How to Invest in Germany: 8 Investing Fails
Nobody likes to fail and do mistakes. That's why this article will include the 8 investing fails you definitely want to avoid if you want your investing career to be successful.
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Have you heard the sentence “You only learn from failure” before? Sounds great and meaningful. But in investing, failures are costly and it can be very difficult to recover from them. So it is a lot more efficient to learn from other people’s money mistakes instead of making them yourself.
Have you also heard sentences like these before?
- “The entire Real Estate market is going to Collapse. You should sell everything before it’s too late.”
- “I found a website that gives free advice on which stocks to daytrade. I will just follow their advice and will be rich in no time.”
- “One of my buddies told me about this investment he has a really good feeling about. You should buy this too.”
- “I analyzed the whole stock market last weekend and I’m an expert now. Trust me on what to buy.”
We sincerely hope you didn’t follow this advice if you heard it before. It is exactly unprofessional and uneducated financial advice that is almost guaranteed to lose your money. We see people making these mistakes over and over again. That is why this article is designed to give you all 8 Investing fails people make, so you do not have to do them yourself.
Investing Fail #1: Forgetting the 7 Investing Tips
- Investing Tip #1 Find Your ‘Why’: Think of the bigger picture and the goals you are investing for
- Investing Tip #2 Think Long-term: Ideally you are Investing for the long-term – or at least as long as possible
- Investing Tip #3 Diversification: Spread your risk and invest in many different asset classes and investment products
- Investing Tip #4 Rebalancing: Different investments will have a different performance – you have to balance this performance over time
- Investing Tip #5 Cut Losses & Let Gains Run: Would a successful investor sell his winning investments and keep his losing investments?
- Investing Tip #6 Employer & State Support: Secure free money that is actually yours – a great way to increase your return even more
- Investing Tip #7 Start Early: The earlier you start investing, the better – because you have more time to recover from potential losses
These 7 investing tips will give you a head start on everyone else who does not follow these tips and has experienced the upcoming 8 investing fails himself.
Investing Fail #2: Forgetting About Taxes
One of the most popular investing fails is to forget that Investments are taxed in general – and that different investment products are taxed in different ways. That is why the first article of this series is dedicated to Taxes on Investments that shows the details of taxation on Real Estate, stocks, Pensions, ETFs, mutual funds, etc. The article also debunks the #1 Myth people think is true when it comes to saving taxes.
This simple example shows why remembering taxes have high importance in financial planning:
An investor needs 20.000€ as equity to buy Real Estate (it does not matter if he wants to buy an Investment Property or a home for his family in this example). The investor Invests 10.000€ and because he is following the 7 investing tips, he manages to double his money to 20.000€ at the point of time he wants to buy his property. Exactly the amount he needs as equity to buy the property he wanted to.
The problem is that the Investor needs to pay Taxes on his investment gains, e.g. 25% Capital Gains Tax (in German Abgeltungssteuer). 25% capital gains tax of 10.000€ capital gains is 2.500€ in this example. Because the investor forgot he has to pay taxes on his investment gains, he would be 12,5% off his goal (2.500€ to 20.000€ he wanted as equity to buy Real Estate). A 25% tax rate isn’t even that high. In This article, you can see that taxes can be as high as 45% in Germany.
On the other hand, do not focus too much on Taxation either. Rather focus on having a solid Investment Strategy that will have great returns. Choosing Investment Products that decrease your tax bill can make sense, but this should never be the deciding factor if you buy an Investment or not. It should also not be the reason to hold an investment primarily for the reason of avoiding paying taxes.
Investing Fail #3: Trying to Find the Perfect Investment
In Part two of our “How to Invest in Germany” series we learned from the Nobel Prize-winning economist Milton Friedman that “There is no such thing as a free lunch.” If there is no perfect Investment on a strategic level, why would there be a perfect investment on a product level?
Most of the time we humans think something is perfect, but we fall into the psychological trap we discussed also in Part one: Confirmation Bias. The psychological tendency to interpret information in a way that supports your already existing belief.
The closest an investor can come to having perfect Investments is in using synergies between different Asset Classes and investment products. Rather than focusing on picking individual investments or stocks, an investor should focus on his asset allocation – having a diversified portfolio of multiple different investments that will help him reach his financial goals in line with his personal risk tolerance (e.g. for investing goal: Passive Income).
A lot of scientific studies show that up to 90% of Investment Success depends on asset allocation rather than Investment product selection. So an investor should focus on using his limited time efficiently on his correct Asset Allocation instead of wasting his time on decisions that will make little to no difference in investment success.
Investing Fail #4: Buying What's Hot & Selling What's Not
This might be the most common Investing fail of all. If you find out about an investment product that is having a great performance, you feel the need to buy this investment product. Otherwise, you would be missing out on great returns, right?
If any Investment product is having an outstanding return, we certainly know one thing: You should have invested in this investment product whenever the journey started. But the time is gone and the great performance happened without you being invested. And since past performance is no guarantee for future results, the only question today is: Does this particular Investment Product offer attractive returns today?
If you are blindly looking for the next hot investment, you are almost guaranteed to lose in the Investing game. There will always be an investment that just had a great return – and the more you search for it, the more hot investments will come up.
If you are jumping from one hot Investment to another hot investment all the time, you will initiate transaction costs, fees, and maybe Taxes every time you buy and sell. You also take away the chance of enjoying long-term outstanding returns a solid investment can offer. A German saying is: “Hin und her macht Tasche leer.”
