Expanding investment horizon – Philosophy and Origin
For years I was an advocate of traditional savings strategies. My meager savings were in a savings account and I got between three and four percent interest annually. In addition, I had invested part of my income in superannuation. Classic German investor behavior. With three to four percent interest, that approach was understandable. Why take unnecessary risk when you have a decent, safe alternative. It took me some effort to get rid of this behavior and venture into the world of stocks and, more recently, crypto currencies. In this post I dedicate a few lines to this decision (stock markets) and give an insight into my motivations, in the hope that one or the other of these articles may help you with your own, perhaps similar decision. My experiences are not all positive, but not entirely bad either. External influences have shaped this path, but more on this in the following sections:
Expanding investment horizon – why the savings account no longer makes sense
Not that long ago, but what feels like an eternity, there was only one economy model for me. I kept the money I needed for everyday use in my checking account. Everything else found its way into my savings account. In those days you got four percent interest on your savings. You could live with that, especially knowing that your money was safe there. What has changed? Well, within a very short time the savings interests fell and fell and fell. Nowadays, you get roughly the same interest rate on a savings account as on a checking account, … nothing. Well, that of course led to my ultimate theory: Savings accounts no longer make sense. Rethinking was the order of the day. The alternative – leaving the money permanently in the checking account and watching how it shrinks annually due to the so far low but real inflation – contradicts my nature. The classic alternatives remained, real estate, minerals, stocks. I already own a property and buying a rental property does not seem as profitable to me as many people suggest it is. (Feel free to prove me wrong) However, I will not explain that here because it is beyond the scope of this article. Gold and Co were too impractical for me, also I couldn’t imagine suddenly hoarding gold at home, although the thought of sitting on a pile of gold like Smaug the dragon does have a certain appeal. Nevertheless, I deciding on expanding my investment horizon and I devoted my attention to the stock markets at first.
Expanding investment horizon – the Germans and their stocks
In the introduction of this article I mentioned “classic German investor behavior”. At that moment you probably thought “Why classic German? It’s the same everywhere in the world! ” But that’s not true. According to the Süddeutsche Zeitung* – a newspaper German people don’t especially like stocks, and not only in the former eastern regions. The West is also lagging far behind other leading industrial nations in terms of share trading and similar forms of investment. But why is that? Are Germans simply less willing to take risks financially than others? The image of the “honest man” from history class jumps straight to mind. You may have other images of Germans in your mind, but I’m trying to avoid that topic here :D. But in this point the newspaper contradicts its original statement. Not all Germans are skeptical of stocks, because according to a study there are certain places in Germany that acknowledge stock trading as an elementary place in their wealth management. In other, often rural areas, one looks in vain for a depot. Perhaps it is also negative experiences from the past that have made stock trading bad “per se” in people’s heads, for example the IPO of Telekom, the dot-com bubble, etc.
According to Focus** many investors shy away from shares because fluctuations and losses in value affect them directly and they have the feeling that they cannot freely choose what to do with their money. Two thirds of the people said in a survey that there were “fears of losses” due to an economic catastrophe. Also widespread is the fear that the choice of individual company shares is simply “wrong”. What is it about these fears? At least when it comes to fear of buying shares of single companies instead of ETFs for instance, Focus gives the all-clear. While the risk of loss for individual stocks is still a full 27 percent over a year, this probability drops to five percent over a period of ten years, which means that 95 percent of the shares make profits over ten years. Of course, the measurement period is also important here. I am not sure that this model will apply to any ten year period.
