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Asset accumulation: step by step to success

  • Anyone who wants to build up wealth needs a clear strategy.

  • If you follow a few basic rules and limit yourself to straightforward financial products, you can develop a solid wealth-building plan with little effort.

  • Call money and fixed-term deposits are ideal for short-term investments. Here your assets are protected by the statutory deposit insurance .

  • Real estate and equity funds (ETFs) offer good potential returns for medium to long-term investments.

 

Everyone should start saving as early as possible - even if relatively little money can be saved during training or at the beginning of a professional career. Because even such small contributions will turn into an impressive fortune in the long term. On the one hand, young professionals should put something aside for retirement in the long term. On the other hand, enough money should be available for short-term expenses - such as a new dishwasher.

 
Step 1: record current assets

 

The current financial situation forms the basis for future planning. Therefore, it is advisable to first list your existing assets and liabilities. This already shows which financial goals have already been achieved and where there are still gaps.

Even in this initial phase, you should consider the medium and long-term investment goals. If, for example, the car has been around for a few years, you can immediately check whether there is credit for the later purchase of the next vehicle.

 

Compare income and expenses

 

List your inputs and outputs. This is how you find out how much money you can invest in building up your wealth every month. You can use any household calculator for this.

 

Save in everyday life
 

You can also use this opportunity to review your daily expenses. Often there are opportunities to save on household-related contracts without sacrificing good performance - for example by changing electricity provider or a cheaper mobile phone contract. Subscriptions that are not required should be canceled.

 

It is important that every private person tries to keep his own monthly fixed costs as low as possible, including reducing the monthly rental costs to the minimum (e.g. renting a cheap small apartment for himself and his family that causes few follow-up costs). Sometimes, however, a room that is not required can be rented out via Airbnb or Booking.com, thus further reducing monthly costs.

 

 

Step 2: Set investment goals and investment horizon

 

In the next step, you define your future investment goals. What is important here: With a view to the means available, you should critically question whether the goal is realistic. It may be necessary to plan medium-term purchases such as a new car or a fitted kitchen one size smaller.

First of all, it is worthwhile to reduce any existing debts, especially since the interest rates are often higher than for the investment. Another important investment goal is private pension provision . It is already foreseeable that if you retire later, your monthly income will be significantly reduced. In order to close this gap, it makes sense to invest in pension provision as early as possible.

 

When these elementary risks are covered, the first step is to save for the short term. Before long-term asset accumulation begins, there should be an iron reserve for unplanned expenses and the financing of planned acquisitions secured. With these investment goals, the security of the investment is more important than a high return - otherwise, when buying a car, for example, the status of the stock exchanges would decide whether a mid-range car or just a small car is affordable.

 

Only when debts have been repaid, the necessary risks secured and the liquidity reserve built up can other forms of investment be considered. Depending on the goal and preference of the individual investor, this can be, for example, savings accounts, bank or fund savings plans.

 

 

 

Step 3: Save with the 3-account account model

 

 

This is how the 3-account model works

 

Instead of a current account, we set up two other accounts:

 

  1. The normal checking account
  2. A savings account
  3. A fun account

 

We already had the normal current account (1) and is still important for everything we need and have to pay for. The rent, insurance, etc. continue to go here.

 

At the beginning of each month we transfer exactly the amount that we want to save to the savings account (2) (very important because: pay yourself first!), For example to have a financial cushion.

 

And the fun account (3) is - you guessed it right - there for fun. From this we pay holidays, short trips, activities, etc.

You can find more information about the 2-account model on the Youtube Chanel from Finanzfluss https://www.youtube.com/channel/UCeARcCUiZg79SQQ-2_XNlXQ

 

Step 4: Long-term asset accumulation with real estate, ETFs or alternative investments.

 

You cannot start building your private wealth early enough. Instead of investing in many different stocks or bonds in order to achieve sensible risk diversification, investors can use investment funds (ETFs) for both one-off investments and savings plans.

 

Another lucrative option for long-term asset accumulation is the purchase of real estate. "Because most wealthy people have either earned their money with real estate or they own real estate." - Gerald Hörhan, Austrian investment banker.

 

 

 

 

 

 

Step 5: Review strategy regularly

 

The fifth and final step in building wealth is to regularly compare the level you have achieved with your investment and life goals. Take the time once a year to readjust your investment strategy if necessary. You should also take into account changes in living conditions - such as increased income or new acquisition plans.

In this way, a long-term functioning strategy for asset accumulation can be developed that is tailored to personal needs and can be flexibly adapted at any time

How do I invest successfully in the long term?
 
Expert tips:
 

A consistent, successful investment with high profits and returns is not an easy thing in practice. Only a few investors create a secure high positive return that sustainably beats the capital market return.

 

This page "Investing successfully" deals with two successfully tried and tested strategies to invest successfully and with high profits as an investor in the capital market.

 

The strategies are used by wealthy and successful professional investors. Paying attention to the strategies is essential for any investor to be successful in investing the money.

 

Minimize risk and limit losses

 

There are 4 magic words that successful investors ask themselves over and over again before investing: How much can I lose? This applies to every investment, not only for stocks and ETFs but also for real estate. The wealthy, successful investor first focuses on the risk of the investment. He wonders what is the maximum he can lose.

 

Only when he is clear about the maximum loss does he consider how high the profit potential is. Many investors think differently. You imagine how high the profit could be and do not waste any thought on possible losses.

