How to Invest in Germany: Magic Triangle of Investing

How to Invest in Germany: Magic Triangle of Investing

1. Introduction

Every post of this 6-part “How to Invest in Germany” series is designed to make you a true investing expert. And after reading this post, you will be the Harry Potter of investing. Because you will learn all about the most fundamental tool of investing strategy: the Magic Triangle of Investing.

In the Last Part we covered that Amanda & Steve feel totally overwhelmed with starting to invest in Germany. Which is no wonder. There are lots of options available to you. Looking at a investing product level you have: Cash & Cash Equivalents, Savings Accounts, Fixed Deposits, Stocks, Bonds, Mutual Funds, Index Funds, Exchange Traded Funds, Real Estate, Real Estate Investment Trusts, Real Estate PartnershipsCommodities, Cryptocurrencies, Pensions, and many more.

When you click the links on the Asset Classes, you can see that each and every one of them have different characteristics and behaviors which will be discussed as we progress through this post.

“The Magic Triangle of Investing will give you a clear overview of all investment products.

One important fact that is often misunderstood: different does not mean that one Asset Class is generally better than another one. We strongly believe that there is no universally good or universally best Asset Class or investment product. The right investment product always depends on the goals that the investors wants to reach.

Almost always is a Diversified Mix the right way to approach investing. And the right distribution between the investment products depends on the personal goals you have. Examples:

  • Do you want to buy a property? Find an investment product to build equity.
  • Do you want to secure your liquidity in retirement? Find an investment product that will pay money continuously.

The beauty about Personal Finance is, that there is always more than one possibility to reach your (financial) goals in life. So the real question is: which investment product or Asset Class is the right one for you to reach your goal?

And while all of these might be interesting and useful products to invest in, one way to organize them is based on the strategic investment goal they cater to. For this, we use the Magic Triangle of Investing.

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2. The Magic Triangle of Investing Explained

Every Triangle consists of 3 corners – not that magical until now. The magic comes from the fact that these 3 corners, that each represent an investing goal, are competing with each other. Investors need to decide which goals are most important for them.

Only 2 goals can be achieved at the same time with any given investment product. So if an investor values two corners more than the other, they have to accept that the remaining corner will be of lesser importance. Therefore, it is impossible to achieve all 3 investment goals at once.

PerFinEx Magic Triangle

Example: The lower two corners are safety and availability. So if an investor says that safety and availability is important to them, they must forego the upper corner return.

The Magic Triangle of Investing explains the relationship between give and take. If an investor has the expectation of getting something – safety and availability in this example. They must be willing to give something in return – in this case return.

The Nobel Prize winning economist Milton Friedman has the perfect quote for this phenomenon: “There’s no such thing as a free lunch.”

3. Benefits of The Magic Triangle of Investing

Thanks to the Magic Triangle of Investing, you can have a clear view of your most important investing goals and define your personal investing strategy. This helps our smart investor-to-be Amanda with her feeling of being overwhelmed in 2 ways:

  • Now she knows it is not about saying “I want investment product A or investment product B.” She should rather make sure that the sum of her investments are positioning her in all 3 corners of the Magic Triangle of Investing according to her individual investment mentality.
  • She also knows to be suspicious if some investment product pretends to offers her all 3 goals at the same time. Because remember: no single investment offers a high return, high safety, and high availability at the same time.

4. Safety & Availability: Bank Accounts, Fixed Deposits, Savings Accounts, etc

Let’s start with this side of the Magic Triangle of Investing, because it is the easiest and the one where most of you are probably invested right now. Financial products on this side are 100% safe – meaning that your money will not lose value. Not factoring in Taxes, fees (if any) and Inflation. Even in the unlikely event that a bank has to file for Insolvency, some products are insured by the European Deposit Insurance Scheme with up to 100.000€ per person.

Besides safe, financial products on this line are also immediately available. So you can make payment transfers at any time, cash everything out, or close your whole account down if you wanted to. On a financial product level you find here: Cash & Cash Equivalents, Savings Accounts, Fixed Deposits, etc

What do all of the financial products on this side have in common? They are all returning 0% – especially in this low interest rate environment. As an example: a 10.000€ account with the average German interest rate of 0,01% per year will return only 1€ in interest per year.

So maximum safety and maximum availability always comes at the expense of return. In order to get a return on your investments, you can either let go of safety, or of availability. How far you let go of each depends on your investor mentality and risk profile.

PerFinEx Magic Triangle Safety & Availability

5. Importance of an Emergency Fund


Our smart investor knows it is important to be ready in case something unexpected happens to her: serious illness, a layoff, etc.
That’s why she keeps an emergency fund.


Our stupid investor doesn’t like 0% return on his investments. He wants to put his money to work and not to sleep.
And for maximum return he is willing to go all in.

If you do not have an Emergency Fund ready when life happens to you, you will have to go into debt to support yourself – which is not good. So be smart like Amanda and set aside at least 3 months of your expenses. Depending on your personal and financial situation it can advisable to save up to 6 or 12 months in your emergency fund.

