Step 2:
Use a system to invest
In 5 minutes you will learn:How to invest? Stocks? Commodities? Real Estate?
How do the richest people in our history invest their wealth? What similarities do these personalities share?
- own equity in a company
- Jeff Bezos, Elon Musk, Warren Buffet, etc. are major shareholders in their own companies.
Most people forget that stocks are much more than dividend entitlements. Owning shares means owning a stake in a company – buildings, machines, land, etc., and best of all, people who try to achieve new goals or generate higher profits every day.
Profits that increase from higher productivity can be reinvested and that way, the overall balance sheet of a profitable company keeps growing. This is also the reason why the value of such a share increases in the long term. You simply own more real estate, commodities, machinery or whatever equipment or assets are held in that particular company.
Always remember: When you purchase a share you receive, among other things, more than just voting rights. You become the owner of a business of your choice without any obligations or legal risks.
Neither real estate, bonds nor commodities have achieved a comparatively high return over the last few decades.
How can it even be possible if you are invested in shares and hence indirectly invested in all these types of assets in various companies and, moreover, company employees are trying to manage profitably?
Which stocks to invest in?
Don’t worry, you don’t have to scratch your head about which stocks to buy for your investment. On the contrary, this is a very risky way of going about it. Of the twelve companies that were listed in the Dow Jones (a prominent American stock index) around 100 years ago, only General Electric is included today.
Despite this, were you aware that this American stock index has increased more than 30-fold over the last 100 years?
Even if we only take the last decade, a fictitious €10,000 investment would have grown to an impressive €23,000. Your investment would have more than doubled in a good decade.
The Dow Jones Index since 1920
In the following section you will find out how such a stock index can climb to new highs despite countless companies declaring bankruptcy and how you can benefit from it.
Capitalism – a safe investment
Our capitalist system is remarkably brutal. Companies that do not manage to generate a high return on equity are flushed out of the market.
“Happiness and sorrow always come in twos”
Even if Jeff Bezos, Elon Musk and Co., as mentioned in the introduction, are now among the richest people in our history – this trajectory of success also simultaneously causes the demise of many market competitors.
Market crises like the global financial crisis 2008/2009 or the 2020 pandemic amplify this effect. As early as 1942, Josef Schumpeter called this “creative destruction”.
“As a result, the world is becoming increasingly uncertain for individual companies, but the long-term profitability of the global economy as a whole is becoming increasingly stable.”
Creative destruction – invest in the best companies in the world
Nobody can predict which companies will be able to defend their market position in the long term. There are simply too many unknowns. Innovative startups replace sluggish organizational structures and high-yield companies with monopolistic characteristics take over and in turn buy emerging market participants.
Ultimately, the financial market is a zero-sum game relative to market returns. If someone wins millions, this equates to a high loss for direct competitors.
The creation of returns in the capital markets
Securities serve to provide entrepreneurs from the real economy with fresh capital, for example, for the acquisition of new machines or employees. The entrepreneur must offer the investor something in return. The riskier the planned project, the higher this return must be.
There are two basic tools for giving returns: stocks and bonds.
If bonds (debt capital) are sold, high interest rates must be offered for risky ventures.
A sale of shares is equity, in other words, a direct stake in the company. The same principle applies here – the riskier the company and the environment, the higher the offered equity share’s value must be.
Looking at the creation of returns from this perspective, there must always be an average (positive) market return. Otherwise, it would mean that investors are giving away their money to companies.
The financial market and the distribution of returns
The earning power of all approximately 8,000 companies in our world that are traded liquid on the stock exchange can be modelled using a Gaussian bell curve.
On the far right of the graph are profitable companies with returns on equity >50%.
On the left is a collection of companies on the precipice of insolvency.
Dying stock companies can lose 100% in value, but new market participants can achieve an increase in value of well over 10,000%.
This capitalist system leads to ultra-stability – in other words, a stock system that maintains itself – the World Ltd. with a medium market return.
Andreas Beck, Gloal Portfolio One
If you take this to heart in your portfolio, your investment will be dominated by the compound interest effect of corporate profits instead of short-term price fluctuations.
To underpin this concept, we would like to introduce you to the yield triangle of the MSCI World, created by DividendenAdel. Although this index does not represent the entire World Ltd., it does represent around 1,600 large companies from industrialized countries.
