Seven valuable tips for investors

Are you thinking about investing? Then you should at least understand the basics of the financial markets and how they are structured. That way, you can avoid making mistakes due to a lack of know-how. Basically, the more you know about the individual markets and financial instruments, the lower the risk of making the wrong decision.

The term "financial market" refers to all sub-markets on which financial products are traded, i.e., foreign exchange, credit, money and capital markets. While you can carry out currency transactions via the foreign exchange market, the credit market is used to issue and take out loans. You can place fixed-term deposits and call deposits on the money market; securities such as equities, bonds and investment funds are traded on the capital market.

Each one of these markets has its own unique advantages and risks. There are a range of factors that determine which market is best suited to your investment strategy and you can find out what these are as part of your personal financial planning. For example, one advantage of stock market trading on the capital market is liquidity. This means that it's generally possible to buy and sell the equities during trading hours. In addition, stock exchanges also guarantee transparent and fair pricing, and transactions are processed efficiently.

Stock exchanges also have a control function: they oversee prices and monitor traders. What's more, they ensure that listed companies publish all price-relevant information and make it available to investors at the same time.

You can trade various types of investments, also referred to as asset classes or investment categories, on the financial markets. The most important ones are equities, bonds and investment funds.

Equities or equity securities are issued by companies that want to obtain equity capital. If you buy equities, you become a co-owner of the respective joint-stock companies. As a shareholder, you are entitled to a share of profits and receive associated dividends.

In comparison with bonds in particular, equities are generally considered riskier securities as they tend to be subject to higher price fluctuations. While equities pay dividends, as a bondholder you benefit from interest income.

Bonds are fixed-income securities and can be issued by both companies and governments. Bond issuers undertake to repay the borrowed cash amount to you on a specific date and to make regular interest payments to you until the end of the term.

But perhaps you'd prefer to put your money into an investment fund rather than invest in individual equities or bonds directly. An investment fund consists of deposits from multiple investors. Fund managers invest the fund's assets in instruments such as equities, bonds, derivatives, bank deposits, real estate and other investments. They invest in accordance with the investment guidelines of the respective fund – to achieve the greatest possible return while taking calculable risks.

In addition to these common types of investment, it's also possible to invest in real estate and commodities or opt for the popular way of saving via a call or fixed-term deposit account; the latter, however, generate little or no return.

To find out which types of investment are suited to you, you'll need to determine your investor profile. The investor profile is a measure of how much risk you can take and to what extent you're willing to accept this risk. Once you have drawn up your profile, you can use it to develop your investment strategy, as this determines up to 80 percent of your investment success. Which is why it makes sense to rely on the knowledge and experience of banking experts when developing your profile and strategy.

There's no such thing as a risk-free investment. But it's unfortunately a very common myth that money in your savings account or under your mattress is safer than in the markets. Nevertheless, you must take a very close look at the risk of your investments. While high returns are tempting, they usually involve more risk. Make sure you know the risk of any investment you're considering.

Once you know the risk of an investment, compare it with your strategy. If the risk is too high, it's best to keep looking. Also keep your portfolio mix in mind. If it contains many low-risk investments, you have more freedom to be somewhat more adventurous. A long-term comparison shows that the risk-adjusted returns on a diversified portfolio are always better than one containing just a single asset class. Risk-adjusted returns are the ratio of returns to the associated risk.

You must have sufficient diversification to balance out the risks in your portfolio. So check to see if you already have similar investments. You should have a mix of asset classes and other criteria, such as countries and industries, at all times.

It's also important that you analyze your entire custody account on a regular basis because over time even a perfectly diversified portfolio can get off balance due to the varying performance of some securities. If the weighting of your holdings no longer matches your investment strategy, strategic acquisitions and divestments will help get your diversification back in shape. Our advisory team will support you in this process.

History has made it repeatedly clear that time plays a major role in investing. This means that the longer your time horizon, the lower your risk of loss.

