Our comparison: investment risk with stocks and investment tokens

Risks of investing in stocks

Like any other asset class, equities are subject to the logic of a proportional risk/return ratio. The higher the return sought by an investor, the higher the associated investment risk. This fact needs to be considered all the more on the stock market, as investors can invest their money here in companies from a wide range of industries, sizes and market segments. Investing in a young start-up that operates in a disruptive and fast-moving industry and has barely any sales is usually significantly riskier than investing in a large company that has been established for many years in a stable market.

If you want to invest in stocks, you should be aware of some specific risk factors that investing in companies entails. Most stocks are subject to the general economic cycle to a greater or lesser extent. In phases of upswing, prices rise, in boom phases, they peak, in phases of downturn, and in depression, they reach their lowest point. It is important for private investors on the stock market to know that the low point does not mean an actual loss in value or even total loss. Only those who sell stocks in a low phase actually realize losses. Most stocks are recovering from their lows and then rising in value again. That is why calm and patience are two of the most important virtues in equity investments.

In addition to general economic risk, individual stocks are also subject to company-specific risk. This means that factors such as incorrect management decisions, poor product developments or lack of cost control can lead to imbalances in a company, which in the worst case could result in insolvency. For shareholders, corporate insolvency usually means the total loss of their investment, as they are only serviced after creditors and bondholders.

Last but not least, equities are also subject to two other risks: currency risk (the shares are listed in a foreign currency, which may lose value) and stability risk (the country in which the company is primarily active becomes politically or economically unstable).

Methods for optimising equity risks

But it is wrong to conclude that with so many risks, equities are fundamentally a risky investment. The decisive factor for successfully building up wealth is not only the type of investment itself, but also the investor's individual willingness to take risks. Private investors who follow two simple basic rules have good chances of generating higher returns in the long term with stocks than with traditional investments.

Principle 1: Diversify risk. Given the company-specific risk presented, you should never invest your money in just one or two companies. No one knows how the share price of individual companies is developing. By diversifying your money across multiple companies, you can significantly reduce your investment risk.

Principle 2: Long-term investing. The prices of stocks can fluctuate significantly. You must therefore expect the possibility of losses in short-term investment periods. In contrast, over a medium-term period of around 10 years, equity markets worldwide barely show any negative returns. In the past, long-term investments of over 15 years were able to achieve a higher return on just about every stock market than with traditional investments.

Risks of investing in investment tokens

Investment tokens have become increasingly popular as digital capital investments in recent years. These are tokenized tangible assets that are linked to an asset and thus represent a financial claim on the respective asset. This allows tangible assets to be digitally divided into shares and made available to investors. This is particularly interesting for formerly illiquid asset classes such as real estate, commodities or private equity, which are therefore also accessible to retail investors.

They are particularly popular Real estate investment tokens. This gives investors the opportunity to invest in both commercial and residential real estate. While residential properties enjoy steady demand, the risk of a loss of value or total loss of commercial real estate is higher, particularly in times of crisis. The last few months have shown that companies stop paying rent in the event of economic difficulties - such as Adidas - or completely close their locations - such as Karstadt/Kaufhof. Insurance companies usually only cover the costs of rent losses in certain cases and over a limited period of time.

The biggest risk factor for investment tokens in real estate is the general interest rate level. Rising interest rates mean higher burdens for both private and commercial owners, which they may not be able to bear in the long term.

Conclusion: Risk optimization improves the risk/return ratio

In principle, investments in stocks as well as in investment tokens carry the risk of total loss. However, the total loss as an investment risk can be optimized by following a few basic rules. If you spread your money across many different stocks or equity funds, the risk of a complete loss in value is low. The same applies to investments in investment tokens: If you diversify your digital investments and invest your money in high-quality tangible assets that have shown a stable increase in value in the past, you can achieve a balanced risk/return ratio.