The goal of each investment is first of all obvious: It is about increasing money. If one asks oneself then however around how much, in which period and with which risk one opens not only a book, but a whole library. Let’s take a look at the common alternatives:
- Risk-free papers: These are mainly government bonds from very large and solvent countries such as the USA or Germany. This is why the scientific community likes to talk about a risk-free interest rate. It concerns therefore a financial investment which cannot fail to 99,99999%. Exactly this low default risk makes this investment risk-free. The problem today: the interest rate is partly not only 0 but also negative. One pays thus money for the fact that one can put on its money risk-free – sounds paradoxical however in these times it is by no means surprising any longer.
- Investment of money on the fixed deposit account: If you go to any bank today and want to invest amount x over a certain period of time, you can also not expect a real interest rate. If you search for a long time you will probably find a bank that will accept your money for 3 years and pay you 0.15% interest per year. Again, the investment is largely risk-free – at least if the bank is liquid and also secured by the government. In the EU this is for example the case with up to 100.000€. Even if the bank should go bankrupt, you can at least expect to be compensated up to this amount.
- Bonds of states and companies with good creditworthiness: Now we are entering an area where interest is actually still being paid. Here it depends mainly on the term and the creditworthiness. States with very good creditworthiness can currently issue bonds with very low interest rates. Other countries with less good creditworthiness pay interest in the low single-digit range. The same applies to large companies. Due to their lower volatility, bonds are also a good alternative to stocks despite the lower interest rate.
- Stocks: In recent years, very good returns have been possible with stocks despite (or precisely because of) low interest rates and despite corona. They therefore remain the gold standard of wealth creation and for many people there is no alternative. This also explains the rally on the stock market since the financial crisis in 2008 until Corona 2020, and even after Corona it did not take long for most markets to reach their all-time high again. An extremely broad-based stock portfolio usually pays out around 7% return – and that averaged over decades. The problem, however, is the high volatility, because you have to be able to cope with a loss of 10% within a few weeks.
- Precious metals: There is a whole range of precious metals like platinum, gold, silver, rhodium, palladium, etc. They are characterized by the fact that they do not oxidize and thus do not lose value. They can be wonderfully printed in small coins or bars and thus physically owned. With precious metals, it is usually the case that they are nevertheless correlated with stocks. The big exception is gold. Because gold usually rises in times of crisis and great uncertainty. The problem that all precious metals have is simply that the internal rate of return is missing. With shares dividends are paid out, with bonds you get a fixed interest rate. With precious metals, however, you only profit if the price rises. And you also have to pay for the fact that you own a precious metal, for example in the form of storage costs. Even if you do not have the gold in your vault at home – someone has to store and guard it.
- CFDs, Options and Co: Now we have arrived at a completely different area, namely the derivatives. Here you don’t own shares, bonds or precious metals – you just speculate on the price. CFDs are so-called Contracts for Difference. You enter into a contract with someone else – usually the broker himself – and simply bet on a corresponding price development. You own nothing and can also sell a value empty. You profit from falling prices. The yield is practically unlimited because you can use leverage. This means that for every 1% increase in the underlying value you can make a 300% return. But vice versa in exactly the same way. If shares are already too volatile for you, you will not be happy with these derivatives. It is clear that CFDs are more like a casino – even for very experienced investors.
Which asset class do you choose?
It depends above all on the risk. How much risk are you prepared to accept? And some asset classes are already being eliminated. The next question you have to ask yourself is whether you want to invest actively or passively.
Passive or active?
A very important question you have to answer is whether you want to actively try to beat a certain index or whether you are simply satisfied with it passively. The latter is in fact very easy and also very cost-effective with corresponding ETFs. ETFs simply replicate a specific index such as the Dow Jones, Nasdaq, DAX, etc. – and that 1:1. With just a few ETFs it is already possible to replicate the entire stock market. So not only individual indices but actually the entire market. This is the best diversified stock strategy – you own more or less all stocks that are traded worldwide.
But active investing means trying to beat this market. And that is not as easy as it sounds. As it turns out, only very, very few people succeed in the long run. There are indeed thousands of funds and fund managers who try to do just that. But they are far from succeeding because of this. On the contrary. Most do not manage to beat the market and cost a lot of fees. The bottom line is that they destroy assets because they leave out a better investment with less risk.
Yes, the fund industry doesn’t want to hear this, but the growing popularity of ETFs confirms exactly this trend. The problem is, however, that passive investing also needs to be actively managed in a certain way – at least if you really want to map the global market. For this purpose, there are separate funds such as the Arero. This fund maps the world market on the basis of scientific findings – but must be actively managed because the world is constantly changing and therefore the weightings must also be changed.
New ways to invest
The principles have not changed in the last decades. Only when the concept of Bitcoin was introduced in 2008. This is a completely new and digital currency system. Bitcoin is administered decentrally and there is no state or authority that can control it. That is what makes it so unique. Bitcoin owners can send payments in real-time. The Bitcoin offer is limited to 21 million – that’s all there will be. So it is not possible to simply print it. Many therefore see Bitcoin as the new gold standard. After all, gold has been the reference value since the introduction of all currencies. It is quite possible that Bitcoin will be the reference value for currencies in the future. However, it is to be expected that governments will try to create an alternative to Bitcoin that they can control, such as the digital Euro. Of course, such a currency offers certain advantages, but it does not correspond to the principle of Bitcoin and crypto-currencies, which can be managed decentrally and controlled by no one.
A billion market has already developed from the crypto currencies. Over file sharing markets it is possible to buy and sell parts of it. Also the CFDs are here already on the advance. That means, it is possible to trade CFDs on crypto currencies. Here we have an extremely volatile market with an extremely volatile trading element – i.e. extreme risk for all participants. Nevertheless CFD trading with Bitcoin is booming.