There is no perfect portfolio for everyone. Investments should be as individual as people and their circumstances are.
There is a big misunderstanding in private investment. Ranking lists, investment tips or product recommendations suggest that you should only invest in the best funds, then everything would be fine. You don’t have to worry about anything else, the return then comes naturally. Unfortunately, the issue is not that simple.
Unfortunately, there is no such thing as the best portfolio for everyone. The needs of investors are very different. While stocks may be the most attractive asset class right now, that doesn’t mean everyone should invest all of their wealth in this asset class. Not everyone can withstand the temporary fluctuations that are part and parcel of the stock market. Or they need a larger part of their assets precisely when prices are temporarily in the basement. On the other hand, savings account interest is by no means sufficient to maintain the real value of savings, i.e. after inflation.
Investments should be as individual as people and their circumstances are. What is the total wealth? When do investors need their invested capital? But above all: How great are the expected returns – and what fluctuations in value are acceptable? As simple as these questions appear at first glance, many find it difficult to find realistic answers.
Let’s take the expected rate of return. The figures that are then given are often around five percent, often even significantly higher. One problem: Many people primarily calculate with the nominal return and forget the taxes and fees that will be incurred. Inflation, which erodes the value of money, is also forgotten. If you subtract all that, what is left “in real terms” is often not five percent, but less than one percent. So it’s about what’s left in real terms, i.e. after costs and taxes.
It doesn’t work without shares
On the other hand, many investors are not aware of what investments are needed to achieve their (often ambitious) return targets. One thing is clear: With the zero and negative returns on savings accounts, the value of the savings cannot be maintained with a view to inflation. But what about stocks? Let’s do a small, admittedly oversimplified calculation: Let’s assume an investor invests 50 percent of his assets in the savings account and 50 percent in shares of first-class companies or a good mutual fund; which would be a bold investment strategy for many German investors. Shares bring six percent, in a long-term comparison. Zero plus six divided by two is three. Such a portfolio realistically yields a return of three percent per year in the long term – before costs, taxes and inflation, mind you.
In other words, even if you put half your wealth in stocks today, in a world without interest, you probably won’t be able to preserve your wealth over the long term. So he needs more shares, not fewer.
On the other hand, share prices can fluctuate temporarily. Anyone who needs their assets in the short term should take this into account. A few monthly salaries can remain in the checking account. For personal liquidity, holidays, purchases and costs that you don’t expect. A college graduate just starting his first job need not fear temporary stock market crashes if he still has many decades of wealth accumulation ahead of him. The situation is different for a senior who has already built up a large fortune that he would like to use up soon.
One thing is therefore particularly important to us: there is no such thing as the perfect portfolio for everyone. Successful investment begins with a realistic assessment of the situation. If you want five percent, you first have to be clear about what you mean by that: nominal or real. And he must have an idea of what it takes to achieve that return target. Desire and reality must match.
Knowledge is required. On the one hand, self-knowledge, to know which fluctuations you can actually endure and what return targets you can expect. On the other hand, expertise. Those who have at least basic knowledge of financial markets and asset classes have an advantage.
Challenge your advisor like yourself! Dealing with the investment topic can be worthwhile. Financially and intellectually.
The article has been published in the current position. The magazine you can subscribe for free.