So you’ve made it this far, to the last article in the basic series. Congratulations! This gives you a good foundation for your own financial freedom, especially if you have done the things that I have asked you to do so far.
Then you now have an overview of your income and expenses, you know your hourly rate and the limits for the reserve deposits. You have looked at the negative returns on your debt, if any. The amount that can flow into the investments is also reasonably clear to you or at least greater than zero in the foreseeable future.
You now know where the money you want to invest can come from. And you also know how to motivate yourself to deserve it and keep yourself well afloat throughout the process. But where should the money go? What investment opportunities are there and which ones suit me?
I myself have found time and again that there are certain criteria that investments have in common. Before I go into the investments individually, I would like to introduce these criteria first. It is important to know them. That simplifies a lot in the later assessment.
You can think of it as a trading card game. All cards have certain properties that are differentiated. Attack cards have better combat values than defense cards and there are also cards that produce resources and can use them up again. It’s very similar with investments. Every investment has a number of criteria in different forms. And depending on what kind of guy I am, I can choose the investment that suits me and put my money on an appropriate card. Or distribute it over several. Depending on.
The criteria that I have put together for assessing investments are eight in total. They could also be referred to as the great eight of investment. Unfortunately, I’m not at all sure whether this will one day catch on as a catchphrase in the scene, but let’s get started.
The most important thing in an investment. Otherwise nobody would do it. I want it to generate a return. The money should eventually increase.
There are different ways to show this return. Especially in financial circles and with many funds and similar professionally designed forms of investment, a method has prevailed that I personally would almost describe as fraudulent. The percentage increase that the investment has made since the beginning is given here. This is very practical for the funds because it can result in really nice high numbers. Especially with longer terms. There is talk of returns of 120% or 150% and more. Looks great. However, if you look more closely, this means that over the entire term, a hundred euros have become 120 or 150. But if the vehicle has been on the market for 5 years or more, then the annual increase quickly shrunk to below 5%. And then it seems somehow puny.
Showing the return in percent is pretty good. You are then not dependent on the actual amount that I want to invest and you can calculate the profits “per euro”, so to speak. But what is incredibly important to be able to compare different investments: the term must be left out. And that works best with the average return per year.
The formula for this is unfortunately a bit more complicated, but it still fits in a single cell in an Excel spreadsheet. I have built a little table here that you you are welcome to copy for your own investments. What we need is the starting value with which the investment was launched (for funds this is usually 100), the starting date and then today’s value and today’s date. The average return per year then tells me by how many percent the investment has increased each year since the start, as if you had invested once at the very beginning and then just let everything go. This results in a value that makes investments comparable to loans using the effective annual rate. And it is not for nothing legally required to be able to compare loans. That works very well there regardless of the runtime.
In addition, I usually leave out the one in front of the decimal point or the first hundred in percentage. I want the pure increase that the investment brings and nothing more. A return of 120%, as usually shown in the glossy prospectus, becomes “only” 20%. The system turns one euro into 1.20 euros after an X year term. Or it turns a hundred euros into 120. That is a 20% increase. Point. If I convert that to the year as just described, I have a single key figure with which all investments can be easily compared. Even if they have a different duration.
But what does this return really tell us? Let’s make a comparison so that we can classify the numbers.
The long-term return on stocks is around 5-8% per year. This can be calculated quite easily by calculating the annual increase in large stock indices using the Excel table just presented. The Dow Jones Index is a great candidate. It has been around since 1884. So we have a history of almost a century and a half that we can look back on. During this time it rose from a starting value of just under 41 to – as of today – almost 35,000 points. If you were to show that like in a securities prospectus, that would be an increase of a whopping 83,400%. A wonderfully high number for marketing. But it also shows the potential that stocks have. Accordingly, 1,000 euros, invested in an ETF on the Dow Jones in 1884, has increased to over 83 million today. The average annual return, on the other hand, is just 5.6%. And that shows that something can be done with percentages that appear relatively low. The compound interest makes it possible.
