Many people have great respect for developing a personal investment strategy. This is understandable, as these are far-reaching decisions. With simple considerations, however, you can arrive at your tailor-made investment strategy without headaches.
Why should you invest at all?
If you have additional money left over after all necessary daily expenses and the emergency reserve for unforeseen events, it's advisable to invest it profitably. Excess money that doesn't generate returns is useless. With a well-thought-out investment strategy, you can create additional income that provides room for future purchases, investments, or retirement.
Which investments make sense?
There are numerous investments. All have their pros and cons. Stocks can rise sharply in price and also yield an interesting dividend, but they can just as easily lose significant value. Account money, savings bonds, or corporate bonds currently yield no returns but are very stable.
Before you consider which investments you want to make, you must be clear about what type of risk-taker you are – risk-loving or risk-averse?
What is your risk appetite?
The value fluctuations of an investment are called investment risk. But how do you personally feel about this rather abstract technical term? Experience from everyday life can provide valuable clues.
How do you personally react to risk? For example, if you park in a no-parking zone to quickly go to the bakery, are you nervous or does it leave you cold? Have you ever forgotten to buy a ticket on a train ride – what was your reaction?
If you're the type of person who doesn't immediately get nervous, you can usually also tolerate value fluctuations in your investments. However, if you quickly become afraid that something bad might happen, you should definitely avoid risky investments. No profit prospect, however great, justifies poor sleep.
Very risk-averse people have no choice but to leave their money in their account, even if it unfortunately earns no interest at the moment.
What risk can you afford?
Besides the question of what type of risk-taker you are, it's also important how much risk you can objectively bear. If you need to access the invested money at any time, you cannot risk fluctuations in investment value. In this case, all risky investments should be avoided.
On the other hand, you can invest your retirement savings in 20 years more riskily, as fluctuations should balance out over time. For example, stocks that have fallen sharply can rise in value again in a few years.
So if you are risk-loving AND risk-capable enough, you can consider various investments.
What is your optimal investment mix?
As in real life, you shouldn't put all your eggs in one basket with investments, as you could lose everything in the worst case. The distribution of risks in investments is called diversification.
Depending on your risk appetite, you should make various individual investments from different asset classes (stocks, bonds, etc.). It can also be interesting to consider more specialized investments such as commodities or loans.
A rule of thumb is to invest your money evenly in at least 10 different securities or types of investments; with 20 different positions, you're already very well diversified.
A simple rule to finish
Finally, a very simple rule that protects against frustration and damage: Only invest in investments that you understand and feel comfortable with. Here too, it's like in real life; you are competent and successful where you can draw on experience and knowledge – everything else is an adventure that can go wrong.
Your investment specialist Michael Boge
