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, 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
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.
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. Anyone who is willing to invest their money for a long period of time and has broadly diversified their capital (rule 3) can sit out possible price drops quite calmly. In the past, the stock markets have repeatedly recovered even after the worst crises.
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 safely invested 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.