What investment strategies made you rich
Investment strategies for everyone: how to invest your money optimally
Image source: © Adobe Stock / Text: Verivox
+++ This guide is updated regularly. The following information and conditions are correct as of February 2020. +++
the essentials in brief
- Investors should know five simple basic rules before deciding on the direction of their investment strategy.
- Are you more profit-oriented or more security-oriented? Your personal willingness to take risks determines how you put your portfolio together.
- Call money and fixed-term deposits form the security component of your portfolio. It is best to equip the return component with one or more index funds (ETFs).
- All costs reduce the return. Make sure you have a low total expense ratio (TER) with ETFs and use a free custody account with low order costs for trading.
To the depot comparison
In times of extremely low interest rates, it has become more difficult to invest your money profitably. Anyone who wants to achieve an attractive return and build up assets over the long term needs a solid strategy. In this guide, we explain how you can develop and implement an investment strategy in simple steps that best suits your personal risk tolerance.
Investment checklist (PDF)
Five basic rules of investing
Investors don't have to be financial professionals to invest their money profitably. Even so, there are a few important fundamentals you should know about investing before you develop your investment strategy.
Rule 1: Avoiding debt is the best investment
In the persistent low interest rates, the interest rates on loans are also at a historically low level. Nevertheless, you generally pay higher interest on your liabilities than you get on your safe savings. You should take this into account in your investment strategy. Invest your money in such a way that you can shoulder unexpected expenses such as expensive repairs to the house without slipping into the red.
Rule 2: There is no return without risk
It is true that conservative investments such as overnight and fixed-term deposits are protected by the statutory deposit insurance and are therefore particularly safe. But the interest rates are low. In the best case scenario, top offers can compensate for the loss in value caused by inflation.
You have the chance of significantly higher returns when you invest in stocks. However, stocks are subject to significant price fluctuations. Although the risks can be significantly reduced through several measures - we'll get to that in a moment, but losses are also possible when investing in stocks. A solid portfolio consists of a security and a return component.
Rule 3: A broad diversification reduces the investment risk
When investing, you should never put everything on one card. A good investment strategy therefore takes several asset classes into account - very safe investments such as overnight and fixed-term deposits on the one hand and high-yield investments such as stocks or funds on the other.
Also, it is best not to invest in one or a few individual stocks. Investing in individual stocks always involves considerable risks. If the company goes into trouble, you could lose all of your capital. So spread the part of your money that you invest in a return-oriented manner over numerous financial stocks. The easiest way to do this is to purchase fund shares.
There is a choice of actively managed equity funds and exchange-traded index funds - so-called ETFs ("exchange traded funds"). With active funds, a fund manager selects the stocks to invest in. An ETF dispenses with active management and instead tracks a large index one-to-one - for example the DAX or the MSCI World. When you invest in an ETF, you automatically spread your money across all stocks that are listed in the respective index.
Rule 4: In the long run, the risks are put into perspective
Shares are sometimes subject to large price fluctuations. However, investors only lose money if they sell their stocks and funds after a price slump. A long-term investment strategy is therefore important. If you are willing to invest your money for a long period of time and have broadly diversified your capital (rule 3), you can sit out possible price drops quite calmly. In the past, the stock markets have repeatedly recovered even after the worst crises. Calculations by the Deutsches Aktieninstitut show: Anyone who has invested in the 30 standard stocks of the DAX and held their investment for at least 15 years has never suffered losses.
Rule 5: All costs reduce the return
Maintain strict cost discipline in your investments. Every euro you spend on fees is at the expense of your effective return. Good daily and fixed deposit accounts cost nothing. This is where the part of your assets that should be invested safely is in good hands. Bonds are often recommended as a security component of the portfolio. However, secure bonds do not bring any higher returns than fixed-term deposits with good interest rates. For this you would have to pay order fees when buying, which would reduce the income even further.
You can also save when choosing your funds. Pay attention to the total expense ratio. It is often indicated by the abbreviation TER (Total Expense Ratio). With many active funds, 1.5 to 2 percent of the fund's assets go into administration and sales every year. You have to make up for that with the return you have achieved. By dispensing with active management, index funds are much cheaper. ETFs get by with a fraction of the cost of active funds. The running costs of a good DAX ETF, for example, are usually between 0.1 and 0.2 percent. Nevertheless, an ETF offers investors just as good return prospects. Numerous studies show that there is hardly an active fund outperforming its benchmark over the long term.
Managing Director of Verivox Finanzvergleich GmbH
Most actively managed funds lag behind their benchmark index. Passively managed index funds (ETFs) are also cheaper and therefore often the better choice.
Align strategy: how much risk can you take?
