Shares: spreading money and risk correctly

A man stands in front of a blackboard with many statistics and diagrams

In order to be able to build up assets in the long term despite current low interest rates, many investors rely on shares. However, a typical mistake when investing in stocks is a lack of diversification in the stock portfolio. If, on the other hand, you invest broadly in equity markets, you can hope for significantly higher returns. We explain why a broad diversification of shares is worthwhile for you and what potential index funds have for your financial investment.

Stocks: rapid losses and price rises

The value of the stock markets – measured by the MSCI All Country World Index – has almost quadrupled in euro terms since January 1999 (as of December 2020). The long-term history of the stock markets shows: the bottom line is that, on average over the long term, returns have been about four percent higher annually than safe money investments. These include, among others, a savings or overnight deposit account.

If you want to invest in shares, you should be aware that temporary losses of up to 50 percent are just as normal as rapid price rises.

Risk diversification is the best and only means against excessive losses

The same applies to shares as generally to investments: never put all your eggs in one basket! Unfortunately, so-called financial advisors still violate this rule far too often by selling their clients overly risky products!

The advantage of risk diversification: sometimes the stock markets are doing great, sometimes a dry spell on the stock market lasts for ten or 20 years. Then it is good to have solid interest income from safe investments. If you want to buy shares, you should therefore not focus on individual stocks and invest in one or a few stocks, but rather diversify your share portfolio broadly. This lowers your risk of losses.

Index funds: broadly spread in stock markets

So-called investment funds, especially index funds, are one way of spreading risk. This is because a large number of different individual securities (interest-bearing securities, equities, real estate) are included.

Index funds (also called ETF, Exchange Traded Funds), track the performance of stock markets worldwide. They are a rock-solid investment and also well-suited to retirement planning. However, keep in mind: even with ETFs, ups and downs are inevitable.

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Investment strategies with shares

The following overview shows how you can invest in a broadly diversified way in stock markets, for example via index funds. This can be done quite easily with one product, but you can also diversify even more and invest in more products:

stock investment strategy with one product

  • MSCI All Country World Index with around 2990 public companies from industrialized and emerging countries worldwide
  • FTSE All-World Index with 3974 stock corporations from industrialized and emerging countries worldwide

⇒ diversification on 3000 to 4000 stock companies

Stock investment strategy with several products

  • 30 to 40 percent – Stoxx Europe 600 with 600 stock corporations from Europe
  • ten to 20 percent – MSCI North America with 704 public companies from the USA and Canada
  • ten to 20 percent – S&P SmallCap 600 with 600 smaller stock companies from the USA
  • five to ten percent – Topix with 2173 stock corporations from Japan
  • five to ten percent – MSCI AC Far East ex-Japan with 1095 public companies from Asia
  • five to ten percent – MSCI Emerging Markets with 1390 stock corporations worldwide
  • five to ten percent – MSCI Emerging Markets SmallCap with 1574 smaller public companies worldwide

⇒ Spread over more than 6000 stock corporations

The above-mentioned stock indices are not the only sensible ones, there are also good alternatives – for Europe, for example, the MSCI Europe or for the USA the S&P500 or the MSCI USA. There are also a number of indices that specifically track the performance of medium-sized and smaller companies, such as the Stoxx Europe Mid 200 or Small 200 and the Russel 2000 US Small Cap Index.

Spreading the risk of shares: tips for buying index funds

The cheapest way to buy index funds is through a direct bank. In the branches of banks and savings banks and financial distributors index funds are not actively offered, because here no adequate commission for the intermediaries is incurred. If the independent search is too complicated for you and you need advice, talk openly with your intermediary about your concerns.

There are also other worldwide spreading funds in the offer of the advisors, which are more expensive, but are sold gladly against commission for it. In this case, at least negotiate the issue surcharge to reduce costs.

Dubious share offers: Warning against calls from dubious stock traders

Caution: For some time now, dubious stock traders have been catching customers! The market watchdog experts at the consumer advice center in Hesse, for example, have warned against unsolicited advertising calls from supposed stockbrokers. Consumers are also offered shares in well-known companies – including Lufthansa, Siemens, Tesla and Amazon – for sale by telephone.

Fake purchases, fake securities accounts

The dubious stockbrokers ask consumers to transfer money to an account abroad for this purpose. In return, they would create a securities account and buy the desired shares. After payment, however, the victims of rogue stock traders do not get access to shares and securities accounts. More about the warning of the market watchdogs against dubious share offers can be found here.

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