Often it is also the horror stories of a few that spoil the pleasure of trading stocks for many. This year, too, has given the whole thing plenty of fuel. It may also be a mixture of many factors that happened to cause the word “stocks” to make the heart jump and create panic in some of my fellow citizens. What I might have smiled at last year now meets with understanding on my part. This fear can sometimes also be justified. I only recently had an extremely negative experience with the crash of Wirecard shares. For those who stopped reading the news this year, here’s a short summary. The company was confronted with considerable allegations of fraud, whereupon the share price plunged into the abyss. The whole thing was a shock at first and made me fundamentally doubt all my equity investment decisions. Ultimately, however, I only allowed myself to be confused by this for a short time and after an extensive analysis of my mistakes, for example ignoring various warning signals #fraud allegations, I decided to shake off my fear and move on. I may, however, dedicate an article to the whole affair some day.
Expanding investment horizon – The somewhat bumpy start
Let’s go back a bit in chronology: Three years ago I decided to start trading stocks. First, I scoured the internet for a suitable broker. There are many in number and yet after a while I was able to make a decision. I chose the Onvista Bank broker. So far, I am very satisfied with this choice, maybe I will dedicate an article to the topic at some point. In short, what convinced me were the deposit protection you get in German if you deposit your money with a German Bank, as well as the 5 Euro purchase fees (plus the respective stock exchange fees). For each share purchase / sale, I am at around 10 euros in total. As far as I am correctly informed here, there are no further fees. I rarely buy / sell, so the 10 euros do not really matter.
I started active trading with a small batch of Nestle shares, a decision I still don’t regret to this day. Then I became more daring, buying one or two stocks that I held for a while and then resold. Often this happened after a short online research or after a few conversations with my friends. In the first two years it worked quite well and the returns, measured against the investment volume, were considerable. Unfortunately (Spoiler alert) this streak of luck shouldn’t last forever. At the end of 2019, my portfolio consisted of some solid stocks, unfortunately 20% of them were oil companies and 15% Wirecard. I do not need to mention where the path led with Wirecard. If you are interested, just read my article, which will hopefully follow shortly. The oil companies, in turn, are a different matter. The corona crisis hit my Shell and BP shares badly, but I’m still holding. How so? Well, in the meantime I have significantly reduced the proportion that the oil stocks have in my portfolio. On the one hand, their depreciation caused the share to shrink. On the other hand, I bought more after the 1st Corona Crash. I also bought some other shares after the crash. Unfortunately, not at the lowest point, but deep enough to make up some lost ground with stocks like Alphabet and Microsoft.
I have since said goodbye to buying and selling shares. I only try to buy those stocks that (even if you can’t rely 100% on that theory) are too big to fail and have a constant growth trajectory or at least moderate growth and consistent dividends. I then buy and hold. Therefore, stock trading may be the wrong word in my case. Stock collection is more likely to hit it.
ETF or single stocks
Many of my friends shook their heads when I told them about my plans to buy individual companies. Presumably, they were not wrong with their premises that it would be better to buy ETFs. There is a much greater spread and, as a result, a considerably higher level of security. Of course, theoretically, higher returns are possible with individual stocks if you have a good hand. In retrospect, I would probably have been more successful with ETFs up to this point. I have been investing money in a semi-ETF fond for a few years now though, (something my insurance guy talked me into) which is why I have largely avoided ETFs in my personal portfolio so far. A mixture of both is probably the best option. For example, 60% ETFs and 40% individual stocks. It all depends on your own attitude and willingness to take risks.
Expanding investment horizon – Long story short
After a haphazard start to stock trading and a few recent setbacks, I am moderately confident that my strategy will deliver long-term success. Of course, the political development of the world also plays a major role here. Even if the worst case occurs, I am probably still better off with stocks than if I park my money in the bank. I try to keep the risk as low as possible in order to build a stable portfolio. I also make risk investments, but not so much in stocks at the moment. Of course, this article is in no way intended to be an investment recommendation and whoever has read it carefully will hopefully not classify it as such. I am still very new to stocks and that is not going to change anytime soon. I do not have the time or the opportunity to acquire expert know-how, which is why I do some things by trial and error. I do stock trading in the hope of expanding my investment horizon and widening my financial portfolio and setting aside one or two pennies for later.
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