Know something about money: Finanzfluss editor-in-chief Markus Schmidt-Ott and co-founder Thomas Kehl. Financial flow / collage: Dominik Schmitt
Passive investing with ETFs can enable successful wealth creation without active management, explain the two money experts from Finanzfluss, Thomas Kehl and Markus Schmidt-Ott. The right balance between risk and security is crucial for wealth creation. Real estate can contribute to retirement planning, but individual life situations should be taken into account.
The internet and social media are full of financial tips. Some of them make sense and help you achieve better returns or avoid larger losses. Others sound obvious, but are simply not true – a fact check.
Misconception 1: You have to actively look after your assets
Many financial experts give the impression that you have to actively look after your assets in order to generate a good return. Passive investing is only for amateurs and does not bring good returns. Such tips mainly come from an environment that itself has an interest in marketing products such as active funds.
It sounds plausible at first glance to entrust your finances to professionals who will actively take care of them. However, active investing is often not necessary for successful wealth creation. Instead, it is enough to invest passively. This works very well with ETFs. Passive investing can even have several advantages over active investing, such as:
Significantly lower costs for ETFs compared to actively managed funds More consistent performance than active funds Broader diversification and therefore higher risk spreading Less time required
The fact that investors have to actively look after their assets in order to be successful in investing is not generally correct. For most people, it is best to invest passively rather than actively because of the advantages mentioned above.
Misconception 2: Building wealth is also risk-free
It is understandable that people like to pay attention to security when accumulating assets. A misconception that is often heard is that building wealth is also risk-free. The statement is correct, but it doesn’t take into account a major disadvantage of a risk-free investment: Without risk, you don’t get any return. The right balance between risk and security is therefore crucial.
If you want to invest your money risk-free, you can do so with a checking account, Daily money account, fixed-term deposit account or the classic savings account. Amounts up to 100,000 euros are protected by the statutory deposit insurance and can be viewed as safe. Amounts above this amount should not be held in the accounts mentioned. In the event of a bank failure, anything over 100,000 euros could be gone.
In addition, it is fatal for wealth creation to forego valuable returns, as this calculation example shows: If you put 30,000 euros in a fixed-term deposit account with 3 percent interest per year, you will receive 40,481 euros after 10 years. However, if you invest the same amount in stocks and receive a 7 percent return per year, that will result in 60,290 euros after 10 years.
The return makes a decisive contribution to wealth creation and too much security leads to less wealth in the long term. In order to optimize the risk, you should invest widely around the world and have a long investment horizon of at least 10 to 15 years.
If you are still uncomfortable with the fluctuations on the stock market, you can invest some of your money in stock ETFs and some of your money in a fixed-term deposit account. This allows you to individually determine which portion should be invested risk-free and which should be invested with risk.
Misconception 3: Investing is only for professionals
Investing is only for professionals is a common misconception, primarily among the baby boomer generation. But such statements can also be heard from those around banks, asset managers or fund managers. But is that really true? Several studies have come to the conclusion that professional funds do not necessarily perform better than an “average” global portfolio.
This shows, among other things, one Study by S&P Global. Year after year, the so-called “fund persistence scorecard” examines whether the best funds in one year are still among the best in the following years. The result is sobering. Almost no actively managed fund manages to be among the best for several years in a row. Good performance in actively managed funds is therefore more of a coincidence and is not maintained in subsequent years.
The study also comes to the conclusion that almost no fund beats an index. So the professionals simply can’t do it better.
Misconception 4: You get rich by investing
Of course, there are many examples of investors who became rich through investing, such as André Kostolany, Warren Buffett or Benjamin Graham. Statistically speaking, however, this is the absolute minority. Rather, this is more of a coincidence or a chain of fortunate circumstances.
If you want to become rich through investing with an average income, you need double-digit annual returns. Although such a return can be achieved from year to year, it is extremely unlikely with the required regularity.
You won’t get rich with regular savings rates and an average return, but it is still possible to build up considerable assets. On the other hand, you are more likely to become rich through a high income combined with a high savings rate, entrepreneurial success or simply through luck.
Misconception 5: The property you use yourself is sufficient as retirement provision
Germany is more of a country of renters, but it counts behind checking accounts and savings accounts Real estate is one of the most popular investments. Your own four walls are perceived as particularly solid and crisis-proof. But is the property you use yourself enough for retirement provision?
Anyone who lives in a paid-off property can at least live rent-free. The problem, however, is that you cannot buy anything to eat from your own house or condominium and the statutory pension is also rather modest. Many pensioners are therefore wealthy on the one hand, but lack sufficient liquidity.
There is also another fact: many pensioners live in old age in a property that is “too big” for them, in which they raised their children decades before. A possible strategy could therefore be to reduce the size of the space. Some of the assets resulting from the sale of the property could then be invested in such a way that you have better access to them.
Conclusion: Not all financial tips are as useful as they sound
Basically, every financial tip should be critically examined. While real estate makes sense as a retirement plan for some people, it is not suitable at all for others. Every life situation is different and tips from professionals in particular should be tailored to the individual situation.
Disclaimer: Stocks and other investments generally involve risk. A total loss of the capital invested cannot be ruled out. The articles, data and forecasts published are not a solicitation to buy or sell securities or rights. They also do not replace professional advice.