The right amount of money in your emergency fund depends on a lot of different factors like:

  • Do you have kids?
  • Are you single or married?
  • Is your significant other working or not?

A good rule of thumb for your Emergency Fund is, that you have enough in savings if you can sleep well at night. Having you and your family secured with an emergency fund is step 1 of investing.

So unless you have an Emergency Fund set aside, don’t even think about investing on the other two sides of the Magic Triangle of Investing. If you do, you have fundamentally the following 2 options to escape the 0% interest rate trap.

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6. Availability & Return: ETFs, Stocks, Mutual Funds, Bonds, etc

The 1st of 2 strategic ways how you can get the most of your money is the availability & return side of the Magic Triangle of Investing. Coming from a strategic level saying that availability and return are important to you – and safety is not that important, we can find on product level: Stocks, Bonds, Mutual Funds, Index Funds, Exchange Traded Funds, Commodities, Cryptocurrencies, etc.

As these Asset Classes can be bought and sold at almost any time, that’s why they are very available. But attention: at their current market price or value. That is why safety is kind of left off the table here, because prices are going up and down.

Between all of those Asset Classes we can see one fundamental difference: in the possible ways they can return a profit:

7. Productive vs Non-productive Assets


Our stupid investor doesn’t have the smartest approach to investing. That’s why he likes to gamble with non-productive assets that have only 1 way of returning a profit.

So he is buying Cryptocurrencies, Commodities like Gold or Oil, etc. While it can make sense to invest in these asset classes, they only offer 1 way of returning a profit: if you sell it for a higher price than you bought it for.

Let’s say you’re buying 1 ounce of gold or 1 bitcoin today and hold it for 20 years. 20 years from now, you will have exactly 1 ounce of gold or 1 bitcoin. These asset will not produce anything for you. Steve is simply speculating that he can sell it for a higher price than he bought it for.


Our smart investor doesn’t like to gamble with her hard earned money. That’s why she likes to invest in productive assets that have 2 ways of returning a profit.

So she is buying Bonds that pay interest, Stocks that pay a dividend, ETFs or Mutual Funds that distribute, or an investment property that pays rental income (which is strategically on the safety & return side of the Magic Triangle of Investing).

These assets will produce some form of income that you can use to buy even more assets. So if Amanda buys these investments today and holds it for 20 years, she will get interest, dividends, or rental income over that period – and will still have her full investment after 20 years.

“A decent productive asset of any kind will outperform a non-productive asset over a long period of time.

As anywhere, there are great success stories in both ways of investing. But the chance of finding the next hot investment product right before its value is exploding, is in fact very low.

So instead of betting everything on one horse, our investment approach is to invest as safely as possible without greatly diminishing the return. That is why we like to Diversify with Mutual Funds and ETFs.

8. Benefits of Mutual Funds & ETFs

As this side of the Magic Triangle of Investing offers availability and return – but lacks safety – let’s try to get the most safety possible. Instead of buying individual investments, you can buy a whole basket of investments.

Each fund follows a certain strategy that is either defined by a human being or a computer:

  • A Mutual Fund is managed by a professional Fund Manager that is actively deciding which investments to buy and which investments to sell. The fund manager bases his decisions based on the current market situation and the investment strategy of his fund. The ultimate goal of any professional fund manager is to outperform his comparison – the so-called Benchmark.
  • An ETF (Exchange Traded Fund) is managed by computer. The computer just buys an index as it is (e.g. S&P 500). As there are no investment decisions to be made, a computer can replicate a pre-given index much cheaper than any human could do. The ultimate goal of any ETF is to be exactly like the index it is replicating.

There are more than 70.000 funds available on the German market – investing into basically everything. We strongly believe that no financial product should rule over your freedom to choose your personal investment strategy without any limitations. If you need help in deciding which funds with which investment strategy are right for you, click the button and secure a free 30m session with us.

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The big benefit of all funds is that they are very convenient for investors, especially if you are just starting to invest in Germany. Most funds combine hundreds or even thousands of individual investments that you all own by buying this fund.

Without funds, you would need to buy each and every one of these individual investments yourself one by one. Which would take a lot of time as well as a lot of money to buy hundreds or thousands of investments.

“Funds save you time, money, and effort by giving you investments in 1 easy package.

Everything that has an upside, has to have a downside as well.  And the downside of funds can be the investment strategy they are following.

9. Downside of Mutual Funds & ETFs

Every single one of the 70.000 funds available on the German market has a right to exist. There is no universally right or wrong fund. But there might be right or wrong fund for you. Any fund – doesn’t matter if it is managed by a human or by a computer – has its very own investment strategy. This strategy might differ from your personal investment strategy.


The S&P 500 returns in any given year -5%. As an ETF wants to replicate its Benchmark as close as possible, it would also return -5%. As a Mutual Fund wants to outperform its index, the professional Fund Manager would be happy with a -4% return.