By now you must know that doubling your money in ten years is normal. A doubling in 15 years, on the other hand, is a rare exception.
The annual average market return is therefore approx. 6-8% – a return that you will certainly not receive from your house bank or savings account.
Now you only need one more tool to be able to invest in World Ltd. This brings us to the Exchange Traded Fund (ETF).
How does an ETF work?
ETF is an acronym for Exchange Traded Fund.
An ETF is an investment vehicle that is traded on stock exchanges, just like stocks. An ETF is a basket of securities (e.g. stocks) that tracks the performance of a particular index, such as the S&P 500, or a specific sector of the economy, such as technology or energy. ETFs are a popular choice for investors because they offer the potential for efficient diversification at low costs.
Funds give investors the opportunity to leverage just one financial product to invest in thousands of subcategories. Anyone can buy a small share of a big pie. For example, you can invest in all (listed) companies in Germany with only 50 Eeuros. A basic distinction is made between passive and active ETFs.
- Behind an active ETF is a fund manager with a self-chosen investment strategy. The included assets are actively bought and sold based on this strategy.
- A passive ETF, on the other hand, simply and inexpensively maps entire markets or selected sectors according to strict criteria.
As mentioned in the introduction, with an EFT you can, for example, buy all listed companies in Germany weighted according to their size.
An MSCI World ETF offers a number of benefits for investors:
- Very low administration costs (approx. 0.25% p.a.).
- The ability to buy and sell any time.
- Automatically be invested in the largest and best-performing companies in the world.
- Stock weighting by company size.
- Continous replacement of underperforming companies with new market participants.
Which ETF should you invest in?
The most effective investment strategy starts with an investment in the “global economy light” – you always want to be invested in the best companies in this world. You don’t need an expensive fund manager or complex investment products for this – only the right ETFs.
The MSCI World is an index containing the 1,600 largest companies in the world, ranked according to their market capitalization. This is the ideal entry-level product for your first investment.
Our ETF recommendation is the ishares MSCI All Country World ETF (iShares MSCI ACWI, ISIN: IE00B6R52259)
The MSCI World is an index containing the 1,600 largest companies in the world, ranked according to their market capitalization. This is the ideal entry-level product for your first investment.
Up to an investment amount of approx. €10,000 you don’t have to worry about how to invest in the entire global economy (there are >7000 companies listed on the worlds’ stock exchanges). To start off, you should only focus on this one product, which we call the “global economy light”.
Invest in the “global economy light” – simple and effective.
Note: You will probably not receive this advice from your bank, as they can not earn any commissions from this.
Info: With an investment amount of more than €10,000, you can continue with Step 3, where we will optimize your investment strategy further.
How much and when to invest in an ETF
The more you can invest in an ETF on a monthly or quarterly basis, the faster you will build up substantial capital. Hence, your goal should be to regularly increase the amount you save as your income increases. Retiring at 30-40 or stepping down from a full-time job is definitely possible with a modest lifestyle.
Most importantly, start now!
There’s no better time. Nobody can predict the future. Use the cost-average effect and take advantage of falling share prices.
Afraid of falling stock prices? – use the cost-average effect.
If you make regular ETF purchases of the same amount, the cost-average effect can improve your returns. This is because when the price is lower, you can buy more shares with your cash.
The chart below shows a stock price which closes right at the initial price at the end of the period, for example, one year. Purchases of one hundred Euro each are made every quarter.
As you can see, the price is up by 50% after the first quarter. This falls back to the entry level in the second quarter, loses 50% in value in the third quarter and finally closes at €100 per share. In total €500 were invested in shares. If you had invested the entire amount at the beginning, the same value (€500) would be in the portfolio by the end of the year.
However, the value of the portfolio would have risen to €566 using the cost average effect. You could have bought more shares with the same investment amount at a cheaper average price.
Create an ETF savings plan and start benefiting from the cost-average effect now!
Here’s how to create your EFT savings plan step-by-step
Your ETF-savings plan – get started today!
Trade Republic offers zero-fee trading on more than 10,000 global stocks and ETFs as well as free savings plans. Trade Republic is regulated by the BaFin in Germany and offers its services to customers all over Europe.
