Investing for Beginners – 10 Tips for Asset Accumulation

Many people shy away from the topic of investing. It seems too complicated and difficult to understand. However, investing is actually much simpler than many think and is especially important in the days of low-interest rates. Use these ten tips to take charge of your own investments.

Take Stock

Take a look at your income and expenditures to find out whether or not you have the capital means to invest. If your expenses exceed your income, disregard the remaining investment steps. Instead, work on repaying your debts, since interest on loans and overdrafts are significantly higher than the interest earned on savings products.

Review Current Contracts

Next, get an overview of your ongoing financial responsibilities. Consider not only their financial burden and duration but also their usefulness. Examine your insurance policies and determine which ones you really need and which ones you can cancel or find a more affordable alternative to. There are numerous online comparison platforms that help you find the best conditions for you.

Build Reserves

It’s advantageous to set aside savings. Hard times can come up anytime and it’s good to be prepared: a car repair, an urgent purchase, a financial emergency in the family. As a guideline, Stiftung Warentest recommends savings to be two to three months’ salary ideally. Call money accounts are a suitable form for this investment. Money deposited here is readily available and earns a small interest. If you want to save in the long term, however, you should opt for fixed-term deposit accounts. Though these have a higher interest rate, they also have a longer term of investment and the funds are not quickly available.

Determine Investor Type

Before every investment, you should figure out what your investor personality is. Do you look for security or return when investing? There are four different types of investors: defensive, conservative, moderate, and risk-oriented. They differ in terms of the risk the investor is willing to take and in terms of the return he or she intends to make. We created a brief questionnaire in our article “What Type of Investor Are You?” which you can complete to discover your investor personality. After all, not every financial tool is suitable for every investor.

Consider Life Stages

Young professionals: Young professionals just starting their career path often spend half of their earnings on living expenses. This often provides very little leeway for investing, although even a small monthly sum can be a start. First, this sum should go toward building up savings before thinking about long-term investments. Liquidity in form of call money and fixed-term deposit accounts plays a large role for young professionals in order to adapt to fast-paced life changes (larger purchases, costs of higher education, etc.). They should also always keep an eye on the investment horizon of their assets.

Families: Those planning to have a family or who already have children should concentrate on supporting them financially. If there is a mortgage to pay, that should be done first before looking at investing. In the case that funds are still available, it is worthwhile developing a diversified portfolio made up of a variety of asset classes and risk categories. Risk should be spread broadly in order to prevent total loss of the invested capital. Again, a portfolio’s tendency toward risk and return depends on investor type.

Generation 50+: Those who are at the height of their career usually have more financial leeway for investments. At this stage, children have already moved out and are independent. The retirement age is around the corner and the main concern is preparing for a comfortable retirement. The primary focus should be on capital preservation. One should avoid large investments in highly speculative assets. Savings products that take several years to make up their costs should also be avoided. One option is a well-weighted portfolio with a large proportion of secure (e.g. saving accounts, building society savings agreement, life insurance, real estate, risk-free government bonds) and sound, profitable investments (e. g. fixed-income securities, bonds with a good credit rating, equities of established companies, international equity funds and index funds) and a small amount of speculative investments (e. g.: equities and equity funds of non-established companies, investment funds, foreign currency bonds, venture capital).

Maintain Liquidity

You should have part of your capital available as cash. Cash does not mean only physical bills but also funds in call money accounts. Call money is readily available and can be used to react to changed circumstances, be it a financial emergency or a sudden investment opportunity. Although call money accounts receive very little interest in times of low-interest rates, at least they offer a minimal return, while cash makes none.

Invest in Tangible Assets

Investments in tangible assets are considered to protect against inflation and unforeseeable risk. They are especially useful as value storage for the case where an economic crisis leads to rapid depreciation of money. Traditional tangible assets are real estate, land, and precious metals (gold and silver). Equities (as individual securities or in equity funds) are also tangible assets. After all, company participations are backed by a real worth: a company with storage facilities, offices, machines, and employees that produces products or offers services. However, investments in tangible assets also require a careful risk assessment, since some tangibles are speculative and require knowledge of the field – e.g. investments in art, wine, watches, or vintage cars, but also exotic precious metals, precious stones, or fine woods.

Invest Long-term

Wherever possible, invest for the long term. A building loan agreement that one pays into each month and which eventually leads to owning real estate is a secure investment with great use. Life insurance is also a long-term investment; however, due to low-interest rates, it is currently unappealing. Investments in companies should also be made with a perspective on the long term. Well-managed companies with proven business models generally overcome even difficult economic crises, as long-term development on the exchange market demonstrates.

Use Return Opportunities

Focusing only on security when investing in times of low-interest rates maintains the value of one’s money in the long term; however, it will not appreciate. Therefore, part of one’s wealth should go toward assets which, although they have greater risk, offer a higher return. These include shares and fixed-interest securities, investment funds, stock funds, or index funds that contain different weighted individual values. Another investment opportunity that offers great potential for return is private venture capital in form of equity crowdfunding. There are a few things to consider when investing in startups through equity crowdfunding. Our article “Investing in Startups: How to Make the Best Decisions” is a guideline for investments in startups.

Spread Portfolio Risk

When putting together an investment portfolio, you should make sure to allocate your capital to investments with different yield opportunities, risk classes, maturities and premium levels. A tried-and-true approach for spreading risk is portfolio theory. In this approach, one examines the correlation of various investments, meaning how much they influence one another. Risk diversification can help to avoid greater individual risks and reduce the possibility of a total default.  You should always keep an eye on the development of your investments in order to be able to transfer them to other assets in case of doubt.

Do you have questions about investing? Let us know in the comments below!