How to Invest in Germany: 7 Investing Tips

Introduction

Many expats think investing in Germany is as difficult as solving a Rubik’s Cube. A toy that has over 43,000,000,000,000,000,000 different possibilities. To put this into perspective, you could cover the surface of the Earth 275 times with standard-sized Rubik’s cubes for each permutation.

Investing In Germany is way easier than solving the tricky Rubik’s cube. Especially with the following 7 investing tips that will make you a true Investing expert.

Investing Tip #1: Find Your 'Why'

Even though Investing can be your way to achieve financial freedom and your Financial Dreams, it won’t always be easy. That is why you need a ‘why’, so you can push through the tough times and enjoy the good times that will come eventually. Investors without a ‘why’ are predestined to lose sight of the bigger financial picture & fail in their investing journey.

“He who has a why to live [or to invest] can bear almost any how.”
Friedrich Nietzsche (1844 – 1900)

Think of your ‘why’ and your long-term goals. Here are some questions you can ask yourself before you Start Investing:

What do I want to get out of my Investments? (e.g. Passive Income)
How much time do I have?
How much risk am I willing to take?

Review your answers periodically and keep asking yourself these questions throughout your entire investing life. Are your Investment Products and your Investment Strategy still catering to the goals you have?

One tip within the tip: Just wanting to have more money is not a goal to invest for. What do you want to do with more money? Maybe you want to buy a home for your family? That’s a goal to invest for. Maybe you want to be financially free with Passive Income? That’s a goal to invest for. Try to give your goals a name and attach it to something tangible.

And please do NOT follow these internet Investing gurus who promise to get rich quickly. Getting rich quickly is very unrealistic and would require a tremendous amount of risk. So have realistic expectations and always think of your ‘why’.

It’s the same when you try to get from destination A to destination B. If you don’t even know where destination B is, how do you ever want to end up there? All you can do is wander in a random direction.

If you Know where destination B is, you can think of the right medium (e.g. bike, car, plane) to get you there. And it’s the same with your investing goal and your investment medium (e.g. stocks, mutual funds, Exchange Traded Funds, Real Estate, Pensions, etc).

Are you investing the right way for the goals you have? Let's find out together.

Investing Tip #2: Think Long-term

The right Investment products for you are determined by how long you can invest or by how soon you might need your money back. If you are for example saving equity for a future Real Estate purchase, you need to invest in investment products that are meant for short-term goals (e.g. Savings Accounts or Fixed-term Savings Accounts).

Investment products that are meant for the long-term (like Stocks, Mutual Funds & Exchange Traded Funds, etc) are simply not suitable for your purpose. The inherent risk in these long-term investment products is too high because their value goes up and down. If you don’t have time to recover from potentially falling prices, your entire goal might be in jeopardy because you were investing in the wrong Investment Products.

To help you think for the long-term, you, first of all, need to think, find, and understand your personal risk tolerance. Psychologically speaking, our risk tolerance is built in our DNA. And as our genetic code changes with age, our risk tolerance changes as well.

Generally speaking, the younger we are, the more risk we are willing to take (in Investing and in life). As we get older, our risk tolerance decreases. This change is perfect for investing because we have more time to recover from potential losses when we are young.

Attention: Long-term thinking does NOT mean buying any Investment product and holding it forever. It means being invested as long as possible. If an investment is not performing the way you want it to, you are free to sell it and exchange it for something else that has the chance to perform better. Just remember that past performance is no guarantee for future results.

Investing Tip #3: Diversification

Diversification may be a complicated word, but the meaning is simple and the effect is great. Why? Because it increases the safety of your Investments and the likelihood that your investing career will succeed.

Every Investment product has opportunities, and opportunities are always great. But every investment product has also risks, and investment risks are never great. Unfortunately, there is no way to avoid the risks. That’s also why investing offers a return according to the risk you are willing to take.

When you diversify your Investments, you do NOT bet everything on one horse – or do NOT put all your eggs into one basket – and spread your risk. We know that not every risk will happen and that’s why diversification increases the overall safety of your investments.

The concept of diversification acknowledges that there is no general best solution in Investing, neither on an investing strategy level nor on an investing product level. That’s why both tell you to invest in many different asset classes.

Some asset classes or investment products will always rise in value. And if you are invested everywhere, parts of your Investments will go up as well. Some investments will also fall in value, but that will be compensated by the other investment products or asset classes that rise in value.

Good examples for diversification are:

German stocks & Japanese Real Estate
Price of Gold & Canadian Government Bonds

These Investments are completely independent of each other and don’t influence each other at all. That’s the ultimate goal of diversification.

Please note: when doing your investment diversification, it is important to remember that past performance is no guarantee for future results. Just because one Investment has not been performing in the past, does not automatically mean, that it will perform badly going forward – and vice versa of course.

Tip within the tip: Diversification does NOT mean buying the same investment product 30x. This mistake happens quite often because most investments have complicated names and mysterious abbreviations. Owning an investment multiple times is not diversification, that is redundancy. As you can probably imagine, redundancy doesn’t help the overall safety of your investments.

“Short-term goals require different investment products then long-term goals."