If you work out the average annual returns for other major indices, you get similar numbers. That fluctuates a bit depending on the index, but on average you always come back to the said 5-8%. This gives us a good guide to what an investment should yield. As we will see, stocks are one of the best and most sustainable investments of all, especially when I factor in the amount of work I have to do in the long term to look after my portfolio. Depending on the investment strategy, you can bring it down to almost zero. So if an investment yields less, you should think twice about whether it is worth the effort. If it brings in more, you have to look particularly carefully at the risk side, because a higher return often goes hand in hand with a higher risk (here, too, we will see that this is not always the case).
But, by and large, that was about ROI. It is important for us that we look at the average long-term return per year and the guide value of 5-8% for comparison.
The term often plays a subordinate role compared to the return, but is no less important. We want investments that yield a decent return over decades. After all, we don’t want to have to worry about where to invest our money every few years.
And here is a rule of thumb that I use fundamentally differently than most other people who are looking for suitable investments. I only invest in systems that have proven themselves on the market for at least five, better ten years under real conditions.
So when an investment advisor recommends something to me, one of my first questions, right after the annual return, is: “How long has this thing been around?” And when he says “We just got off to a good start” or “For two years now,” then I usually wave it off and tell him I’ll keep an eye on it until it has existed for five years or more.
The reason for this is that I have already invested in a number of systems where after two, three or five years it was said that unfortunately the whole thing did not develop as it was initially thought. Most of the time, that’s because there are cycles on the stock market. The long-term cycles move precisely in this period of two to five years. So if a plant has survived those five years, then it has usually gone through a long-term cycle. Also its downward phase. And if she survives, then she has a good chance of making it through the next few decades.
What I would also like to have are systems with an endless runtime. This means that the investment should not be designed to be paid back to me in, let’s say, ten or 20 years. Then I have to look again where I put the money and the work starts all over again.
Here, too, stocks are a good example. A company usually wants to live and grow as long as it can. A good share portfolio must be maintained continuously and every now and then a share is completely exchanged, but the term of the entire portfolio is designed for eternity. Or should we say better, for the rest of your life. And if the heirs have also learned to take good care of them, then of course for a longer time.
There are many risks. It is not for nothing that most investment prospectuses are so long. And that although the risks are usually printed very small. Here, too, I would just like to briefly address the most important ones, because many risks are often completely incorrectly assessed. The risk of total loss, for example. In theory, it exists in every system. Even with those with a guarantee. Ultimately, the guarantor can also go bankrupt. Then you have a guaranteed claim, but as the saying goes: you can’t reach into the pocket of a naked man.
But it’s not as bad as it sounds right now. The most important thing about a risk is the probability with which it will occur. Only in combination with this can one say more precisely how much attention should be paid to this risk. And the chances of total losses are often lower than you think when you read the word. Especially with well-made investments (keyword: runtime).
Nevertheless, these probabilities are often difficult to quantify. Concrete figures are rare. Especially in advance. You may be smarter afterwards, but if you’re unlucky, the money is gone too. Then you have learned something from the thing, but the real goal is not to make losses, but to make profits. The good thing about it: through these learnings, a feeling arises relatively quickly as to which risks can have an impact and how much. So when in doubt, the second golden rule of investing applies:
Only invest money you can afford to loose.
Money you don’t need tomorrow for some important things.
This can be combined with the following rule of thumb:
The worse I can assess the risk, the less money is invested.
With these two rules you are on the safe side in most cases and can continue even after a failure. Investing small amounts for testing is usually a good way to get familiar with an investment and to better assess its risks. Because that is the most important thing: never put everything on one card. I want to get started and as early as possible so that I can keep the compound interest effect working for me for a long time. But no matter what goes wrong, I want to be able to move on. Only then will I reach my goal in the long run.
If I cannot quantify a risk well, especially the total loss, it often helps to look at the behavior of the system at a time when there is a Black Swan. How did the vehicle fare when the exchanges went underground? E.g. in the years of the financial crisis in 2008. Or in the last few years, since the outbreak of Corona. You can usually see such black swans very well in the large stock charts and if the investment in which I am considering investing also has a chart, I can compare the trend and see what has happened. How much has the chart collapsed compared to the Dax or Dow Jones? With a solid investment, I would expect the slump to be weaker because good management counteracted it in good time.
