There is no end to the number of tips on saving and investing your money. Novices are particularly at risk of getting lost in the jungle of recommendations. But it’s worth staying the course and fighting your way through the undergrowth. The following tips offer you a way through all the flora, allowing you to take your first steps as an investor.
How much money do you want to invest?
It’s important to take an overall look at your finances before investing any money. Take a look at your income and compare it with your outgoings. And don’t cheat! Make a note of absolutely everything you spend your money on, including all your card payments, standing orders and even small cash payments. And there are plenty of apps out there to help you – but a simple Excel sheet will also do the job. Or you can go old school and do it on paper. This will help you work out how much money you have left over at the end of each month. You shouldn’t invest that whole sum. It’s very important to have some “emergency money” put to one side! As a rule of thumb, you should always try and keep three to four month’s wages in your current account, just in case you need it in an emergency.
Decide what the goal of your investment is!
Set your savings goals. Are you looking to do something for your retirement provision? Is your goal to build up additional assets? Do you want to save up for your children’s education or a driving licence? The answers to these questions often indicate the most suitable time horizon for your investment. Retirement provision usually requires a long-term investment horizon. But if you’re looking to buy a car, for example, you should only be aiming to invest your money over the medium term. Once you’ve worked out your goal, then it helps to find the right investment product and stay motivated.
How much risk are you willing to take?
Decide what your personal risk appetite is: Would you prefer to play it safe or are you prepared to take a greater investment risk – with higher potential returns? Even though the willingness to take risks has increased somewhat in recent years, nearly two thirds of Germans are still relatively risk-averse when it comes to financial investments. In a survey carried out by the Association of German Banks, 65 percent of those surveyed said that, despite greater potential returns, they would not be willing at all (25 percent) or were unlikely (40 percent) to take more risk.
Greater returns are often only possible with greater risk. Nevertheless, you should always be realistic about your investment options and be more cautious if you only want to invest your money for a relatively short period. However, if you are looking at a long-term investment horizon, you are better able to manage the risk because then you have time to ‘sit out’ the price falls or adjust the investment mix by buying back positions at a lower price. If you’re unsure what level of risk you are willing to take then talk to an advisor at your bank.
Look for suitable investment products!
When you’ve decided on your goals and your appetite for risk, then the next step is to find the right investment product. Don’t be put off if you come across the term “asset class” when doing your research. An asset or investment class is a grouping of financial products that exhibit similar characteristics. They differ in terms of risks and potential returns. Important asset classes include, for example, shares, real estate, fixed-interest investments such as fixed-term deposits, overnight money and bonds.
Most investors prefer traditional investment options: When asked if they would be willing to invest a large sum of money, 36 percent of respondents to the association’s survey said they would prefer to invest in overnight money. 29 percent said they would prefer to buy shares and 19 percent said they would invest in a fixed-term deposit.
Spread your risk!
Don’t base your investments too much on what other investors are doing. And above all: don’t put all your eggs in one basket, be sure to diversify your investments. That means: be prepared to spread the risk of your investment. So, if you were to lose money on a particular financial investment, this would not affect your entire portfolio or all your savings.
A solid basis for your financial investment might be, for example, a mix of overnight money, investments in equities via individual shares, classic funds and/or ETFs (exchange-traded funds). An ETF is an exchange-traded index fund that invests money directly in the shares of an index or replicates the index, i.e. tracks the fluctuations of an index. This allows you to invest even small amounts, as with classic funds, in many sectors throughout the world. For example, you can only invest in the largest companies in the world on the MSCI World index with an ETF. Spreading your investments widely across regions, businesses and sector reduces your risk – particularly if you are saving regularly or investing long term.
If you are not looking to invest your money long term, then you might want to consider overnight money or fixed-term deposits. However, despite the recently increased interest rates on savings, you still need to keep an eye on inflation. Depending on how high the rate of inflation is, you may end up losing purchasing power on your money. That means: Even if the nominal amount of money on your account remains the same or increases slightly due to interest earned, you will actually be able to buy fewer goods and services with it. Nevertheless, you should still deposit some of the money you want to invest in an instant access savings account so you can access it whenever you need to – especially in an emergency. Long-term investments in shares and ETFs, on the other hand, offer higher potential returns. Although the risk is generally higher, market fluctuations or price falls are usually offset over the term of the investment. This means the longer you invest, the better your returns! If you invest in shares and ETFs, you should plan to invest for at least five to 15 years, depending on the structure and spread of your investments.
Note: keep an eye on the costs. These should be in proportion to the potential profit. The “ongoing costs” are published in the respective investor documentation. The documentation might be referred to as the “basic information sheet” or “product information” or “cost information sheet”. For example, most funds also charge fees after your purchase. If in doubt – ask!