Before you can start putting your portfolio together, you have to make an important fundamental decision: Would you like your investment strategy to be more security-oriented or more return-oriented? There is no right or wrong here. You need to be comfortable with your decision. It is important that you stick to your strategy even if the ETF portion of your portfolio should slide into the red. Many investors have already lost money by selling their shares and funds out of fear of further losses after a severe slump in prices, of all places.
So be honest with yourself and think carefully about how you want to weight the security and return components. With a balanced investment strategy, half of the portfolio consists of safe savings and ETFs, while in a security-oriented strategy, overnight and fixed-term investments are predominant. Conversely, with a return-oriented investment strategy, a larger part of the money flows into stocks or ETFs.
Your risk tolerance determines the strategy
|Security-oriented investment strategy||Balanced investment strategy||Return-oriented investment strategy|
|25% stocks / ETFs||50% stocks / ETFs||75% stocks / ETFs|
|75% daily and fixed deposit||50% daily and fixed deposit||25% daily and fixed deposit|
Investing money: putting together a portfolio in 3 steps
As soon as you know how safety-oriented or how profit-oriented you want your strategy to be, you can start building your portfolio. There are three steps involved:
- Step 1: Create nest egg
- Step 2: Fill up the security module with a fixed deposit
- Step 3: Equip the return module with ETFs
Step 1: create nest egg
First, set aside a nest egg for unexpected expenses. This reserve is best invested as overnight money. So you can get the money whenever you need it. Because of the relatively low interest rates, you shouldn't park too much money in the overnight money account. According to a rule of thumb, three net monthly salaries are a reasonable amount for the nest egg. With net earnings of 2,000 euros, that would be 6,000 euros, for example.
In the current low interest rates, many banks no longer pay interest on overnight money. More and more people are even asking for negative interest rates. With top providers you still get 0.35 percent. With an investment amount of 6,000 euros, investors earn an interest of 21 euros a year - at least a modest return that you should not miss out on. Important: The interest for overnight money can change daily. So check from time to time whether your provider has changed the conditions and whether other banks are now paying higher interest rates.
To the overnight money comparison
Building the nest egg has top priority
The nest egg is used to avoid debts (rule 1 of a successful investment). This means that building up this liquid reserve has top priority when putting together your portfolio. Only when the nest egg is completely built up do you distribute the remaining capital between the security and return modules according to your investment strategy.
What does that mean in concrete terms? Suppose you have 10,000 euros at your disposal, earn 2,000 euros net and have decided on a balanced investment strategy: Then you still invest the entire nest egg of 6,000 euros as overnight money. Because the nest egg is part of the security module, the remaining 4,000 euros flow completely into the return module and are invested in one or more ETFs. If you were to pursue a security-oriented investment strategy, a further 1,500 euros would have to flow into the security module in addition to the nest egg. This money would then be invested as a fixed-term deposit.
Step 2: Fill up the security module with a fixed-term deposit
Fixed-term deposits are just as safe an investment as overnight money, but they generate higher interest rates. You won't get the money for this during the term. Therefore, you shouldn't commit yourself for too long in the persistent low interest rate environment. If interest rates rise again in the future, it would be a shame if a large part of your assets is stuck in investments that hardly bring any income. On the other hand, fixed-term deposits with long terms bring higher interest rates than short-term investments.
Our tip: Distribute the fixed-term deposit portion of the security module evenly over two alternately expiring systems with a two-year term. One of the two investments expires every year and you can react flexibly to changes in interest rates. To get into this rhythm, you can split the fixed-term deposit component into one investment with a one-year term and another with a two-year term when building up your portfolio.
A careful comparison of providers is also important when investing money in fixed-term deposits. Because here, too, the differences in interest rates between the banks are enormous. On average, 2-year fixed-term deposits currently only bring 0.3 percent. Top providers pay up to 1.1 percent. With an investment amount of 10,000 euros, you would reap around 80 euros more in interest per year. In the case of lower investment amounts, interest rate differentials do not have quite as much impact. Even so, it is best to make a habit of investing your money optimally right from the start.
To the fixed deposit comparison
Step 3: Equip the return module with ETFs
Now you can equip the return component of your portfolio. ETFs are particularly suitable for this. Because index funds offer a broad diversification with low costs at the same time (rules 3 and 5 of a successful investment). The question is which index do you want to invest in?