There is a wonderful vehicle in trading to be able to assess the risk relatively well: the maximum drawdown. This is the biggest loss that a system trader has made in his lifetime. The lower this maximum drawdown, the lower the risk that you run when you bet on this trader. Of course, you have to look at that in combination with its return and the duration with which it is already on the market. A drawdown says little if the term is only one to two years. But since I’ve been dealing with system trading, I’ve always looked at other investments that have a chart to see how much they have fallen as a maximum.
For comparison: the major stock market indices have maximum drawdowns of over 70, in severe crises even 80%. In other words, in a severe crisis, up to 80% of the previously made profits are lost on the stock market! And yet you make your 5-8% a year with stocks in the long term if you stick with it and don’t lose your nerve in the crisis.
For a managed investment, I would like this maximum drawdown to be lower than on the stock exchange. For most good traders it is around 30-35%. If it is much more, e.g. B. over 40%, then hands off! There are better options. This also applies to funds. A good equity fund must have existed for more than ten years, during which time it must have beaten the market (average annual return greater than 8%) and then it usually has a drawdown that is not significantly above 50%. Not even in the 2008 financial crisis.
There is a lot more to write about on the risk of investments. Most of the risks are specific to the investment in question. I am currently planning a series of articles in which I would like to go into the various investments individually and also examine their risks in detail. If this interests you, then take part in my feedback survey. Because only if I know what you as a reader need and want to know can I deliver the content that will get you ahead.
There is, however, one last point that I would like to make here. It’s psychological in nature. People are by nature risk-avers. The Fear of loss often outweighs the joy of winning. This has also been proven in scientific studies. Allegedly, it is up to three times worse emotionally to lose a euro than it makes you feel happy when you win a euro. This psychological threshold has to be overcome. Because statistically more attempts will fail until you reach a goal than you have hits. This also applies to investments. The hits have to overcompensate for the losses. And that goes z. For example, if you start out with less money at the beginning, spread it well and later top up the things that have developed well.
It only works if you are willing to accept losses and still carry on. Even if it hurts and is more scary than a win brings joy. From my own experience, I can say that almost every one of my investments that worked over the long term, initially fell. Very few stocks go out right from the start when you get in. The performance of pretty much all traders is also subject to fluctuations and in the rarest of cases you will hit a low point of such a fluctuation when you first enter. And if the fresh investment rises immediately, it can happen that a few weeks later you can see the first profits melt away and even end up in the red. As long as nothing has fundamentally changed in the investment, there is only one way to get through this: Stay away from the sell button! Those who push buttons emotionally driven are more likely to make losses from a purely statistical point of view. The famous gut feeling is deceptive on the stock market! At least in the first few years. Due to evolutionary technology, our psychology is set in such a way that it does not work from the start with financial investments. It is only after a few years and many attempts that the learnings come in that you need to stop being chased by your own psychology. Then you can slowly start to trust your gut feeling. And so that you fare better than me, I am writing these lines in the hope that your learnings will not cost you as much money as it did for me.
With that we have ticked off the three most important properties for assessing investments. The following are not unimportant, but if the first three are wrong, I usually don’t need to look at the rest of them.
When it comes to passivity, I want the system to become a sure-fire success at some point. After all, we talk all the time about passive income and a machine that works in the background by itself to finance one’s own lifestyle.
Of course, this is not absolutely necessary. If you enjoy lending a hand in trading stocks or cryptocurrencies or looking after your own real estate, looking for tenants and organizing craftsmen, you are welcome to do so. Everyone else should look at how much time I have to put into an investment in the long term once the basic learnings have been made and it works in the long term.
This can best be measured in terms of working hours per month, similar to your own working hours at work. How far can I reduce this working time and do I feel comfortable with this number of hours that I then have to invest permanently?
The hourly wage that the investment brings me is derived from this. The annual income that I get in through the return is divided by the hours that I have to put into it per year. The higher this hourly wage the better. And of course it should be higher than that of my normal work. Otherwise the whole thing won’t do me any good. But we already had that.
How can that look in detail? I believe that you can get pretty much any of the classic investments on a number of hours that is well under 40 per week. At some point a good trader may only sit at the computer for two hours a day and make the money he needs to live in that time.
