The Basics Of Investing. Investing is a complicated subject. And one that poses many dangers for careless and inexperienced investors. Nonetheless, if you follow the simple rules of our little investment table, you will be well equipped to avoid the worst investment traps and invest your money successfully.
Here are the ten principles to keep in mind when investing money:
1. Make your goals clear to yourself
It sounds banal that you have to be clear about your goals before investing. An intensive examination of one’s own goals is by no means a matter, of course. But it is essential for good planning and the right decision. Take your time and write down what you expect from your investment – and from your life situation. Are you planning to make major purchases in the medium or long term? Are you planning to move, or do you want to start a family? Perhaps your professional situation is uncertain, or you are about to retire? Will you have higher or lower monthly charges in the future? Are you financially stable or is the overall situation uncertain and the future difficult to predict? Do you want to invest money once or would you prefer to save something monthly? Divide up your funds: do you want to invest part of it long-term and still have it available if necessary?
The investments must match your individual goals. So think about where your priorities lie: is it the high return, is it available at all times or is it absolute security? No investment can achieve these three goals at the same time. You can only expect high returns by foregoing availability or security.
2. Debt settlement has priority over investments
Before you invest, consider one thing: credit and debts are expensive. They generally cost more interest than you can get by investing the same amount. For you, this means that you should always try to reduce debts first before investing money elsewhere. Paying off loans and advances is usually the best investment you can make. Of course, some of the exceptions for it, as an example; when taxes lower the bottom line, which can be the case with rented real estate. Some old home loan and savings contracts offer returns of up to 4 per cent because of the bonus interest, and classic life insurance policies that were taken out up to 2004 have tax advantages and, depending on the provider, the guaranteed income after costs can still reach around two or even 3 per cent. Anyone who is debt-free and has a sufficiently high reserve also avoids over drafting the current account in the future if damage in the household or car needs to be replaced or repaired.
3. Insurance can protect assets
Certain events can have serious financial consequences. The most solid financial investment can vanish in no time if you are liable for damage to your own assets, for example. If you are the family leader and took after your family, you may not want to drive them into financial difficulties if they die unexpectedly or if they can no longer work due to illness or accident. Keep these risks in mind. Many of them are well protected in our welfare state, but not always to the extent that enables them to maintain the standard of living they are accustomed to.
Anyone who does not want to endanger the standard of living by the occurrence of certain risks can buy an appropriate insurance cover. Only you know which risks you want to cover and which risk protection you feel more comfortable with.
Also, consider how high insurance coverage should be. Do the surviving dependents have to be provided for until they retire, for example, or is five years enough because this period is sufficient to adjust to the new situation? Avoid rules of thumb and checklists that sellers like to use. Your personal needs are the only decisive factor.
4. Can and do you want to take risks?
If you take more risk, then it leads to higher returns. So the risk is not something that is bad per se. And security has its price, the yields are then simply lower, at the moment, with luck, you can just manage to compensate for inflation, i.e. maintain the purchasing power of your money. It is therefore crucial to dose the risk in such a way that you feel comfortable with it. The number of potential losses should be clear to you, and you should be able to handle them. With our online return calculator, you can get a feel for the income opportunities and risks of different investments. It is vital to know and note that this only applies if you invest widely in stocks. More on this in the next step. In connection with the personal willingness to take risks, the risk-bearing capacity is also important. Because not everyone who would like to have a higher return can also afford a higher risk due to the life situation. Anyone who has to live with the assets should generally avoid fluctuations in value unless the assets are so large that the fluctuations are irrelevant.
5. Spread the risks
Regardless of whether you want to invest a large amount of money one-off or just a small monthly savings contract: spread the risks! Capital markets always harbour risks, even if the newspapers paint a bright future. Stock prices can always collapse, and interest rates can turn at any time. But don’t confuse risk diversification with simply buying multiple products. Those who only have savings bonds, overnight money and bank savings plans do not spread the risks! Rather, what matters is the asset class that you represent with the product.
THE FOLLOWING ARE BASICALLY AVAILABLE:
- Participations in companies, in the form of shares or, even more widely, in the form of global equity index funds (ETFs). You can find out how this works and how you can use index funds (ETFs) here.
- Debt, often called monetary assets. All loans fall into this category, including overnight money, savings bonds, government bonds and pension funds. Classic life insurances also fall into this category, as they mainly buy debt securities from governments and banks.
- Real estate, in the form of your own home, rented property or in the form of open real estate funds and real estate investment trusts (REITs), which also offer access to this asset class for small amounts. Beware of closed real estate funds.
- Speculative values , such as raw materials or precious metals. These investments offer no interest, and their performance is highly uncertain. However, gold is probably one of the oldest means of payment of mankind, and every paper currency (category: debt) has survived. Information on investing in gold can be found here.
The asset classes usually develop differently. For example, when stocks tend to weaken, bonds have often been ahead in the past – and vice versa. When the value of stocks and debt collapsed worldwide during the financial crisis, the gold price boomed. Spread your assets across all of these asset classes, then you practically eliminate the risk of total loss and stabilize the total return. The spread of risk is also called diversification.