- Step 1 – Build Nest Eggs: First create a liquid reserve of three net monthly salaries as overnight money.
- Step 2 – Choose Investment Strategy: A good portfolio consists of a security and a return building block. Weight the two components according to your personal risk tolerance.
- Step 3 – Deposit: Distribute the fixed portion of your portfolio to two alternate 2-year deposits.
- Step 4 – Select Index: Choose the return building block for one or more indexes you want to invest in. The MSCI World is particularly wide-spread.
- Step 5 – Buy ETF: Open a free online repository and buy an ETF that maps the selected index.
- Step 6 – Check portfolio: Check once a year whether the security and yield components are still weighted correctly.
For a good investment, you do not have to be a financial professional. For example, if you want to invest $ 10,000, you can get there step by step with a simple timetable. We give important investment tips and give you three simple investment strategies that you can easily implement yourself.
Avoiding debt is the best investment
The best investment is to settle existing debt and avoid new debt. After all, you pay higher interest rates on your liabilities than you receive on secure savings deposits. That’s why you should also be able to pay for unforeseen expenses such as home or car repairs without losing ground.
Step 1: Create nest egg
In a first step, you should therefore cover a nest egg. This reserve must be liquid at all times. Therefore, the nest egg is best kept on a call money account. On daily allowance you have access at all times and it throws off at least low interest rates in contrast to current account balances. Deposit deposits are protected throughout the EU by the statutory deposit insurance up to at least 100,000 euros. So it’s a very safe investment.
Indispensable despite mini interest rates: Three tips for your daily allowance
Important is the provider comparison. Because of the low interest rate environment, many retail banks are hardly paying any interest on call money. After all, top banks grant an interest rate of 0.6 percent (as of February 2018). If you would invest the full 10,000 euros, that would bring at least 60 euros interest a year. That would be overkill, though. Because other forms of investment bring even more interest, you should not park too much money on the call money account – a nest egg in the amount of about three net monthly salaries is sufficient.
To the daily money comparison
Basic rules of investment
There is more return against more risk
In the long term, stocks promise a much higher return than call money and time deposits. The latter are protected by state deposit insurance. However, equities are subject to price fluctuations, so that in the worst case losses threaten. A solid portfolio consists of a security and a return component.
Long breath reduces risk of loss
Because of the price fluctuations, investing in equities carries the risk of price losses. But you only lose money if you sell your shares at a lower price than you bought them. In retrospect, the stock markets were always able to make up for the most severe downturns. Calculations by the Deutsches Aktieninstitut show that investors who have invested in the standard values of the DAX for at least 15 years have never suffered losses – regardless of whether they started at high or low prices. The decisive factor is therefore a long investment horizon in order to be able to take advantage of price losses if necessary.
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Wide spread reduces the risk
Never put everything on a card. Be sure to spread your investments across multiple asset classes – for example, safer savings and higher-yielding assets such as equities. With equity funds or exchange-traded index funds – so-called ETFs – you spread your investment once again within the asset class shares through a variety of different companies.
Cheap investments improve the return
All saved costs have a positive effect on your return. Call money and fixed-term deposits usually do not incur any costs and are therefore the first choice for the security component of your portfolio.
For equity funds, annual fees of 2 percent of the market price are no exception. An ETF can afford a fraction of this cost. This fund replicates large indices such as the MSCI World or the DAX one to one, spreading your capital as broadly as an actively managed equity fund. Few classic funds outperform their benchmark over the long term. Investing in an ETF therefore has at least as good a return expectation at significantly lower costs. An ETF is therefore the ideal fund for the yield component of your portfolio.
Funds as investment: How to find the optimal fund
Step 2: Choose your investment strategy
Every investor has to decide for himself how much risk he can and wants to take – whether he assembles his portfolio in a more security-oriented or rather yield-oriented manner. For example, civil servants with a very secure income may be more at risk when investing than a freelancer who can not estimate the future order situation. The investment horizon is also crucial. The longer you invest the money, the larger the yield component may be.
Depending on your personal risk profile, you then choose an investment strategy and put together your portfolio. In the balanced investment strategy , the security and return components of the portfolio are equally weighted.
Security-minded investors choose a portfolio with a larger overnight and fixed-term portion. Conversely, the portfolio of yield-oriented investors includes a higher proportion of shares.
How to invest the 10,000 euros
Important: Regardless of which strategy you choose, you should first create the entire nest egg. An example: You earn 2,000 euros net per month. If you have not yet formed a nest egg, you will first need to pay € 6,000 (three months’ salary) as daily allowance, regardless of your investment strategy.
