In the third and last step, we have to invest our saved and hard earned money.
The question is just, where do we get really good interest rates nowadays? On the instant access saving account and the fixed deposit account there is now a gaping void. The maximum is 1% and with an inflation rate of 2% means that we are loosing money right now!
So where to go with our money? To the stock market!
Since we have no idea and this topic requieres a lot of background knowledge, most people invest their money into funds. There we entrust our money to a fund manager, who buys stocks and builds a portfolio out of it with the aim for a high rate of return. Unfortunately only a few can create this. But now our problem is to find the right funds, including the right fund manager who creates a high rate of return. Sounds difficult. Assume we had luck and found one, who get us an interest rate of 7%o Great, awesome. But sadly we now have to deduct the initial charge, administrative fees, transaction costs, custody fees and performance fees. So if everything goes well, roughly 3% remain. Inflation-adjusted remains only 1%.
In additon to the actively compliant funds, there are also passive funds. These are called ETF´s. ETF stands for Exchanged Tradet Funds. This funds copies the values of an index, this means if the index increases, the etf also increases. The big difference is, that this funds produce almost no costs. A small example. The DAX has achieved an average return of 6% over the past 10 years. So this Index will be copied and the ETF is also reaching almost 6% less management fees of about 0.3% and inflation of 2% remains a return of 3.7%. That is 2.7% more than an actively managed fund, provided you find one.
4 pros for the purchase of ETF´s!
- low costs
- high flexibility
- high transparency
- broad diversification
What I really wanna know, in which kind of investment do you put your money?