The “René wants profitability” column: Wealth creation begins with an important question

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Get more out of your money: Almost everyone has this desire. For this to be successful, there is a simple question at the beginning of wealth creation: Why do I want to start saving now?

The question of why is important, not because it aims to motivate me by imagining the reward I will someday get for my savings efforts. It is important to choose the right investment strategy. Because building wealth is about when I need the money. To put it more technically: generating wealth is a matter of time, because the great danger is that I will have less money than expected at a given time.

What does that mean? To do this, we first have to take a step back and talk about risk. There are different types of risks when investing. For example, there is a risk of default, which means I will lose a lot of my money. This would be the case, for example, if you invested in a company and it went bankrupt shortly afterwards. I can protect myself from this risk by widely diversifying my investment. If the number of companies is large enough, the risk of default in relation to the entire portfolio is practically zero. The fate of a given company barely influences my investments.

About the author Clemens Schömann-Finck

Clemens Schömann-Finck is a financial expert and is behind the YouTube channel “René wants profitability”. In his FOCUS Online column he highlights current issues related to the stock market and investing. He subscribe to his newsletter here for more financial information.

Then there is the risk of volatility. It means the value of my investment fluctuates. The amount I receive interest on in a savings account remains the same, but in the stock market the value of my investment changes practically every minute. However, studies show that with a long investment horizon this volatility risk is negligible: in the past, a broadly diversified stock portfolio has offset any setbacks over time.

This means for my wealth creation: the money I need in the near future has no place in the stock market. The risk of volatility is too great. So, if the answer to the question “Why am I saving?” is “A new car I need in two years” or “The loan I have to pay off soon,” then the stock market is not an option for this savings. goal. Then you might be better off with a demand money or fixed deposit account. So security is more important than high performance. In this case, I have to achieve my savings goal mainly through my own efforts.

Invest money for the long term

The situation is different if the savings goal is in the distant future, such as the dream of traveling the world that I want to fulfill one day, or my retirement plan. Then I can also invest in the stock market with low risk and good profit opportunities. With a long investment horizon of ten years or more, the risk of volatility is practically irrelevant. Why do fluctuations bother me if I don't need the money anyway? Prerequisite: I invest very broadly, for example via a global ETF, and do not depend on individual stocks. Then I can also neglect the risk of failure.

However, it is important to understand that as an investor I do not have to fear long-term fluctuations and I can deal with them. But that doesn't mean things can't get violent sometimes. Price declines, which can sometimes last for years, are common in the stock market. I have to be able to endure that and not lose my temper. But it also rewards me with the ability to earn a significantly higher return than the savings account. Thanks to the higher profitability and the effect of compound interest, I get real support to generate wealth.

To be clear: an average return of seven percent, as has been achieved over the long term in the stock market with a broadly diversified stock portfolio, is enough to double my money every ten years or so.

Of course it sounds good, but investing shouldn't cost you sleep. The second important question when generating wealth is: How good are my nerves? The better I can deal with fluctuations, the greater the proportion of my assets I will be able to invest in the stock market. The more a temporary loss in my portfolio bothers me, the smaller it should be. So my total assets will increase more slowly. But I live more relaxed.

More free stock market knowledge

You can find information on how to create a good, simple portfolio in my free PDF with valuable stock market insights. You will receive it as a thank you when you subscribe to my free weekly newsletter. Order here

The newsletter “René wants profitability” is published once a week and analyzes the situation of the financial markets in an entertaining and understandable way. Renowned experts regularly contribute guest contributions. He will also periodically receive valuable advice for his investments, as well as the most attractive offers on accounts and securities accounts.

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