In Part 2 of this “How to Invest in Germany” series we compared computer-managed Exchange Traded Funds with Mutual Funds that are managed by professional fund managers. The result of this comparison was, that the professional fund managers who live & breathe Investing have a hard time performing better than ETFs that just perform like the average return of the index they replicate.
If experts have a hard time in the competitive Investing landscape, what makes you think you can have an outstanding return that is better than average?
Like in Investing Fail #3 and Investing Fail #8 the reason for this investing fail is again Psychological. The social anxiety you feel when you see Investments having great returns is called FOMO: Fear Of Missing out. FOMO is very common and very dangerous because it probably led to more bad investment decisions than any other of these investing fails on this list.
Because Emotions play such a big role in determining your Investment Success, a whole article will be dedicated to the second biggest emotions: greed & fear. You can find the article on the psychology of investing here.
Investing Fail #5: Listening to Investment P*rn
Besides friends, neighbors, and colleagues who have “good feelings” about certain Investments, there are also so-called “investing Experts” who try to predict the future by publishing investment p*rn. Examples can be found here:
- New CEO of Disney valued positively vs. valued negatively, both on February 26th 2020
- Experts predict German Real Estate will rise vs. the Bubble that is bursting now, both in Jan/Feb 2020
- Bitcoins falling because miners are selling vs. Bitcoins rising because institutional investors are buying, both in Jun/Jul 2020
We understand there are different perspectives on things and every opinion is valuable and has its right to exist. What we as readers of these news headlines have to Understand is that the job of journalists is to get the most attention possible. To achieve their goal, they use clickbait titles and make a lot of noise.
Your job as an Investor is to achieve your Financial Goals within your personal risk tolerance. These goals differ fundamentally so there is no need to listen to so-called experts who write daily news. If you want to hear an expert opinion, listen to the first American to win the Nobel Prize in economics, Paul Samuelson (1915-2009):
“Investing should be more like watching paint dry or watch grass grow.
If you want excitement, take $800 and go to Las Vegas.”
The big Learning from this great quote is, that Investing is not supposed to be exciting. So don’t follow advice from news journalists, friends, neighbors, colleagues, etc. Unless they can prove that they are able to generate a return with their “strategy”. Would you trust a personal trainer who’s not in shape himself? Would you trust a gourmet chef who cannot cook? Most likely not. So only listen to people who do well in investing themselves – and ignore the rest.
Investing Fail #6: Trying to Time the Market
If you are an Investor looking for great long-term results, you should remember one sentence to not fall into the trap of Market Timing: Time in the market beats timing the market.
Successful Investing is very consistent in its approach and does not change overnight. The stock market crash in Q1 2020 because of the global pandemic is the perfect example. Who would have predicted such a sharp decline followed by a steep recovery? Some people looking for excitement might say consistent Investing is boring, but it delivers great long-term results.
About 250 years of capital market history show that is simply impossible to guess market tops or Market Bottoms – or if any given Investment will rise or fall in value. Therefore the strategically most Successful Way Of Investing is by regular consistency.
The worst form of Market Timing is holding on to a losing investment until it gets back to the price you bought it for. Because investors are not willing to admit they made an investing mistake, they might actually be losing twice:
- If a losing Investment continues to lose until it is actually worthless
- Opportunity cost: Money might be better invested in a winning investment that delivers a better return than the losing investment
Investing Fail #7: Procrastination
Do you know the people that just talk the talk and never walk the walk? These are the kind of people that like to procrastinate. Procrastination means delaying or postponing certain actions over and over again – most of the time until it is too late.
- Want to get in shape? Well, the gym is tomorrow.
- Want to clean your apartment? Well, do it tomorrow.
- Need to write a paper for university or work? Well, tomorrow.
Working for multiple years now as the No. 1 Financial Planner for Expats living in Germany, we heard all kinds of Procrastination excuses:
- “I will wait until the Market Drops to have an opportunity to start investing.”
- “I will start Investing with my next paycheck.”
- “The market is too low right now. I will wait until it recovers.”
Nobody wants to lose his hard-earned money so it is completely understandable that beginners are hesitant to start Investing. Especially with the language barrier expats face in Germany. That’s why this series of articles is supposed to support everyone who wants to know “How to Start Investing in Germany”.
Beating Investing fail #7 is easy by just starting to invest. It is not about waiting for the perfect opportunity, because this moment will never come. Just follow the 7 Investing Tips and you will do strategically better than the majority of investors who just start. You will also take responsibility for your life and start to control your financial future.
Investing Fail #8: Emotions
Investing fail #7 Procrastination is the failure that reveals that we humans are our own worst enemy when it comes to (starting) Investing. This fact detaches investment Success from choosing the right Investment Product and shows that the right mindset is needed to succeed in the investing game. There’s an old saying in the financial world, that financial markets are driven by just these two emotions alone – both fueled on a daily basis by Investing Fail #5 of course:
- Fear of falling prices of your investments makes you sell them at the worst possible moment
- Greed to want more and more until you start ignoring your Personal Risk Tolerance
If you let these two emotions take over your Investment decisions, your financial future is doomed. Their impact on your Investment Success is so tremendously big that an entire article is devoted to helping you control your emotions.
Many new Investors make mistakes when they Start Investing. A great way to avoid making mistakes is following the 7 Investing Tips and knowing the 8 Investing Fails that you are aware of what to look out for.