How can someone invest their money

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 multiplication table, you are well equipped to avoid the worst investment traps and to 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. You should therefore also consider where your priorities lie: is it the high return, is it availability 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.

These are all questions that you should ask yourself, because they provide information about sensible and less sensible investment opportunities.

Investment: Checklist to prepare for the consultation

2. Debt settlement has priority over investments

Before investing any money, consider one thing: credits and loans are expensive. They generally cost more interest than you can get by investing the same amount. What this means for you is that you should always try to reduce debt first before investing money elsewhere. Paying off credits and loans is usually the best investment you can make.

There are exceptions to this rule, for example when taxes reduce the bottom line, which can be the case with rented real estate, for example. Some old home loan and savings contracts offer returns of up to 4 percent 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 2 or even 3 percent.

Anyone who is debt-free and has a sufficiently high reserve also avoids overdrawing the current account in the future if damage in the household or car needs to be replaced or repaired. The best way to do this is to have a well-yielding call money account with a bank with German deposit insurance.

Loans and loans: You can also save on borrowing money

3. Insurance can protect assets

Certain events can have serious financial consequences. The most solid financial investment can vanish in no time if you have to be liable for damage to your own assets, for example. Anyone who has a family to support 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 an 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 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 the 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 salespeople like to use. Your personal needs are the only decisive factor.

Life insurance: protection in the event of death and investment

4. Can and do you want to take risks?

The more risk you take, the higher the returns can be. So risk is not something that is bad per se. And security has its price, the income is 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. There shouldn't be any nasty surprises when the stock markets hit capers again. The amount 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 investment distributions. It is important to 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 make a living from 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 on a one-off basis or just a small monthly savings contract: spread the risks! Capital markets always harbor risks, no matter how rosy the future may be. Stock prices can always collapse and interest rates can turn at any time. Don't confuse risk diversification with simply buying multiple products. If you only have savings bonds, overnight money and bank savings plans, you do not spread the risks! Rather, what is decisive is the asset class that you represent with the product.

The following are basically available:

  • Investments in companies, in the form of shares or, even more widely, in the form of global equity index funds (ETFs). You can read about how this works and how you can use index funds (ETFs) here.
  • Debt, often called monetary assets. This category includes all loans, including overnight money, savings bonds, government bonds and pension funds. Classic life insurances also fall into this category, as they primarily buy government and bank debt.
  • 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 rule out the risk of total loss and stabilize the total return. The spread of risk is also called diversification.

You can find out when too much risk becomes critical here.

6. Be skeptical of salespeople

Bank advisors and other financial intermediaries are usually paid on a commission basis. So you are a seller. You must therefore assume that these advisors will only recommend products to you that the sellers make ample money on. Of course, this also applies to the savings bank advisor, even if he does not earn anything personally from the sale. Savings banks and Volksbanks also sell in-house products or products from third parties with appropriate sales cooperation and set sales targets for their employees. What can you do about it? Nothing. You can ask advice from other competitors who are also sellers and who may then suggest other products to you, but that doesn't exactly make it easier to make a decision.

If you want to form your own opinion, you can fall back on independent sources, for example test reports from Stiftung Warentest and advice from consumer advice centers.

7. Take a critical look at past performance

We know it: In order to sell you a product, you will be presented with beautiful graphics with upward curves. You are told that this has been the development so far, that it is a top grade paper with which you can practically only win.

Attention! No expert in the world can predict how a security will develop in the future. It has long been a well-established truism among researchers that the forecasts of experts and analysts are at least as often wrong as they are correct.

If someone says the opposite in the consultation, then you should get up and leave immediately. Such forecasts are only ever used for the sale of products and the constant shifting of securities. They have nothing to do with serious advice, which should always value appropriate risk diversification.

8. Minimize costs and commissions

Costs and commissions reduce the return you can get from an investment. The costs are certain, you always have to pay them, while interest income and positive price developments are often uncertain.

Different costs arise depending on the investment product. You can find an overview for different product types in our guide Avoid unnecessarily high costs for financial products. In principle, you can negotiate commissions (also: donations). By the way, funds and other products still incur fees after they have been sold. The annual fees can be found in the so-called key investor information (also: basic information sheet, product information) under "Ongoing costs". Because of a sales follow-up commission, which the fund company pays to the bank, your bank automatically continues to earn money from you even after the sales pitch. In the case of closed investments, up to twenty percent of the deposits disappear because of the costs, which then almost destroys any prospect of positive income.

So look carefully and ask if in doubt. The cost burden is one of the most important criteria for assessing investment products. Even the brightest performance in the past and the rosiest projections for the future should not prevent you from taking a sober look at costs. There are also cheap products with no commissions. But don't expect a seller to recommend them to you.

9. Document what your investment advisor advises you

Most people cannot or do not want to look after their assets completely independently and without advice. Many go to a bank or what is known as an independent consultant, who can and must also only sell products. Some also turn to fee advisors or robo advisors who are paid by the customer and do not earn anything from product sales.

Whoever you turn to, the advice remains a matter of trust. Anyone who needs advice doesn't know any better than the consultant and can therefore not evaluate whether the consultant is doing his job well. There is no checklist that helps you to find out about your qualifications, for example. If you want your trust, you should deserve it.
Make this clear to your advisor. This assumes that your advisor is 100 percent behind what he said to you in the conversation.

Write down the advisor's statements on the risk, return and availability of the recommended product. Also ask on what basis the recommended product was selected. Because it's "the best"? Because the fund managers are "good" and can therefore look to the future? Because it's cheap? If you want to earn your trust, you should be ready to sign all of your notes so that they can also be used in court if necessary.

10. Check your goals and strategies regularly

You have clarified your goals, obtained sufficient information and made an informed investment decision. And now?
As a rule, it makes no sense to reallocate your systems every few months, because it only incurs additional costs. An old stock market adage rightly states: "Back and forth makes pockets empty".
Even so, you should check your finances on a regular basis. Because life situations can change, unforeseen events can occur. After some time or after an inheritance, the focus may no longer be on the return, but above all on liquidity, because your plans have changed and you need to dispose of the money quickly.

So take the time at least once a year to check: How are my finances? Has anything fundamentally changed in my situation? Do my investments still meet my needs? Only if you keep an eye on all of this can you be sure that your investment will still meet your requirements in a few years.

This content was created by the joint editorial team in cooperation with the consumer advice center in Baden-Württemberg for the network of consumer advice centers in Germany.