Investment strategy

Our grandparents had it even easier. In the Federal Republic of Germany of the 1950s, 60s and 70s, the savings book was the non-plus-ultra in financial investment and the classic investment strategy provided for the addition of a few shares as well as life insurance and a building savings contract.

The single-family house was paid off step by step and at the end of a successful working life there was the statutory pension, which was almost always enough to live on. Investment strategies were only in demand to a limited extent, as the nice employees of the house bank knew better anyway and made offers that were still worthwhile at the time.

What looks like a little paradise from today’s point of view is unfortunately long gone. Terms such as investment strategy, which had previously only been known to business economists and bank employees, as well as a few merchants at most, have become part of everyday language.

Since statutory pensions and fixed-interest investments have been falling, new solutions are needed to avoid simply losing money. In fact, a life insurance policy with guaranteed interest was three percent in the 1980s, rose to as much as four percent in the 1990s and is now bumbling around at 0.9 percent.

This refers to the maximum guaranteed interest rate set by the Federal Ministry of Finance. However, the final commissions and administrative costs still have to be deducted, so that in the end less than half a percent of the interest rate is charged on average. On the other hand, there is the inflation rate and thus general inflation, which in Germany is between one and a half and two percent.

You don’t need to be a mathematician or an investment strategy to realize that traditional forms of investment usually entail losses. The same can also be said of time deposits or overnight money – it is simply no longer worthwhile and is therefore hardly recommendable for an investment strategy.

Investment strategy and diversification

In the direct aftermath of the foreign word “investment strategy”, the term “diversification” is also used. We are talking here about spreading the risks and avoiding putting all the proverbial eggs in one basket. The procedure is clear, because those who invest all their money in one and the same form of investment can lose everything in one fell swoop and thus work without a net and double bottom. Accordingly, diversification can be regarded as the be-all and end-all of any investment strategy and should be taken into account anyway.

This also applies, by the way, if not all available money is used for the investment. Finally also private consumption or paying off a home of one’s own and/or the investment in school books, furniture etc. is to be regarded as a form of the investment strategy – it concerns also here the question, how money is invested, although no purely material profit jumps out.

A successful investment strategy in the sense of diversification is achieved when the individual investments are in no way interdependent. Anyone who chooses a life insurance policy, time deposit and savings book is always dependent on the interest rate level, and anyone who chooses the shares of commodity companies, the US dollar and ship investments, for example, has to do in any case with the development of the US currency.

Ideally, one should know the connections between individual forms of investment and the question of which industries depend on each other should also be answered in order to find a clever investment strategy. Of course, you can always rely on the expertise of external consultants in this context, but some of them also make a living from commissions, so that the tips are not always altruistic.

Diversification is, of course, something you have to be able to afford. If you are just at the beginning of your investment strategy, you may be inclined to buy only shares or only ETF or to invest only in your own property. This can be okay if there is diversification in the medium and long term.

The currently popular ETFs are diversified by themselves. Exchange-traded funds or also exchange-traded funds hide behind the abbreviation. The composition of equities is based on clearly defined indices and can change constantly. Often there are more than 100 companies from different sectors behind an ETF, ensuring that it is broadly based in the truest sense of the word.

Unfortunately, investing in ETFs, equities and the like is not the only investment strategy.

Investment strategy and expertise

In some places it is said that an investment strategy is always based on specialist knowledge. This too may be true, but you should never rely on the supposed wisdom of the stock markets. There are a number of “stock market wisdoms” that are often correct but not always true. Any examples?

Then there is, for example, the advice: “Never reach into a falling knife”. The significance behind this is that falling share prices are by no means always a recipe for success and that some companies even go into free fall after initial losses.

Another classic among stock market truths and a supposedly profitable investment strategy is to buy standard stocks and wait a long time. André Kostolany said so, but not everyone is in a position to bridge long financial bottlenecks and “go to sleep” as the saying goes.

The same applies to Warren Buffett’s statement that an investment strategy is to invest only when you understand the business of the company. Sounds logical and yet the complexity of even simple business models should not be underestimated, while supposedly difficult transactions only need to be well explained. Mind you: the stock market gurus tend to be right, but not always, so that no one-to-one investment strategy can be derived from this.

Finally, anticyclical action is repeatedly recommended as an investment strategy. This approach also needs to be learnt and should not be used without need. After all, there is often a reason why a value is asked for all at once or why traders part with a stock XY.

Sir Isaac Newton once said, “I can calculate the orbit of the stars in centimeters and seconds, but not where a crazy crowd can drive a stock price.”

Anyone who comes up with the idea of having their investment strategy based on stocks or equity funds should always keep this clever sentence in mind.

Alternative investment strategies

With the recommendation of sufficient diversification or risk diversification in mind, an alternative investment strategy can be easily found. In this context, the admixture of precious metals, especially gold, is often mentioned.

The advantage is obvious, because gold is something “real” and has been a recognized means of exchange and payment almost since the beginning of mankind. Anyone who invests in gold, or at least adds to it, relies on crisis resistance.

The disadvantage is that gold does not yield any dividends and there is no guaranteed interest. Although gold is a liquid means of payment almost worldwide, those who need money at short notice are exposed to the sometimes high price fluctuations. This can work, but does not have to.

Real estate is also popular as an investment strategy. Here the advantage consists in regular rental income and in the case of a financing in the enormously favorable interest rates. On the other hand, there are risks due to loss of rent, repairs, tenant changes and all the imponderables that can arise in the relationship between tenants, landlords, owner associations and utilities.

Also real estates are very strongly exposed to the fiscal access and can – according to the name – only with difficulty be sold. The capital is not mobile.

A real trend is crowdfunding and crowdinvesting. Here money is invested directly in companies or even only in projects that promise success. Unlike stock exchange trading, no banks act as intermediaries and no commissions are paid which have to be taken over by the investors.

Above all Crowdinvesting can be exciting, because usually behind the concrete projects are established and experienced enterprises, which would like to receive fresh money at a lucrative interest rate. Crowd investing as an investment strategy can also include investing in ships, which are either purchased after the required sum has been collected or extensively modernised.

The interest rates are fixed in advance and are distributed in the form of a regular return or an increased final payment. Please note that ship investments may also be unsuitable as a pure investment strategy due to the risk involved. However, if you are looking for an exciting addition to your portfolio and are planning for the long term, you are acquiring a genuine top product.

Last but not least, tangible assets are always part of a clever investment strategy. If you’re clever, you’ll be opting for luxury watches, vintage cars or expensive wines and spirits. In some cases, profits are just as possible as with designer furniture and other luxury items. The risks could be argued about very well, because after all many of the material assets or objects are also used and thus promise at least an emotional profit.

In principle, the well-known formula that an increased risk goes hand in hand with a higher profit potential also applies to an investment strategy. In earlier years, there was the alternative of a fixed investment, but in the meantime only losses can be guaranteed. Accordingly at least a small risk is inevitable, in order not to let its fortune shrink.