Select the desired index
The broadest diversification is offered by MSCI World, which lists over 1,600 companies from 23 countries. However, the American market is clearly overrepresented. About 60 percent of the stocks included come from the USA. If you prefer to invest in European companies, ETFs on the Stoxx Europe 600 offer you the broadest diversification. Of course, you can just as easily buy a DAX ETF. Please keep in mind, however, that the capital employed will then only be distributed over 30 shares and that you will only invest in the German market. This is not a problem in a mixed portfolio. However, if you only want to invest in a single index, it makes sense to spread it over several countries and as many stocks as possible.
Open a cheap depot
To buy an ETF, you need a securities account. The custody account is also a significant cost factor for many investors. Most resident banks charge annual custody fees - often a percentage of the current custody account value. The more your assets grow, and with it the securities portfolio in your custody account, the higher the costs for custody account management.
It doesn't have to be. At numerous direct banks and online brokers you will find custody accounts that get by without fees. The order costs for buying and selling securities are often significantly lower here than with a branch bank. Some providers even completely waive the order fees when buying certain ETFs. With a deposit like this, you can cut your costs even further.
Find cheap securities accounts
Now you can equip the return component of your portfolio. It is up to you whether you invest in just one or in several funds. To start with, it can make sense to focus on just one broadly diversified index such as the MSCI World or the Stoxx Europe 600. To find a suitable ETF, you can either search for its name or its international securities identification number - the so-called ISIN.
In the following tables we have put together some ETFs on the MSCI World and the Stoxx Europe 600 including ISIN:
ETFs on the MSCI World
|ETFs (MSCI World)||ISIN|
|Amundi MSCI WORLD Ucits ETF EUR||FR0010756098|
|ComStage MSCI World TRN UCITS ETF||LU0392494562|
|db x-trackers MSCI World Index UCITS ETF 1C||LU0274208692|
|iShares Core MSCI World UCITS ETF||IE00B4L5Y983|
ETFs on the Stoxx Europe 600
|ETFs (Stoxx Europe 600)||ISIN|
|Amundi ETF Stoxx Europe 600||FR0010791004|
|ComStage Stoxx Europe 600 NR UCITS ETF||LU0378434582|
|db x-trackers Stoxx Europe 600 UCITS ETF (DR) 1C||LU0328475792|
|iShares STOXX Europe 600 UCITS ETF (DE)||DE0002635307|
Put money in and leave it
Once you have put together your portfolio, you don't have to invest a lot of effort in maintaining it. Check once a year whether security and return components are still weighted according to your investment strategy. A good time to do this is when your fixed-term deposit expires. If the market value of your ETFs has fallen and the return component is underweighted as a result, buy some fund shares with part of the capital that has become free. Conversely, you can sell shares and shift the proceeds from the reinvestment of the fixed-term deposit into the security module if the return module is significantly overweighted after a price rally.
In the meantime, it is best to leave your depot and the entire portfolio completely alone. Avoid frequent redeployment. One of the most common mistakes many investors make is being too active. On the one hand, they produce high costs and, moreover, are often not invested at the moment when large price jumps make the system particularly profitable.
An analysis by the Hamburg-based Sutor Bank shows that if you only missed the best 13 days in 31 years of investing in the 30 standard stocks of the DAX, you lost half of the return. Without the 33 best days, the return would even be negative. Because no one can predict the decisive days, investors should simply leave their portfolios untouched. This is the only way to ensure that you are invested at the crucial moment and also benefit from the price increase.
How to implement your investment strategy with savings plans
Many investors do not want to invest a large amount once, but regularly save small amounts. If you always want to set aside the same amount, the easiest way to do this is with a savings plan. Then, for example, 200 euros go out of the account every month and are invested.
You should also stick to your basic strategy with regular investments. Either you split the monthly savings contribution according to your willingness to take risks - with a balanced investment strategy, for example, you then pay 100 euros every month into an ETF savings plan and the other 100 euros into the daily money account. There you park the money until the next time a fixed-term deposit expires. When reinvesting, you can then switch it to the fixed-term deposit account.
As an alternative to halving the savings installments, you can alternately invest the full amount once a month in ETFs and invest it in the following month as overnight money. This rhythm is particularly recommended to save order fees if your depository provider does not offer discounted ETF savings plans.
Invest money automatically with a robo-advisor
If you shy away from the effort of looking for suitable ETFs yourself and putting together a portfolio, but still want to invest your money profitably, so-called robo-advisors are an ideal alternative. These are digital investment assistants that invest your money for you.You simply answer a few questions about your personal risk tolerance and financial background. Based on this, intelligent software compiles and manages the portfolio for you.
While you have to pay for this service, most robo-advisors invest all or most of their investments in cheap index funds and bond ETFs. The cheapest providers come up with total annual costs of less than 0.5 percent of the assets under management. Compared to actively managed funds, such a “robo” is still very cheap.
Compare robo-advisors now
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