by higher interest rates.
Benefits of P2P lending
- high return
- Investment possible even with a low investment sum
Disadvantages of P2P lending
- high risk of non-payment
- Risk that the platform will become insolvent
- often low liquidity
Investment tip 6
Put little money into P2P lending
In recent years, the market for P2P lending, as P2P loans are also called, has grown significantly. However, only investors who are very willing to take risks should invest here and only put a small part of their assets into this risky form of investment.
Invest in cooperative shares
As an alternative to classic financial investments, investments in cooperative shares currently offer higher interest rates than call money or fixed-term deposits. This form of investment has a long tradition. There are cooperatives in different areas such as agriculture, housing construction, banking or the energy sector.
If you own cooperative shares, you are both a member and co-owner of the cooperative. If profits are made by the cooperative, you will receive a proportionate payment. Cooperative shares as an investment are recommended for security-oriented investors, as the bankruptcy rate is only 0.1%. In the event of insolvency, you have no legal right to compensation.
Benefits of cooperative shares
- high security
Disadvantages of cooperative shares
- low liquidity
- Number of acquirable shares often severely limited
Invest money in classic investments
Daily allowance and fixed deposit
Call money is a very flexible form of investment. A call money account is an interest-bearing account without a fixed term. So you can access your money at any time. The interest rate is usually higher than that of a savings account. However, the interest rate is not fixed and can change up or down on a daily basis.
With a fixed-term deposit account, you invest your money for a certain period of time. The term is at least 1 month and a maximum of 10 years. This means that you cannot access your money for this time. The interest rate is higher than with a call money account.
Benefits of overnight and fixed-term deposits
- Deposit protection up to €100,000
- available at any time (with overnight money)
- guaranteed interest rate (fixed deposit)
Disadvantages of daily and fixed deposits
- low interest rates
- Money not available for a certain period (fixed deposit).
Foreign currency account
A foreign currency account is an account with a US bank or a bank operating in the USA that is managed exclusively in a foreign currency. Such foreign exchange accounts are also subject to deposit insurance and guarantee higher interest rates on savings. For example, Volksbank Lübeck pays 7.5% interest on its currency account in Turkish lira (September 2022). In return, investors bear the risk that the lira will fall in value, which can lead to significant losses. The return on a foreign currency account is calculated as interest income plus a gain or loss on the exchange rate. It can also be negative. Foreign currency accounts are speculative.
Advantages of a foreign currency account
- relatively high profits possible
Disadvantages of a foreign currency account
- Risk from changing exchange rates
Comparatively high interest rates are currently offered by child accounts. If you have children, you have an additional opportunity to invest money. Because the branch banks rely on early customer loyalty, they entice them with interest rates of up to 3% for amounts up to €500 for a children’s account. A positive side effect: Your offspring will learn how money transactions work right away.
Child Account Benefits
- good interest
- high security
Invest in a savings contract
The home savings contract is very popular in the USA. You can pursue two goals with building savings: either the construction of a property or pure investment and saving. A home loan and savings contract is only worthwhile as a savings investment if you choose a tariff that includes high interest on the credit balance and you receive capital-forming benefits from the state as a subsidy. Otherwise, you are usually better off with investments such as overnight money or fixed-term deposits.
Advantages of building savings
- partially useful as construction financing
- suitable for government subsidies
Disadvantages of building savings
- little flexible
- not suitable as a pure investment
Invest money in an endowment life insurance policy
Endowment life insurance is a combination of protection and investment. This is also your advantage, because the insurance pays in any case: both in the event of death and when the contract expires. The term of an endowment life insurance policy is often long, e.g. B. 12 years. If you want to get out of the contract before the end of the term because you need your money, you have to reckon with additional losses. You can be more flexible with your money if you save it in a call money account.
A life insurance policy isn’t necessarily the best investment if you look at it as a profitable investment. Usually high ongoing fees of z. B. 3% due, so that the costs exceed the guaranteed interest of 0.25% (since 2022). Savings returns are further reduced as the insurance withholds a portion to cover the risk of death.
Advantages of an endowment life insurance
- Payment both in the event of death and after the term has expired
Disadvantages of endowment life insurance
- high fees and low interest rates = negative returns
- Counterparty risk (creditworthiness of the insurance company)
- little flexibility due to long term
- Early Exit Losses
Investment tips 7
Include the tax in your considerations
Whether and how much taxes such. B. the withholding tax on your profits will have an impact on your ultimate return. So include the tax in your portfolio considerations right from the start. If you are unsure or in doubt about how certain asset classes are valued, consult your tax adviser. In the case of cryptocurrencies in particular, the legal situation has often not yet been conclusively clarified.