Why should I invest?
- Allows you to reach your financial goals quicker (e.g. early retirement, house down payment)
- In a low interest rate environment, leaving all your money in a bank account makes no sense
- Have stronger financial stability at retirement
How can I invest?
- You can invest in a lump sum, and/or invest a smaller amount into a monthly savings plan. Usually you should do both, as besides your initial amount (e.g. €5,000), a monthly savings plan (e.g. €50) will allow you to gradually build-up your wealth
- To invest your money, you typically have the following options available:
- Private bank/asset manager to manage your money: tailored advice but expensive
- Robo-advisor: cheaper option but you are not in control of your money
- Do-it-yourself: be in charge of your money and save advisory costs
Where can I invest?
- Typically, you will distinguish between investing in stocks and bonds
(you have as well more asset classes such as real estate, commodities, derivatives, but let's focus on the main ones).
- Stocks provide you with an ownership in a company. This means that your return on your investment will be composed of the profit you made once selling your stock (if price went up!) and dividends paid to you (note that not every company does). The downside is that the value can quickly change based on the financial health of that company or even its perception amongst investors. So it's risky.
- If you are risk averse, you may prefer look at so called bonds, which are loans a company or government take in return for interest payments. Here key factor is that the safer the issuer of the bond, the lower your interest rate. Compared to a stock, this is clearly a lower-risk saving option. But as well less rewarding.
- Unless you are a seasoned investor and you know exactly what stock to buy or how to benefit from bonds, you may want to turn towards so-called “Exchange Traded Funds” – ETFs. They allow you to replicate an entire index and this across various asset classes (e.g. stocks, bonds).
(see here for our dedicated article on ETF)
- Still not sure what this means? Let's assume you would want to buy a stock of each company in the DAX 30. This would mean you would have to go and buy each single share of 30 companies. This would take time and would be costly in trading fees. ETFs allow you to by a fraction of these companies in one go (think of it like a bag to hold all the different fruits you bought).
- As such, ETFs are a cost-efficient way to invest in wider markets, thus allowing you to spread the risk of your investment, commonly referred to as diversification. This makes ETFs particularly well suited for long-term investing.
Are ETFs risky?
- Every investment bears risk however, with a well diversified portfolio your risk exposure can be reduced. But remember, that the riskier your asset (e.g. stock, P2P lending), the higher return you will require.
- The performance of an ETF follows that of the index it tracks: if the index changes value, so does the ETF. But short-term changes (i.e. volatility) should not worry you.
- In the long term, ETFs present the best opportunity to growth, and if prices would fall (as we currently endure), that would be an opportunity to buy further shares at a cheaper price.