Many people are concerned with the question of how best to invest their money. The focus is often on two basic goals: the return should be as high as possible and at the same time the risks should be minimised. In this comprehensive blog post, we want to show you how you can combine return and security to build a successful money investment strategy. In doing so, we will look at various aspects and instruments that will help you to minimise risks and protect your assets in the best possible way.
Basics of investing: return, risk and liquidity
Before we look at the various investment strategies, it is important to understand the basic concepts and relationships in the world of investing. Three factors in particular play a decisive role: return, risk and liquidity.
- Return: The return is the profit that an investment generates. It is usually expressed as a percentage of the capital invested. A high return therefore means that the money invested increases in value quickly and strongly.
- Risk: Risk describes the uncertainty associated with a financial investment. The higher the risk, the greater the probability that the investment will lose value or even become completely worthless. Risk and return are closely linked: As a general rule, higher returns can only be achieved through higher risks.
- Liquidity: Liquidity indicates how quickly and easily an investment can be converted into money. High liquidity means that the investment can be sold quickly and without major losses – this is particularly important when money is needed at short notice.
When choosing a money investment strategy, it is always a matter of finding an optimal compromise between these three factors. Fixed-term deposits, for example, offer a high degree of security and good liquidity, but usually only a low return. Shares, on the other hand, can generate high returns, but also entail a higher risk and are less liquid than fixed-term deposits.
Diversification: risk spreading as the basis of investment
A basic principle in investing money is diversification, i.e. spreading the invested capital over various forms and classes of investment. This reduces the risk that a loss on one investment will jeopardise the entire assets.
There are various ways to diversify the portfolio:
- Spread across different asset classes: Don’t invest in just one asset class, such as equities, but also spread your money across bonds, real estate or commodities. Each asset class has its own risk-return characteristics and reacts differently to economic developments.
- Distribution within an asset class: You should also distribute your money among different investments within an asset class. Example: Don’t invest in just one stock, but in several stocks from different industries and countries.
- Time diversification: By buying investments at different times, you can take advantage of price fluctuations and reduce timing risk. An example of this is the so-called “cost-average effect” in the savings plan, where you regularly invest in an investment at fixed times.
Through well-designed diversification, you can increase the return on your portfolio without significantly increasing the risk.
Investment horizon and risk tolerance
Before choosing an investment strategy, you should be clear about your investment horizon and your risk tolerance. The investment horizon is the period over which you want to invest your money. The longer the investment horizon, the more likely you are to include riskier investments in your portfolio, as fluctuations and losses are more likely to balance each other out. Short-term investments, on the other hand, should tend to focus on safety and liquidity.
Risk tolerance is a personal assessment of how much risk you want to take in your investment. A high risk tolerance means that you are prepared to accept greater losses in order to achieve a higher return. A low risk appetite, on the other hand, means that you prefer safety and accept a lower return.
An overview of investment strategies
Below we present some common money investment strategies that have different emphases on return, risk and security. You can use these strategies as a starting point for your own money investment and adapt them to your individual needs.
Conservative investment strategy
A conservative investment strategy focuses on security and liquidity and is therefore particularly suitable for investors with a low risk tolerance and/or a short investment horizon. The portfolio consists mainly of safe and liquid investments such as call money and time deposits, bonds issued by governments and companies with good credit ratings, and selected dividend stocks.
Balanced investment strategy
The balanced investment strategy is a compromise between potential returns and security. The portfolio consists of a mixture of safe investments (e.g. bonds, fixed-term deposits) and yield-oriented investments (e.g. shares, real estate, commodities). Depending on risk tolerance and investment horizon, the ratio between safe and return-oriented investments can be adjusted.
Growth-oriented investment strategy
The growth-oriented investment strategy focuses on returns and is therefore suitable for investors with a high risk tolerance and a long investment horizon. The portfolio consists mainly of yield-oriented investments such as equities, real estate and commodities. Nevertheless, in order to reduce the risk somewhat, a small part of the portfolio can be invested in safe investments such as bonds or time deposits.
Passive investment strategy
The passive investment strategy relies on low-cost and broadly diversified index funds (ETFs) that track a market index such as the DAX or the MSCI World. This automatically diversifies the portfolio and keeps investment management costs low. Passive investment strategies are suitable for investors who want to invest for the long term and do not want to actively intervene in individual investments. Depending on the risk appetite and investment horizon, the ratio between low-risk and return-oriented ETFs can be adjusted.
Current laws, regulations and court rulings in the area of financial investment
When investing money, it is important to be informed about the applicable laws and regulations as well as current court rulings. These have a direct influence on taxation, the legal framework and the security of your investments. In the following, we provide you with an overview of important laws and current court rulings in the area of financial investment:
Final withholding tax: Since 2009, thefinal withholding tax on investment income has applied in Germany. This amounts to a flat rate of 25 percent (plus solidarity surcharge and, if applicable, church tax) and is withheld directly by the banks. There is an annual tax-free allowance of 801 euros (1,602 euros for married couples).
Investment Tax Act: The Investment Tax Act regulates the taxation of investment funds and their investors in Germany. Since 2018, an advance flat rate has applied to reinvesting funds, which is calculated annually on the basis of the base rate. This is also covered by the final withholding tax.
MiFID II: The EU Markets in Financial Instruments Directive II (MiFID II) has been in force since 2018 and aims to strengthen investor protection, increase transparency in the financial markets and promote competition. Among other things, this includes improved advisory documentation, the disclosure of costs and the introduction of independent investment advice.
Ruling of the Federal Supreme Court on banks’ duty of disclosure: In a ruling of 19 December 2017, the Federal Court of Justice (Bundesgerichtshof, BGH) ruled that banks must inform their clients about the initial negative balance arising from the premium and issue surcharge when providing investment advice (Case No. XI ZR 152/17). This concerns closed-end funds in particular and may provide an opportunity for investors to assert claims for damages.
FAQs on investment
In the following, we answer frequently asked questions on the topic of investing money:
Which forms of investment are suitable for a safe investment?
Investment forms with low risk and high liquidity, such as call money, fixed-term deposits or government bonds of countries with good credit ratings, are particularly suitable for safe investments. However, with these forms of investment, the potential returns are also limited.
How do I find the right investment strategy for me?
To find the right money investment strategy for you, you should take into account your personal risk tolerance, your investment horizon and your financial goals. A detailed analysis of your personal situation and needs is essential. If you are unsure, independent financial advice can also be helpful.
How can I protect my money against inflation?
To protect your money from inflation, you should invest in forms of investment that generate a return above the rate of inflation. These can include shares or real estate, among others. Broad diversification of your portfolio can also help reduce inflation risks.
What is the difference between an active and a passive investment strategy?
In an active investment strategy, the investor or fund manager tries to achieve a higher return than the market through targeted selection of individual investments. A passive investment strategy, on the other hand, relies on low-cost and broadly diversified index funds (ETFs) that track a market index and thus generate the average market return.
How can I combine investment and sustainability?
To combine investment and sustainability, you can invest in sustainable funds, ETFs or individual shares of companies that meet environmental, social and ethical criteria. There are various sustainability ratings and indices that can help you make your choice.
Investment and concluding facts
Combining return and security when investing money is a challenge that requires careful planning and a well-thought-out investment strategy. Fundamental principles such as diversification, consideration of investment horizon and risk tolerance, and a comprehensive understanding of the various investment forms and classes are essential.
In addition, always keep yourself informed about current laws and regulations as well as relevant court rulings in order to make your investment decisions on a sound legal basis. If you are unsure, it may be useful to seek independent financial advice.