But you as the investor who bought the fund would not be happy, right? Because you lost either -4% or -5% of your investments with this fund. That’s why it is important to focus on your personal investment strategy instead of random averages some funds want to beat or not.

“Investing is about a steady growing performance with limited risk.

This is especially important if you only have a limited timeframe to invest – maybe because you want to reinvest this money in a couple of years again (e.g. buying a home for your family). By investing in financial products with a long timeframe, you are taking quite some risk hoping to get a return.

If you only have a short timeframe, you are taking too much risk by investing in financial products with a long timeframe. Simply because you will not have enough time to recover from falling prices.

10. What Is Better? Mutual Funds vs ETFs

Even though ETFs have become increasingly popular over the last years – and Mutual Funds have become increasingly unpopular – the answer is, as so often: it depends.

It is no wonder that investors put more and more money into ETFs as the global stock market has basically gone only up since the Global Financial Crisis in 2009. As a result ETFs have done very well, better than most Mutual Funds in fact. Markets are pretty efficient over a long period of time. That’s why it is difficult for Mutual Funds to outperform ETFs. Not impossible, but difficult.

Another reason why ETFs have outperformed most Mutual Funds is that they have a clear cost advantage. Every fund has a management fee for putting the basket of individual investments together. An average ETF is pretty cheap with ~0,5% management fee per year, a Mutual Fund can cost up to 2% per year – so up to 4x as much. So a professional Fund Manager has to be at least 1% better than a comparable ETF just to recover his fees.

“Always remember: past performance is no guarantee for future results.

We still believe that ETFs are not the universally perfect investment product for everyone like they are treated most of the time. Because they are meant for the long-term – and your investment goals might be in a near future. If you need your invested money within the next 15 years, you would take an incredible amount of risk by investing in ETFs.

Just because global markets go up in the long-term, they not necessarily go up in the short-term as well. Global stock markets have seen -50% drops on 3 separate occasions in the last 20 years.

11. Return & Safety: Real Estate, Pensions, etc

The 2nd of 2 strategic ways how you can get the most of your money is the return & safety side of the Magic Triangle of Investing. Coming from a strategic level saying that return and safety are important to you – and availability is not that important, we can find on product level: Real Estate, Real Estate Investment Trusts, Real Estate Partnerships, Pensions, etc.

PerFinEx Magic Triangle Safety & Return

12. Real Estate (Investing)

Probably the most obvious Asset Class on the return & safety side of the Magic Triangle of Investing is Real Estate. While many people aspire to buying a home for their family in Germany, we are talking only about Real Estate Investing in this post. From a financial planning point of view, an investment property (that you rent out) is completely different from a home (you live in yourself).

If you are interested in a detailed comparison “Buying or Renting Real Estate: What’s better?” let us know and drop a comment below.

13. Risk vs Return: Finding Your Risk Tolerance

Now that you know the complete Magic Triangle of Investing with all its Asset Classes, it’s time to talk about the relationship between risk (the possibility of losing your hard earned money) & and return (the possible profits you can make by investing).

Generally speaking, the greater the risk you are taking, the greater your possible return. An average German bank account on the safety & availability side of the Magic Triangle of Investing offers 0% return for 0% risk. In the beginning of the graph, you can generate a meaningful return for a relatively low amount of risk. At the end of the graph you are basically playing the lottery or in the casino. You return is limited, but your risk is virtually unlimited. We basically see a saturation curve that shows a Diminishing Return in the investment efficiency:

PerFinEx Investment Efficiency

We see with many people who invest themselves that they take far too much risk for the return they generate for themselves. Like Steve, who’s investment efficiency can be increased greatly by using synergies between certain Asset Classes or financial products. By managing to increase investment efficiency to Amanda’s level, you have 2 choices:

  1. If you are willing to take the risk you are taking, you can get some extra return that Steve is missing out on.
  2. If the return you are generating is enough, you can achieve the same result by taking less risk.

To have long-term success in investing, you need to figure out your personal risk tolerance. People who don’t, sell their investments usually at the worst possible time when markets decline and prices fall. To help you finding your personal risk tolerance, try to imagine you invest 10.000 €. The first time you check the value of your investments you see that there is only 9.800 € left. 9.000 € the 2nd time. 8.000 € the 3rd time you check the value of your investments. The point you are thinking you lost enough of your hard earned money, is where your personal risk tolerance is.

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The safety of your investments has always the highest priority if you want to be a successful investor. That’s why you should never listen to people throwing out random investment advice without knowing your personal risk tolerance.

14. Conclusion

Hopefully the Magic Triangle of Investing showed you that ALL sides offer conceptually and strategically useful and interesting financial products that you can potentially invest in. The goal of successful investing is not to find a so-called “best” investment product. The ultimate goal is to position yourself in all 3 corners of the Magic Triangle of Investing – according to your personal investing mentality.

What investing goal is most important to you? And what are willing to give up in return?

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