The most important thing in brief
- Types of Investments: Investing is a way to build wealth.
Options include securities, tangible assets (like real estate or classic
cars), and bank deposits such as daily or fixed-term accounts.
- Investment Duration: Investments can be categorized as
short-, medium-, or long-term. The best investment horizon depends on
individual financial goals.
- Finding the Right Investment: Investors can identify the
best investment option by defining their goals, estimating required capital,
and assessing their risk tolerance.
Overview: All in-depth articles on investing are just a click away
What Is an Investment?
An investment includes all accounts or financial instruments that may gain or lose value
through price increases, appreciation over time, or interest earnings. Investments range
from financial instruments like stocks, mutual funds, or ETFs to tangible assets such as
collectibles, gold and silver, classic cars, or real estate.
In theory, interest-bearing savings accounts are also considered investments. However,
especially in Germany, savings accounts and passbooks generate little to no interest and
rarely produce gains. That’s why, at WeltSparen, they are categorized under "saving" rather
than as an investment for building wealth.
Risk notice: Every investment in the capital market involves both
opportunities and risks. The value of investments may rise or fall. In the worst-case
scenario, a total loss of the invested amount may occur. You can find detailed
information under Risk Notices.
What Investment Options Are Available?
There are various ways investors can invest their money. Bonds, stocks, mutual funds, and
ETFs or index funds are among the most common. Before deciding which option is best for you,
it can be helpful to directly compare the different types of investments.
Asset Class |
Description |
Transparency / Comprehensibility |
Stocks (Standard Securities) |
Certified shares of companies, forming the foundation of any investment
portfolio. |
High transparency, easy to understand. |
Bonds (Standard Securities) |
Interest-bearing securities that entitle the holder to repayment of capital
plus interest. |
High transparency, easy to understand. |
Index Funds (Mutual Funds) |
Passive mutual funds that track an index (e.g., DAX, S&P 500) and mirror its
performance. |
Transparent and understandable. |
ETFs (Exchange-Traded Funds) |
Passive funds tracking an index’s performance, traded on the stock exchange.
|
Transparent and understandable. |
Active Mutual Funds |
Funds following the strategy of a fund manager, often involving high fees.
|
Often not transparent, strategy difficult to follow. |
Options (Derivatives) |
Right to buy a security (e.g., stock) at a specific time and price.
Originally for professional investors to hedge risks. |
Transparent but complex. |
Futures (Derivatives) |
Forward contract to buy/sell an underlying asset at a fixed price and date.
|
Transparent but complex. |
Warrants (Structured Products) |
Certified options. |
Very intransparent, complex. |
Certificates (Structured Products) |
Debt instruments with derivative components. |
Very intransparent, complex. |
Why Is It Important to Build Wealth Through Profitable Investments?
For many years, savers received little or no interest on their bank deposits. In some cases,
negative interest rates were even applied to savings. This changed in 2022 when the European
Central Bank (ECB) initiated a shift in interest rates by raising key rates. Since then,
interest rates on typical bank deposits—such as savings and fixed-term accounts—have risen.
Despite a first rate cut in June 2024, attractive rates are still available.
However, money held in savings accounts continues to lose purchasing power due to inflation.
In 2024, inflation in the Eurozone remains elevated, although lower than the peaks of
previous years. This means that non-interest-bearing balances are still losing real value.
To counter inflation, it may be worthwhile to consider alternative investments such as
securities.
More about investing in
ETFs
What Does Diversification in Investing Mean?
Diversification means spreading your investments across different asset classes to reduce
risk. By dividing your wealth between ETFs, fixed-term deposits, and savings accounts, you
can protect yourself from major losses and make the most of your investments. This strategy
is particularly beneficial when assets develop differently in value. Investors can also
benefit by offsetting potential losses with gains elsewhere.
Costs of Investing
The cost of investments can reduce overall returns. That’s why comparing fees can help
optimize results. While savings and fixed-term accounts are usually free of charge, equity
funds often incur high management fees. Choosing lower-cost ETFs instead of individual
stocks or actively managed funds can help minimize these expenses.
What Is the Best Investment Duration?
For equity funds or ETFs, the duration of the investment is crucial in limiting or avoiding
potential losses. A long-term horizon is often beneficial for such investments. Even if
markets decline, there is a better chance of recovery over time. When choosing the best
investment, it's important to decide whether a short-, medium-, or long-term horizon is
suitable. Investments up to 3 years are considered short-term, up to 10 years medium-term,
and anything beyond that long-term.
Short-Term Investment: What Are My Options?
Short-term investments are characterized by short notice periods, giving investors quick
access to their funds. These types of investments are often used to temporarily park unused
money before committing to long-term investment strategies. They are also suitable for
building an emergency reserve. It is generally recommended to keep an amount equivalent to
three months' salary as a reserve to stay liquid in unforeseen situations. Common short-term
investment options include savings accounts and fixed-term deposits with short durations.