With the classic share portfolio, where high-growth or high-dividend stocks are essentially bought and held, it can go down for up to a few hours a month. Here you will essentially follow the news of your favorites, read one or the other quarterly report and maybe even see what there is to eat at one or the other general meeting.
And even with real estate you can often hand over the work to such an extent that all you have to do is swing the phone if there is something to get the in-house favorite craftsman to answer who you would have invited to the next barbecue anyway.
However, this “if anything” can become an argument for or against a particular investment. With real estate, there can be weeks or months of silence and then suddenly a repair is due. Sometimes this may be announced in advance, but it can also happen unexpectedly. Or the tenant quits and then there are still three months to find a new tenant. If I have planned a longer vacation, of all things, it can be difficult – or I have to reckon with failures that may reduce the return a little.
So what is best to look for here: the investment should not only match the amount of time I have to invest, but also the availability that I have to show as an investor. How are the hours distributed over the year? Personally, I don’t like investments where unforeseen things can suddenly happen that I have to deal with as quickly as possible. Even if there is silence for months or even years between the individual incidents. The other may not like to devote time continuously and regularly. Even if it’s only a handful of hours a month.
As already written, this is a subordinate criterion. That belongs more to the category “luxury problems” once the shop is up and running.
The scalability of an investment is more or less a basic requirement. I want my investment to still generate its return even if I have invested as much money as I need to get my lifestyle financed over the long term.
This is where the orders of magnitude come into play again. For initial learning and to become familiar with the subject, amounts in the order of one to a few thousand euros are suitable. Even total losses are quite easy to cope with here, because I can get them back relatively quickly even with a low hourly wage and can continue.
Later, however, I want the return not to collapse once my investment has grown to the order of ten or one hundred thousand euros or even in the millions. And with average returns of 5-8% per year, as we have seen with stocks, I’ll have to break the million mark in order to be able to live reasonably well. One million, invested in a well-running share portfolio, amounts to around 30,000 to 50,000 euros per year after taxes, depending on the tax rate. Maybe a little less or a little more, but the order of magnitude is in the mid five-digit range. That is mostly enough to live on. Almost everywhere in the country. In a city like Munich, at least half of the rent is gone. Then it can be a million more capital.
To cut a long story short: before familiarizing yourself with the subject matter, you want to check whether the system works in the seven-digit range or whether the potential is capped at some point. This is the case with many investments. Savings accounts, for example. Apart from the fact that today there is no longer any interest on which something reasonable could be built, most call money accounts and fixed-term savings contracts have a maximum amount up to which the measly interest rate can be paid. And that is often in the six-digit range, e.g. B. at 100,000 or 250,000 euros. Everything beyond that is often paid significantly less interest or even no interest at all.
What definitely scales into the millions and well beyond are stocks and real estate. I have no problems here. Especially with stocks, the range of scalability is great. You cannot start with any amount of play money and once the ruble rolls, it will be topped up until the goal is reached.
With real estate it is exactly the opposite as with overnight money. Here I have to start with larger amounts right from the start, because a single apartment cannot be had for a thousand euros. The scalability upwards is given, only in the lower area there is a lack. And with such systems you have to be careful not to get a lump risk. If possible, I want to avoid larger chunks in my portfolio that will tear a hole in my performance if something goes wrong. Such investments are therefore more for people who already have some capital stock and are looking for a second pillar to diversify.
There isn’t much to write about on the learning curve. This is about the time that I need until I have familiarized myself with the subject so far that it runs smoothly. Until I have come to the time required that I envisioned for the criterion of passivity.
This time must of course be compatible with the lifestyle that I currently have. I have to be able to familiarize myself with the investment parallel to my job, otherwise it simply won’t work. As long as I haven’t invested any money, I don’t have any pressure here either. Everything can easily happen in my free time and I can also leave it behind for a few weeks or months when something more important is pending. But as soon as the iron is in the fire, I have to expect losses if time should run out.
So how much time do I need to learn? How many hours a week – and how long will it take?
