The following is a guest post from Alexander Voigt. He started his career in the financial business back in 1999. For many years, sharing investment ideas with his readers on his website is an important part of his life. You can almost call it his passion.
Savings accounts or call money are currently not really suitable to increase one’s own capital by interest. There are other investment opportunities much more efficient, such as equity funds.
As the name suggests, this investment consists of shares, not in individual stocks, but in a portfolio of shares of different companies. The advantage here is that the risk of loss is significantly reduced if the investment strategy is correct.
At the same time, with a correspondingly intelligent selection, there are good chances to increase the various values in the equity fund. Without any need to scan the markets for individual stocks, this makes the investment profitable.
Certainly equity funds are a means of investment that demands more attention from the investor than the well-known savings account, but then an equity fund pays off while a savings account is actually losing money.
The risks involved in different funds can also be assessed with a little knowledge of the stock market. An investor need not be a securities specialist to be able to gauge how risk and opportunity behave in an equity fund.
Safe Investments – Equity Funds
Conventional savings are usually linked to the interest rate of the respective central banks. These are not growth-oriented, which of course is politically correct. Central banks must control the amount of money in circulation, using among other things the key interest rate, which is raised or lowered depending on the situation.
In contrast, public companies are obviously growth-oriented. A small example shows the differences. In the euro zone, the base rate was 3.25% in 2000. This meant that banks on savings deposits paid maybe 4 or 5% interest.
With slight fluctuations, the key rate remained in this area until 2009. After the global economic crisis in 2008, the key interest rate fell to currently zero percent. Even with generous calculation a savings balance of 100 euros would, including compound interest, result in 40 euros interest in the best possible case after 17 years.
Assuming that the 100 euros were invested in the DAX, which with its industrial heavyweights is by no means a very dynamic equity fund, but extremely conservative in the area of equity investment. Nevertheless, the DAX achieved an average performance of just over 5% per annum over the same 17-year period.
Invested in the DAX the 100 euros would have made almost 130 euros with compound interest. Other, more dynamic equity funds are still far above that. It should be noted that the past 17 years produced particularly mixed results for the stock market.
For whom are equity funds suitable?
While belongs to the most speculative approaches to make money in these days, investments in equity funds give the investors more safety. So, they are also connected with less emotional stress.
Especially people looking for an alternative investment to the usual bank products are well advised to turn to equity funds, especially when it comes to long-term investment objectives with an overall low risk.
The management of an equity fund usually follows a specific investment concept with considerable diversity, such as investment in certain industries. In this case the companies of one or more industries are rated in terms of their growth, but also in terms of their stability.
If a company meets the specified criteria, its shares are integrated into the fund. Another concept is tied to or specific regions, which may be a whole continent like Europe or a single state such as Japan.
Another distinguishing feature may be a focus on small or large companies. The advantage of investing in small caps, in smaller stock companies, lies in the faster performance of their stocks. Especially in recent years, funds have achieved excellent value growth with this investment concept.
For example, the best small-cap funds made gains of between 13.8% and 15.76% between 2014 and 2016. The risk can be cushioned by a wide spread. But the success of such a fund may also turn out to be a handicap.
If the fund reaches a certain size thanks to multiple investors, it may be difficult for the managers to invest the amount of money according to their own criteria. In this case what’s lacking are simply suitable public companies.
Are there high risks in equity funds?
In fact, the risks are minimal if the investor or investor avoids certain types of funds, like sector funds with a very high degree of specialization. Of course just these equity funds offer the same promise of return, but the risk is very high that the forecasts for development will not materialize. With investments in a single industry even a company getting off the rails can pull down others.
Although the stock market and in particular equity funds have shown a positive performance over decades and are thus actually ideally suited for asset accumulation, skepticism remains high. This is clearly shown by the shareholder rate, the proportion of people in a country who invest their money in shares or equity funds.
Focusing on the goal instead of the way
Of course the daily price performance is a problem when investing in equity funds. With long-term investment periods of perhaps 10, 15 or 20 years, it may well happen that the price of the fund slips below zero on some days.
But this is by no means significant for the overall development. This is demonstrated very well by the world's oldest stock index, the Dow Jones. This index of the 30 largest industrial companies in the United States records their price development since 1928.
In these almost 90 years including a world war, several stock market crashes and other economic and political difficulties, the Dow Jones index climbed from about 30% to 10,170%. If somebody had theoretically invested only 100 euros in the Dow Jones equity fund in 1928, they would have achieved a whopping 10,270 euros in 2017, mind you, without compound interest.
With compound interest, it would be an amount with 29 digits. At 10 digits one reaches a billion, at 13 digits a trillion. Of course this is just as abstract as the assumption of an investment over the course of 90 years.
But it shows a very clearly that buying stocks beat every other investment working with fixed or floating rates. Because behind stocks there are people with ideas, with experience and with knowledge, working every day to move ahead, thus advancing the stock corporation.
An equity fund is in this sense not just a mix of shares of different companies, but a representation of the employees of these companies.
Investors who are searching for a more self-managed approach may profit from reading the article . The article explains the difference between stock screeners, stock scanners and charting tools. It also presents 40+ different investment tools that are available and it tells you how to use them effectively.