You should avoid these top 4 investment mistakes!

Most of us probably have savings goals. Be it for your own home, a carefree retirement, a new car, the children or for more financial freedom in general. The will to save and capital are also available, as if from a latest study by the Bundesbank emerges. But successful, long-term wealth creation requires a great deal of know-how, especially in the ongoing zero-interest era.

1. Capital destroyer instead of yield provider

During the corona lockdowns, many citizens were barely able to spend their money. As a result of the consumption backlog, even more was deposited in interest-free current accounts — which can lead to significant losses as prices rise.

For example, the volume of all monetary holdings in private households in 2021 is the mark of seven trillion euros exceeded — a new record. However, Germans still prefer to invest in avoidably “safe” forms of investment, which, however, turn out to be long-term capital destroyers. The savings account (43%) and current account (47%) are investor favorites. Pension and capital life insurance is used by around 30% of German citizens. Real estate (26%) and investment funds (23%) are in the middle. With around 17%, shares are in second to last place in the top 10 of the most popular investments among Germans.

However, the capital primarily deposited in the savings account or current account is exposed to significant currency devaluation, which results from the currently unfavorable combination of inflation and zero interest rates: According to current DZ Bank calculations Capital from non-interest-bearing investments, including cash, will be devalued by an average of 2.3 percent this year. The resulting loss of purchasing power in private financial assets is likely to amount to 116 billion euros — which corresponds to a “minus” of around 1,400 euros per investor.

But there are also encouraging trends: Although Germans are still very risk-averse when it comes to investing money, awareness of equities has increased during the pandemic. According to figures from Deutsche Aktieninstitut In 2020, around 12.4 million German citizens were active on the stock exchange — as many as last 20 years ago during the dot-com era. The group of people under 30 was particularly enthusiastic about stocks. Almost 600,000 young adults ventured into the stock market during the corona year — an increase of 67%.

2. Diversification instead of “putting all your eggs in one basket”

Despite the attractiveness of stocks, young and relatively inexperienced investors in particular should not make the mistake of “putting all your eggs in one basket.” Reasonable risk diversification in terms of portfolio diversification is better. The diversification strategy aims to create a balanced risk/return profile. It can include positions across industries, asset classes, or even various financial instruments. This includes (tokenized) tangible assets such as real estate, art and collectibles as well as stocks, funds, liquid assets and precious metals.

In this way, it is possible to diversify assets in such a way that asset classes behave differently in terms of their return opportunities and loss risks under the same market conditions and balance market risks.

A targeted diversification strategy applies to retail investors as well as to family offices. One difference, however, is that large and very large assets can be selected from a variety of liquid and illiquid assets. In addition to the stock market, family offices are available as diversification options for real estate projects, corporate investments and alternative investments. The family office will continuously monitor the selected strategies for wealth creation, examine the portfolios of managers for cluster risks and readjust diversification if necessary.

Owners of smaller assets usually do not have the necessary expertise or access to tangible asset classes and therefore focus primarily on index funds with broad equity diversification or may finance their own home in parallel. But by using blockchain, private investors now also have access to illiquid assets such as art or real estate projects and, by selecting specific individual tangible assets, can create a diversified multi-asset portfolio put together.

3. Knowledge is money

How can it be that fake cryptocurrencies like the Squid Coin Bounce investors out of millions? Or that shares of relatively unsuccessful companies such as Windeln.de or Gamestop are sold by a Short squeeze from private investors suddenly achieve huge price jumps and similar losses? The reason for irrational or short-sighted investor behavior is largely a lack of knowledge. Instead of following trends and blindly investing in something, investors in this country should build up more financial expertise.

One current study came to the conclusion that around 50 percent of Germans consider their financial education to be “mediocre,” as confirmed by the associated knowledge test. People with low educational qualifications in particular may therefore be worse off in two senses: On the one hand, they have a lower income, and on the other hand, they invest it less profitably due to lack of expertise.

4. Costs cost returns

But even if the necessary expertise is available and the portfolio is structured in a diversified way, high costs can be at the expense of returns. You should therefore always keep an eye on the fees for bank deposits and accounts. These include transaction costs, fees for standing orders, deposit management, the current account and penalty interest rates. According to data from Verivox comparison portal At least 135 institutions now charge negative interest rates with a total balance of 50,000 euros or less per customer. Some institutions even charge negative interest rates starting at 5000 euros or less. At the same time, the number of banks and savings banks charging so-called custody fees has risen by 214 to 392 institutions since the beginning of 2021. Most savings banks and banks base their custody fee on the interest of 0.5 percent, which they have to pay on part of their excess deposits from the European Central Bank (ECB). But 13 institutions even charge penalty interest of 0.55 to 1.0 percent.

Other cost factors also play a role when it comes to tangible assets such as diamonds, art, fine wine or classic cars. This includes, for example, the tax-optimised import and storage of works of art and diamonds in duty-free warehouses. In the Classic Cars asset class, there are other influencing factors that can be at the expense of returns. For example, maintenance and repair costs, taxes, garage rental and car care.

Investors who want to benefit from the market opportunities of a diversified, attractive portfolio of tangible assets should therefore ideally entrust their investment to experts. In this way, they save time and “teaching money,” benefit from maximized returns and avoid the four typical investment mistakes mentioned above.