 

Warren Buffet, one of the most successful investors, once established two important rules when investing.

 

The first rule is: never lose money. The second rule was: never forget rule one.

 

 

Invest in extreme situations

 

Investing in extreme situations means looking for and taking advantage of market situations in which the market deviates significantly from the normal case. If an extreme case is recognized, one relies on equalization and a return to normal.

The article explains how to discover extreme scenarios and how to invest accordingly in order to benefit from a return to normal.

 

Extreme situations can arise in any market: with stocks, real estate, commodities, bonds and currencies. The strategy can therefore be applied to all investments, regardless of the asset class.

There are three different types of extreme scenarios in the markets mentioned:

 

  • Fundamental or valuation extreme situation

  • Technical extreme situation

  • Extreme mood situations

 

 

Fundamental or extreme valuation situation:

 

Extreme fundamental valuation differences occur when the price for an investment such as a share, property, etc. deviates very significantly from the long-term average upwards or downwards.

 

The stock market offers very good illustrative material to explain such extreme situations. The price-earnings ratio (P / E ratio) is one of the most important metrics in the stock market to assess whether the stock market is expensive or cheap. For example, the long-term average of the P / E in the US stock market is 16.

 

A good example is 1982. That year, the economy had been bad for a long time and the stock market was also down for a long time. Nobody wanted to buy stocks anymore. The PER was 8 at the time.

 

This was one of the best times to buy US stocks. The stock market rose 50% in the following year and even doubled by 1986. 17 years later the stock market increased tenfold.

 

The opposite situation arose in 1999/2000. The euphoria in the stock market was so high that the average P / E was 33. That was an untenable overestimation. The stock market then crashed and produced losses over several years.

 

To make a profit from fundamental extreme situations, the investor should compare the current valuation with the historical long-term average.

If the current valuation is significantly below the long-term average, the investor should buy the asset and, if the valuation is significantly higher, avoid the asset. Speculatively minded investors can also speculate on falling prices.

 

Technical extreme situation:

 

In the technical analysis, prices and trading volumes are analyzed in order to assess the development of markets and to obtain decision-making aids.

Extreme technical situations exist when a market is "overbought" or "oversold". Extreme situations can be measured using technical aids such as the Relative Strength Index (RSI Relative Strength Index) or the Bullish Percent Index.

 

Of course there are other technical analysis tools that can be used to measure extreme situations, but these two indices have proven useful.

The two tools of technical analysis are used to discover extreme situations in the markets and then to set a balance to normal.

If, for example, the Bullish Percent Index shows that a share is "overbought", then the investor buys instruments with which he can benefit from falling prices (e.g. put options, short sale of shares, reverse certificates).

 

In an "oversold" market situation, the investor relies on instruments with which he can benefit from rising prices (e.g. call options, buying stocks, ETFs or leveraged certificates).

Dealing in extreme technical situations relates to short to medium-term trading opportunities.

 

A tried and tested strategy is to trade stable blue chips if they lose value and are "oversold" due to temporary problems (eg product recall or a lower quarterly profit than expected).

 

At this point in time, the blue chip shares or leveraged instruments (call options or certificates with the blue chip base value) can be bought, as blue chip share prices usually recover after such short-term price setbacks.

 

Extreme mood situations:

 

The purpose of observing sentiment indicators from market participants is to determine whether they are optimistic or pessimistic about an asset class. Sentiment can be measured for different asset classes such as stocks, bonds, commodities, real estate or currencies.

 

The idea is to find out for which asset class the market participants are particularly optimistic or pessimistic and then to take the opposite position.

 

For example, if market participants are pessimistic about bonds, then bonds are bought and vice versa: If market participants are very optimistic, then the asset class is probably expensive and it is better to sell the bonds.

 

There are a few informal references to sentiment indicators, such as headlines in newspapers and magazines or topics of conversation at parties.

 

If an asset class such as stocks is a hot topic and is on the front page of many magazines or even the tabloid newspapers as it was in 2000, then the mood is very positive, the asset class is very expensive and ripe for a price decline. Newspapers and magazines usually publish topics that sell well.

 

If an asset class is not mentioned at all or even negatively in the newspapers and magazines, then only a few investors are interested in it. This is a sign that the asset class is valued cheaply. This is what happened with stocks in 2009 with a subsequent sharp rise in stock prices.

 

The idea behind watching the conversations at parties and family gatherings is similar. If many people are enthusiastic about an asset class and often speak very positively of it, then they are already heavily invested. This is often a warning sign of overvaluation. In this case one should not buy the asset class or even bet on falling prices.

On the other hand, if a lot of people at parties find a certain asset class really bad, it may be time to invest.

 

There are of course other objectively measurable sentiment indicators from various publishers. The same applies to these indicators: In extreme cases of optimism or pessimism, you should take the other side.

 

The three extreme situations often go hand in hand. A fundamental undervaluation is often accompanied by an extreme technical situation of the "oversold" and deep pessimism for the asset class. The opposite applies to an overvaluation, which often goes hand in hand with great optimism and technical signals that indicate an "overbought".

 

Examples from the past have shown that it is worth taking the other side in the medium to long term and thus making high profits.

 

Further information on the subject of equity investment risk and how the investor can reduce it is explained in an article on the Equity Risk website.

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