Savings accounts are highly liquid, allowing deposits and withdrawals at any time. They are
also considered relatively low-risk, as balances are protected up to €100,000 per person and
bank under the EU-wide deposit guarantee scheme.
What Are the Options for Medium-Term Investments?
- Medium-term investments are ideal when you already know you'll need the money at a
specific time—for example, when saving for a major purchase.
- Fixed-Term Deposit: A fixed deposit for 3 or 5 years allows you to
invest money until it is needed. This option is protected by the deposit guarantee
scheme up to €100,000 per person and bank.
- Savings Plans: These can also be considered suitable for
medium-term investment goals.
Overview of Long-Term Investments
- Long-term investments are often used to build additional retirement savings.
- ETFs: Investing in stocks, equity funds, and ETFs is common. A long
investment horizon helps offset potential losses and maximize returns. Holding onto
investments longer increases the chance of benefiting from market upswings and
reducing the risk of losses at the time of sale.
- Private Equity: Investing in non-publicly traded equity can also
yield attractive long-term returns.
How do you find the best investment?
When deciding how best to invest your money, the so-called Magic Triangle of Investing can be
a helpful guide. Each investment option can be placed within this triangle, which represents
the three core criteria of investing: security, liquidity, and profitability. These are the
key and comparable attributes of all investments. Depending on the characteristics of a
specific investment, it can be positioned accordingly. For example, aiming for high returns
usually requires accepting higher risk. Conversely, investors seeking more security may have
to accept lower returns.
The triangle offers a simplified model of investment characteristics. The goal is to
determine your own position within it and to find a suitable mix of different investments
that reflects your personal risk-return profile.
Examples of the classification of different investment types:
- Savings Accounts: Positioned between security and liquidity.
- Fixed-Term Deposits: Found closer to the security corner of the
triangle.
- Stocks, Funds, and Low-Cost ETFs: More difficult to categorize as
they depend on diversification, duration, volatility, and return potential. Key
factors include your risk tolerance, available capital, goals, investment horizon,
and financial needs.
Determining Risk Tolerance
Most investors desire the best possible investment with no risk, but high interest and strong
returns. However, all investments involve risk—especially equity funds, securities, and
index funds. Since market trends cannot be predicted, it is important to only invest money
that can be set aside for the full investment period.
Many providers of equity funds and ETFs use historical data and past performance to calculate
volatility, or the degree of fluctuation. While these figures can help guide investors, it
is essential to understand that past performance is not a reliable indicator of future
results. Investors can also adjust their portfolio to match their personal risk
tolerance—for example, by selecting an ETF portfolio with a lower proportion of equities.
Choose your ETF portfolio
now
Define Your Goals and Capital Needs
To find the most suitable investment, it's important not only to determine your risk
tolerance but also to define clear goals, financial needs, and investment horizon. If you're
saving for retirement, a long-term investment may be appropriate. For investors who know
they will need the capital in a few years, a medium-term investment may be more suitable.
Ultimately, the expected return is also a key consideration when selecting an investment
strategy.
Review Available Capital
To determine the best investment strategy for your individual situation, it’s important to
assess your total wealth. Investors should have a clear overview of how much money they need
each month. It is also advisable to set aside a sufficient emergency reserve—typically
around three months’ salary.
Those who still have loans to repay and access to a larger sum in the short term may consider
using that money for a special repayment before investing. Since interest on debt generally
exceeds any possible investment return, this can be a smart financial move.
The Top Five Financial Insights Among Germans
What financial decisions have people in Germany made, and what lessons have they learned? In
a representative survey conducted by Civey, 2,500 individuals were asked which financial
insights they plan to follow in the future.
- Relying on Qualified Advice: The top financial insight
among Germans is the realization that 14.70% of citizens previously relied on less
qualified financial advice. Lacking personal financial knowledge can be compensated
with the right guidance that focuses on real investment goals rather than empty
promises.
- Fulfilling the Dream of Homeownership: Amid housing
shortages and rapidly rising rents, 13.90% of respondents regret not having invested
in property or building a home.
- Factoring in Risk When Investing in Stocks or Crypto:
Over one in ten (11.10%) reported having experienced losses due to risky investments
such as stocks or cryptocurrencies. These risks should always be considered before
investing.
- Setting Aside Savings: Financial reserves can protect
against falling markets. 10.30% of Germans have come to understand that savings are
an essential foundation for financial security.
- Keeping Track of Income and Expenses: For 9.00% of
citizens, the most important insight is to avoid overdraft usage in the future.
Those who manage to keep their spending below their income and avoid interest
charges can begin building wealth.
Using ETFs as an Investment with WeltSparen
Every investor can determine the best investment strategy based on their personal
circumstances, investment horizon, and financial goals. WeltSparen offers options for
different investor types to build wealth with attractive return opportunities.
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