Writing now for Business Insider: Finanzfluss editor-in-chief Markus Schmidt-Ott and co-founder Thomas Kehl. Financial flow / collage: Dominik Schmitt
Thomas Kehl from Finanzfluss gives advice on how to start building wealth. It is important to choose the right bank, the right custody account and a suitable investment strategy. Long-term thinking, tax optimization and ignoring stock market news are crucial for success.
Anyone who has been investing in the capital market for a few years has already made one or two mistakes and has thus gained valuable experience. So that you don’t make the same mistakes, Thomas Kehl, co-founder of Finanzfluss, gives you some advice to make it easier for you to start building wealth.
Which depot should I choose?
The selection of banks and brokers in Germany is quite large and, especially as a beginner, you can no longer see the forest for the trees. Before choosing the right depot stops you from investing, I have good news: most depots in Germany are pretty good.
The biggest difference between providers is the cost. Neobrokers and brokers from direct banks are usually free. But if you feel more comfortable with your old bank, these fees won’t be immeasurably high.
With a savings rate of 250 euros per month, you end up with a cost of 75 euros per year at one of the most expensive banks. Not a small amount when you consider that you can also have the same service for free. But before you hesitate for too long, you should just get started. The 75 euros won’t deprive you of your assets – but delaying costs valuable returns. After starting, it is also possible to change your account at any time, similar to a checking account.
Which ETF should I choose?
Like with that Depot selection You shouldn’t make rocket science out of ETF selection and just start as soon as you’re familiar with the topic. It is important that you are fundamentally clear about how you want to invest and define a strategy for yourself.
One strategy could be: invest passively in global stock ETFs as broadly as possible. This results in the selection of the index that the future ETF should replicate. This could be a combination of the MSCI World (developed markets) and the MSCI Emerging Markets (emerging markets). Alternatively there is this FTSE All-World or MSCI All Country World-Index, both of which combine industrialized and emerging countries. Once you have made this decision, the most important thing is done.
Now you have to choose the right ETF that tracks the selected index. For example, one of the over 30 ETFs on the MSCI World Index. This large selection could be intimidating at first glance. But you should imagine it a bit like the supermarket shelf: You have already decided that you want to buy milk and are now faced with the choice of which brand it should be. The products differ in price, but no matter which one you choose, it’s more or less the same everywhere. It’s the same with ETFs.
Ideally, you choose an ETF that is as cheap as possible. The annual costs, which are stated in the form of the so-called TER, are often less than 0.2 percent. And you should choose an ETF that has a certain popularity so that there is no risk of it being removed from the range. To do this, you choose an ETF with a fund volume that is larger than 100 million euros.
What do I do if stocks and ETFs fall?
Stock prices fluctuate. This means that the price does not always only go up, but also often down. If you start investing, it is very likely that after a short time you will see the first red numbers – i.e. the first price losses. Then it’s worth zooming out a little to see more than just the short-term nervous fluctuations. Because in the short term, share prices fluctuate almost randomly. In the long term, however, there is an upward trend: in the past by an average of 7 percent per year.
Whether your portfolio has good news in the form of price gains or bad news in the form of price losses depends on how often you look at the portfolio. We at Finanzfluss once evaluated the fluctuations in the MSCI World index and came to the following conclusion: If you look at your portfolio every day, you will get about as much good news as bad news: The probability that the price has just risen or fallen is around 50: 50. If you look monthly, you will find that the price has risen in 60 percent of cases and fallen in 40 percent of cases. If you have the discipline to only look at your portfolio once a year, you will see price gains with a 70 percent probability, and if you only look once in 10 years, your assets will have increased with a 97 percent probability. If price fluctuations make you nervous, you should try to stop doing one thing in particular: checking your portfolio often.
Should I invest in current or fixed-term deposits?
Interest rate products are competing with the stock market when it comes to investing, as interest rates have risen significantly. We are often asked in streams and on social networks whether it makes sense to pause the ETF savings plan and instead save money in a current account or fixed-term deposit account. After all, interest rates are up to 4 percent, while the stock market went downhill at times. But you should be careful here.
Because it is almost impossible to find the perfect entry point when prices recover after the crisis. As a rule, the price rises particularly sharply after the crisis. Anyone who is not already invested in the midst of the crisis will most likely miss this sharp increase. We did the math: After the past crises, the MSCI World rose by 30 to 70 percent in the following year. Anyone who missed this price recovery by just one month would have already missed around a quarter or even half of this price increase.
Secondly, an interest rate product generally cannot compensate for inflation. In the past, the interest rate on daily and fixed-term accounts was almost always below the inflation rate. Stock returns, on the other hand, beat inflation in the long term.
Interest rate products like daily money or fixed deposit accounts but are suitable as part of a long-term strategy. If you don’t want to invest 100 percent in stocks, you can invest part of your assets in these products. But reallocating depending on the market situation in order to get better returns tends to cost valuable returns in practice.
Do experiments sooner rather than later and on a budget
It’s okay to try one thing or another when building wealth and learn from your mistakes. Ultimately, this also brings with it experiences. But the later you make mistakes or change your strategy, the more wealth is at stake. If you start with small amounts and try it out a little, any damage will be limited. If you have invested 1000 euros, a 50 percent loss or even a total loss is a painful lesson. However, the same loss with a large part of your future retirement savings would permanently change your standard of living.
From a tax perspective, it is also worth pursuing the strategy you initially chose for as long as possible. If you sell securities, capital gains tax is due on the profit. The later this tax is due, the longer the assets can generate returns for you and the more assets you will have in the end. It is therefore worthwhile Control events postpone as long as possible.
What if the MSCI World falls?
Stock market news can be very unsettling. A new crash is always being conjured up or one’s own investment strategy has to be reconsidered due to political crises. We were particularly amused last year by headlines like “Is the MSCI World still worth it?” or “MSCI World under criticism” after the stock index fell by a few percentage points. Anyone who has been investing for a long time knows that reports like this happen all the time. If things are going well on the stock market, bubbles and an imminent crash are predicted. And when things are going badly, there is an abundance of supposedly wise advice with alternative products.
If you don’t want to be put off by this, you should reduce such headlines to what they actually are: permanent background noise. Then it becomes easier to simply ignore these messages.
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.