When trading, it is often enough to read a good book and then start with a sample portfolio on paper. And even if I’ve already switched to real money, I can take a break at any time after I’ve closed all positions. With a stock portfolio or when I follow good traders it can be even easier. In the best case, I have next to no effort here if I get the right one.
And with other stories such as B. Real estate, familiarization can become almost a full-time job. Here I need to know how things go with the purchase, the notary and all the taxes. I need a good appraiser and have to look for tenants, especially at the beginning, when the apartment is empty. And so on.
Please don’t get it wrong, I don’t want to steal real estate investment from anyone. I’ve been thinking about doing this myself for a long time. I only decided against it myself for exactly these reasons. The initial learning curve, like passivity, is a secondary criterion. But in my experience you should have at least given a few thoughts about it.
This is about what an investment is actually suitable for. Most investments are intended as investments, i.e. to get more out of my money. But there are also a few that are great for other purposes, and it is important to distinguish between the individual classes. Because not every system is suitable for every purpose.
The classic investments are, as already written, there to increase money. But you take a certain risk with your sour earnings. These are usually investments in stocks, real estate, investments in corporations, trading with everything that has a price (stocks, (crypto) currencies, raw materials, metals, oil, etc.) and lending money against interest.
In contrast, there are also systems that are intended as stores of value. Here you want to have as little risk as possible. Your own money should be parked in such a way that it retains its value over time, so that I can turn it into money at any time if I need it.
The classic savings book or the bundle of cash under the mattress would be an example, even if the monetary value is eaten up over time by inflation. And the compound interest effect works against us. This is not immediately noticeable and also not very obviously. Loss of value due to inflation is more of a gradual process that accumulates over the years. I’ve kept a few cash reserves in a safe place myself for absolute emergencies. It is not much, however, because our money is increasingly becoming a risk with no returns.
A very good store of value is gold, possibly also silver and other precious metals. Gold has retained its value for thousands of years. Even in ancient Rome you could buy a high-quality toga for an ounce of gold. This is roughly comparable to a tailor-made men’s suit in our time. Depending on the tailor, it can cost around 500 to 1,000 euros. And about 100 years ago, when the first industrially manufactured automobiles rolled off the assembly line, you could get a Ford Model T for around 10-15 ounces of gold. And for the same amount of gold you can get a solid new small car today, maybe even more. Gold does not generate any return, but neither does it lose its value over time. It is therefore ideally suited to keep the own nest egg stable and also very good to save space.
With regard to the last criterion of investments, we look at how and where it is actually stored. This is important to know because such an investment is a long-term thing. I want it to be kept in such a way that it is protected from unauthorized access.
Most systems today are digital. This applies to stocks and other commodities, where contracts, options or other derivatives usually change hands and no more pork bellies or oil barrels are physically delivered to a trader. Here you should have a look at the trading house or bank with which you want to have your custody account. What country is she in? How is it regulated? How well-known is the bank? With all the big banks here in Europe and also in the USA, I would have no problem entrusting them with my money on a permanent basis. In addition, stocks, funds, ETFs and certificates are legally treated as special assets, i. H. even if the bank goes bankrupt, they do not flow into the bankruptcy estate; the owner has the right to transfer them to another custody account.
I am careful with all the discount brokers that are now available. Here I have had bad experiences myself and have also heard negative ones. You have to z. For example, you can expect the low order fee to be recovered from the fact that the broker offers a worse rate than a major bank, especially for larger quantities. Or commissions flow that you don’t see at first. At my bank, I get the cost of an order to the nearest cent, before I hit the buy button. Before that, I was at a discounter, where I only found out about various commissions in the following year through a letter that they are probably now legally forced to send. But regardless of business practices, I would prefer to store my financial basis with an established bank that has existed for more than a few decades and has thus also proven that it can survive severe crises.
Unfortunately, this is (still) different with cryptocurrencies. You currently have to take care of the safekeeping yourself. Permanent storage on a crypto exchange is just as risky as having a larger depot at a very young discounter. Here I would at most feel comfortable with a diversification of my assets over various large exchanges.