Investing Tip #4: Rebalancing

After diversifying your Investments, it is important to rebalance your investments. Rebalancing means that you return to your original investment distribution (diversification) that you hopefully selected carefully in the beginning. That is another reason why it is tremendously important to have a solid diversification to Start Your Investing Career.

From our Experience working as the #1 financial advisor for expats living in Germany, tip #4 and tip #5 are most often ignored or not done. Most likely because new investors are excited about their new venture, but over time they lose interest and may even forget that they are invested. The following example will show you how important it is to rebalance periodically:

Let’s start easy and Invest in only 2 of the 16 different asset classes with a 50%: 50% split. That is our starting Diversification. Over time, one asset class will grow and our distribution will shift to 60%: 40%. Our two asset classes are no longer the way we wanted them to be. We wanted 50%: 50% in the beginning. Let’s say the trend continues with 1 asset class doing great and our diversification will be 70%: 30%, 80%: 20%, …

And all of a sudden our Investments are no longer like we wanted them to be. Because we never rebalanced, our investments are distributed 90%: 10%. 90% of our entire investments are in one asset class and only 10% in the other asset class. What if the asset class we are 90% invested in crashes just months before we want to retire with our savings? Rebalancing – like diversification – will increase the safety of your investments and protect you against the one unforeseeable event that will wipe you out.

You have two options on how to rebalance your investments:

By Time: done most often, e.g. once per year (not as efficient as option two)
By Percentage: Once your Investments reach e.g. 60%: 40% you rebalance back to 50%: 50% (no matter how long that takes)

Whichever option you choose. Just make sure it happens.

Investing Tip #5: Cut Losses & Let Gains Run

Cutting losses and letting gains run is the best rule to follow when you Rebalance your Investments. Like tip #4, this tip is easy to understand but often not done by investors. In fact, many investors do the exact opposite and destroy consequently their own returns.

When your Investment products start to lose value and have no prospect of improving again, it is time to accept the pain and get rid of this loser investment.

“When the horse is dead, it’s time to get off.”
German saying

Many Investors have the psychological tendency to delay separating from losing investments. They want to give the investment more time to recover – or even worse – try to make up for their loss by buying even more of this losing investment. But all investors are doing, is putting even more valuable cash into their dead horse.

Successful Investors think the other way round: When their investments rise in value they let them keep climbing and hold on for the long-term benefits.

Unsuccessful Investors sell their winning investments too early because they want to secure the gains they made.

Successful Investors double up and buy more of winning investments that have the projection to rise even more in value.

Unsuccessful Investors double down and buy more of their losing investments because they are “cheaper” than the first time they bought them.

Successful Investors also remember in this context 3 things:

They combine Tip #4 “Rebalancing” with Tip #5 “Cut Losses & Let Gains Run”
Buy low, sell high
Past performance is no guarantee for future results

Successful investing is easy. We will show you how to do it!

Investing Tip #6: Employer & State Support

What is more efficient than Investing your own money? Investing with your own money + money from other people. We are not suggesting that you should get into debt in order to start investing. In most cases, it is a really bad idea to invest with leverage by taking a loan or credit (except for Real Estate of course). In most cases, it is also a really good idea to secure the money that is actually yours. But what can you get in Germany?

ALL Pensions in Germany offer Tax benefits either during the pay-in phase or when you take money out. Pensions Level 1 and Pensions Level 2 offer tax benefits in the contribution phase & Pensions Level 3 in the payout phase.
Pensions Level 2 also offers state bonuses or a match from your employer (at least partly).
Employees pay a lot into German Social Security and in Taxes. That’s why here are 5 tips to increase your net income in Germany without increasing your gross salary.

Investing Tip #7: Start Early

Last but not least the most important Investing tip of all. The earlier you Start Investing, the better it is. If you invest your money clever and wisely it will grow exponentially and you will need less money to achieve your investing goals. This effect is called compounding interest and it is your best friend in investing.

The famous German physicist Albert Einstein described this effect as “Compounding interest is the 8th wonder of the world. He who understands it, earns it; he who doesn’t understand it, pays it.”

Let’s compare two investors both investing 100€ per month with the 7% historical average rate of return of the global stock market. Amanda is 25 years old and has 40 years to invest until she reaches Retirement Age. Steve on the other hand is 35 years old and has 30 to go. See in this graphic how both their investments will develop:

Calculations:

Steve: 100€ x 12 months x 30 years with an annual interest rate of 7%
Amanda: 100€ x 12 months x 40 years with an annual interest rate of 7%

Amanda will end up with more than twice as much money compared to Steve! That is a life-changing amount of money she gets for starting investing early because she uses the full potential of the power of compounding return. And you should as well!

The sooner you Start Investing, the sooner you can get your money working for you – instead of you working for your money. In case you are still hesitant to wait for the perfect moment to start investing, let us say that there will never be a perfect time to start investing. Let us consider today the perfect day.

Conclusion

Many new investors make investing mistakes when they Start their investing career. That is not just very unfortunate, but also very unnecessary because almost all mistakes have been made before already. A great way to avoid making mistakes is by following the 7 investing tips in this article.

Another way to avoid making mistakes is by asking Experts. We are here to help you with our free 30m session that you can secure right here.