How you spend the rest of the € 10,000 depends on your risk profile. If you are pursuing a return-oriented or a balanced investment strategy, the remaining 4,000 euros will be fully invested in the yield component of your portfolio. After all, the target share / ETF share has not yet been reached. Security-minded investors are buying ETFs for € 2,500. The remaining 1,500 euros are invested as time deposit.
Step 3: Create the time deposit correctly
Like overnight money, time deposits are protected by the statutory deposit insurance, but brings slightly higher interest rates. However, you can not have your fixed term deposit during the term. Although long-term deposits bring in higher interest rates, you should not be tied for too long. Currently, the interest rate level is very low. It would be a pity if you did not get your money for years, if interest rates rise again in the future.
More about: interest rates and interest rate forecasts for savings and lending rates
It is best to spread the fixed income portion of your portfolio evenly between two alternate maturities, with one due each year. This will allow you to benefit from rising interest rates if you invest the money again.
By the way, the interest rate differences are just as big as the daily allowance. Here, too, is worth the comparison of different offers. Currently brings 2-year fixed-term deposit only 0.23 percent interest. The best deals offer an interest rate of 1.3 percent. With a total investment of 10,000 euros that would be over 100 euros annually difference in interest income. At 1,500 euros, interest rate differentials naturally have less impact. But over time, your wealth and, with it, the fixed income portion of your portfolio grows. It’s best to make it a habit from the beginning to invest your money optimally.
For a deposit comparison
Step 4: Select index for ETF
Now you need to populate the return module of your portfolio – best with ETFs because of the lower cost. If you only want to invest in a fund, we recommend an ETF on the MSCI World. Because this index comprises over 1,600 companies from 23 industrialized countries in the world. With an investment in the MSCI World, your capital is automatically spread extremely broadly across all industries and many regions of the world.
However, the US market is significantly over-represented in MSCI World. Around 60 percent of the stocks included are US stocks. Those who prefer to invest in the European markets, buy the best one ETF, the Stoxx Europe 600 maps. It lists the 600 largest companies in Europe. As German indices, the DAX or MSCI Germany would be eligible. However, these indices contain significantly fewer equities than in the MSCI World. The capital is thus spread over less financial stocks.
For example, anyone who values ecologically and ethically sustainable investment can include ETFs on the MSCI World Socially Responsible Index or the Dow Jones Europe Sustainability Screened Index.
More about: Sustainable Investment – Investment with a clear conscience
Step 5: Buy ETFs
Whether you want to invest in just one or more ETFs is entirely up to you. If you want to invest a relatively small sum, such as 10,000 euros, it may make sense to focus initially on only one very widely spread index – for example, the MSCI World.
To buy an ETF, you first need a securities account. Branch banks usually charge an annual fee for this. A pure online deposit, however, is usually free. Well-known providers are, for example, Onvista Bank, Flatex, Comdirect, Maxblue and Consorsbank. When trading ETFs, no sales charge is due and the order fees are low.
You can search for funds either by their name or by their ISIN (International Securities Identification Number) number. We have put together a short list of recommended ETFs on the MSCI World and the European market for you:
|ETFs at the MSCI World||ISIN|
|Amundi MSCI WORLD Ucits ETF EUR||FR0010756098|
|ComStage MSCI World TRN UCITS ETF||LU0392494562|
|db x-trackers MSCI World Index UCITS ETF 1C||LU0274208692|
|iShares Core MSCI World UCITS ETF||IE00B4L5Y983|
|ETFs on the Stoxx Europe 600||ISIN|
|Amundi ETF Stoxx Europe 600||FR0010791004|
|ComStage Stoxx Europe 600 NR UCITS ETF||LU0378434582|
|db x-trackers Stoxx Europe 600 UCITS ETF (DR) 1C||LU0328475792|
|iShares STOXX Europe 600 UCITS ETF (DE)||DE0002635307|
Step 6: Readjust the portfolio once a year
Once your portfolio is put together, you do not have to spend much time on it. Once a year, you should check whether the security and return components are still weighted correctly. A good time for this is the appointment, when your time deposit expires. Then you can adjust the portfolio if necessary.
If the market value of your ETFs falls well below the proportion that matches your investment strategy, then buy. Conversely, you can sell some of the ETF shares and convert the proceeds into fixed-term deposits if the ROI is overweighted.
Stay true to your strategy
It is important that you remain true to your investment strategy even if the yield component should slip into the red. Many investors have lost money by selling their securities and realizing price losses in times of crisis.
Adjustments to your strategy are only necessary if you are saving on a specific goal and need your money on a specific date – for example, as equity for mortgage lending. Then, a few years beforehand, you should begin to gradually reduce the ETF portion of your portfolio in favor of safer investments. As a result, you save your savings early against fluctuations in the price that are always possible with ETFs.