Since the beginning of 2020 there has been a law in Germany that allows banks to store crypto currencies. Quite similar to a foreign currency account. However, there are no offers yet. So you will have to protect your bitcoins yourself until further notice. The subject matter is a bit more complex and would go beyond the scope of this article. So if necessary … you now know the link to my feedback survey.
Not all good investments are digital. Real estate is a prime example. They “camp” on their respective property. I don’t think there’s much to say about that. If you want to live tied to a place anyway, this can be just the thing for you. And whoever is or wants to become a digital nomad will find real estate as Investment is not so suitable – unless you know a good administrator who you are willing to give a piece of the cake to.
For own stored physical goods such as gold, silver or cash there are essentially two options: Rent a locker from a bank or a precious metal dealer or the classic safe in the basement. It doesn’t necessarily have to be in your own basement. Maybe your parents’ house, which has been standing for several generations, or you have a holiday home that is so remote that you think your savings will be safe there.
If the cost side of storage plays a role for you: the safe in the basement costs a little more once and the locker has a permanent annual fee. Also a matter of taste. The only important thing is that, in addition to the purchase, you may also have running costs that need to be taken into account.
The locker, in contrast to its own storage, may have the disadvantage that it could be problematic if it were to be prohibited. In the past this was the case for gold a few times. Then the state would presumably pass a law that the next time a police officer visits the locker, a police officer can check that no prohibited goods are stored there. That can’t happen with the safe in the basement. However, I think the probability that something like this will happen again in today’s democratically governed countries is very low. Such a ban is ultimately a massive cut in the right to property, which is guaranteed by the constitution or the Basic Law.
I think the risks are similarly low with both variants. It’s more about which variant makes me feel more comfortable and sleep better. Of course, I can also split my property into both variants. This combines the disadvantages of the individual options, but a loss then only affects part of the assets.
And then there are external physical investments such as B. certificates on precious metals (so-called paper gold), shopping baskets of industrial metals and the like. With such systems, only a good research on the provider or someone I can help. B. can rely on recommendations. For me personally, the risk for black sheep with such stories is now too great. I’ve already participated in too many investments where something went wrong at some point. I want my systems to run for the long term. That means over several decades. And a lot can happen there. If I am ready to take on responsibility for my financial future, then I shouldn’t risk it again by entrusting my nest egg to others – and I wouldn’t use physical goods for more than my own nest egg, as they are usually traditional stores of value that do not yield any returns.
Investments have different criteria, eight in number, by which they can be judged. Probably the most important criterion is the return, expressed in average increase per year in percent. The term in years (at least five, better ten under real conditions) and the risk are closely followed. These are the three most important criteria for assessing an investment.
Every risk has a probability with which it will occur. But they are usually difficult to quantify. What helps here is experience and as long as you don’t have it, it is better to start with only small amounts. But still get started, nothing comes from nothing. And be careful with your own gut feeling. It can be deceptive, at least at the beginning of your investment career.
An investment should be passive as far as possible. The time I have to invest long-term care should be well below that of a full-time job, in the best case a few hours a month. It has to be scalable, so it has to work so well even with an investment amount in the millions that it yields the promised return.
The learning curve for induction has to be compatible with the lifestyle and the time that I have available. And I would like to see whether the system is suitable for my purposes at all (do I need it to increase my money or rather as a store of value) and where and how it is stored so that someone else doesn’t just disappear with it.
So far, so good. This was the last article in the Basic Series. You are now ready to choose the investments that suit you.
You have received a lot of general information here that can help you assess various investments. You are probably thinking to yourself now: well and good, you can do a lot with that. But work is only just beginning now. Next I would have to start researching which investments have which criteria and make my experiences with the individual things to see what is suitable for me. A lot of people have already done that, can’t someone tell me more about it?
You are absolutely right. I am already planning the next series of articles for this blog, which covers exactly this topic. But before I go any further, I need something from you. You can probably guess it by now, I’ve mentioned it over and over again in the articles. I need your opinion.
I want to know how you think about the blog. Does he give you what you want and can need? Do you like the writing style and does it encourage you to read on or do you have to fight your way through to get the information that is relevant to you? If I know things like that, I can develop myself further and offer you exactly the added value out there that you need.
So, if you want to go further, then …