6: Informed Savings Decisions

Strategy Structure

• The course aims to guide private households in making informed decisions about their savings.
• Making decisions requires weighing factual inputs with personal preferences and ideology.
• Focus is given to risk/return trade-offs.
• Investors should consider where they want to sit on the risk/return spectrum and how much of their savings should be allocated there.
• Passive buy-and-hold strategies can outperform active value-trading.
• Equity (stocks) tends to outperform debt capital in the long term.
• Diversification reduces risk.
• Reducing fees can increase net returns for private investors.
• Financial risk-taking is highly personal, depending factors like time horizon, psychological attributes, financial security, and ideological attributes.

Time Horizon/Situational Aspects

• Financial risk-taking is highly risky in the short run, due to the potential for losses.
• Risk-taking, particularly with well-diversified buy-and-hold stock portfolios, historically outperformed safer investments over a long investment horizon.
• Investors should only expect risk-taking to be beneficial if they are willing to wait long enough.
• "Patience" and risk-taking are correlated.
• Stocks are suitable for investment horizons of 10-15+ years.

Psychological Attributes

• Wealth fluctuations can be stressful.
• Losses and poor decisions can be emotionally taxing.
• Impulse trades/non-strategic behaviour, such as panic sales or hype buys, are often detrimental.
• Investors should be unsusceptible to emotional influences.

Financial Security/Risk-Taking

• A financial strategy should consider the household's overall financial situation.
• Existing risks like job insecurity, missing retirement plans, or potential health issues should be taken into account.
• If a household is already exposed to risk, further investment risk might be excessive.

Ideological Attributes

• Ideological concerns can affect investment decisions.
• Religious or political beliefs can lead to perceiving the stock market as immoral.

Forming Your Strategy

• Individuals should decide on an absolute amount of liquid money (€) to keep, typically in a debit account.
• Determine the percentages of total wealth to allocate to different asset classes/securities.
• You can start by investing a small amount as per plan, to get a feel.
• You should invest all available savings as per plan, once comfortable.
• You can set up an automated savings plan to invest monthly.
• You might need to rebalance your portfolio periodically, such as yearly.

Additional Information

• "Finanzfluss ETF-Finder" can be revisited as tool for browsing and comparing bonds and stock ETFs.
• The tool summarizes important aspects for each fund, like returns, country distribution, and max drawdown.
• Note the ISIN of securities to find products with your broker/app.

Algorithm for browsing

• Pick your asset class, the index/country/sector, and restrict to accumulating funds.
• You can also sort by TER (cheapest first) and pick physically replicating funds with 3+ years of age and large volume.
• Rebalance your portfolio annually to maintain your allocation.
• This is primarily due randomness and differences in expected return, as securities achieve different returns.
• The two ways to rebalance, are selling from positions that are "too large" and invest in "too small" position or, rebalance with extra-investments.
• Stick to the investment plan and avoid trying to time the market by reacting to headlines.
• Disciplined rebalancing can help one time the market automatically, if anything.