The general rule is that the riskier your investment profile, the longer your time horizon should be. However, the expected returns are higher as well. If you invest your money for a longer period, then short-term price fluctuations will also be less important because there is a longer period to absorb price fluctuations. For this reason, private investors with a short time horizon of a few years should have a higher percentage of bonds in their portfolio, and keep equities low. However, those who can keep their money invested for more than eight years should aim for a higher proportion of equities.

Empirically speaking, if you invest your assets, for example, in the global equity index MSCI World for a month, your probability of loss is around 40 percent.

The index combines almost 1,600 equities from 23 industrialized countries and includes the world's most famous companies. With a longer time horizon of 10 years, the chances of generating a negative return are just under 5 percent. And with a 20-year time horizon, the probability of loss falls to almost zero.

Approximately 80 percent of your investment success is determined not by tactics but by your choice of strategy. In other words, the things that matter in the long term are patience and an investment strategy tailored to you and your needs. Be disciplined about sticking to your strategy and don't get nervous about short-term and medium-term price fluctuations. Especially if you're convinced by the long-term earnings prospects of your investments. Exactly what you consider to be convincing earnings prospects depends on your personal goals.

Is your focus on liquidity, in other words to have access to your savings if you need them? Are you aiming to achieve the highest possible returns? Or are you more interested in secure investments? Following these three competing goals is difficult because no single investment can offer high returns, a high level of liquidity and the greatest security at the same time. When investing, therefore, you need to focus on one or two of these goals or prioritize one aspect more than the others.

Of course, we all make mistakes. But the best way to avoid them is to be aware of them. If you don't have much experience with investing, you may be at risk of repeating the same mistakes that other investors make because you haven't studied your investments sufficiently. The following mistakes are particularly common:

Putting all your eggs in one basket: diversify your portfolio and invest your money in various asset classes, sectors and countries.

Investing without a specific goal or strategy: the success of your investments depends on your goals and the resulting investment strategy. So don't buy and sell without a plan.

Following insider tips: before investing, check whether the investment fits your strategy.

Following trends and hype: stocks that are fashionable on the stock exchange are usually expensive and the period of major price gains has usually already passed. When investing, stick to your investment strategy.

Buying, selling, buying again, selling again: too many transaction fees reduce your return. Avoid action just for the sake of it and don't try to squeeze out as much profit as possible through lots of buy and sell transactions.

However, the biggest pitfall for an investor is to let yourself be guided by emotions. Making investment decisions based on an emotional reaction, whether positive or negative, rarely leads to success (behavioral finance). It's particularly common for our recollection of events to become distorted, for example: we generally expect something to happen again because we have already experienced it, or we simply see failures as bad luck. In these cases, keeping an investment diary can help you track what was crucial to your good or bad investment. However, as long as you're disciplined in sticking to your investment strategy, you'll be immune to letting your emotions govern your investment decisions.

Financial market trends show the direction in which the markets are headed – and provide important indications of your potential investment opportunities. Only by identifying and understanding these trends will you become accomplished in assessing opportunities and risks and making informed decisions about your investments.

When analyzing financial market trends, you should be aware of the importance of news and economic indicators (such as GDP [gross domestic product] growth, the unemployment rate and consumer confidence). Political events, central bank decisions and economic developments can also have a significant impact on the financial markets.

An analysis of financial market trends also involves looking at corporate reports and key financial figures. By doing so, you can assess the performance of individual companies and entire sectors. However, valuations and reports often depend on your own point of view. Here's a simple example: if a listed joint-stock company reports a profit increase of 25 percent, its stock price may still fall. This is due in part to the fact that profit expectations were higher. If you know how to assess the reports, you can protect yourself better from rushing in and making the wrong decision. If you want to make fewer mistakes and enjoy more success with your investments, it's best to rely on the know-how of specialists – and benefit from the combined expertise.

The right investment strategy, encompasses a combination of many things: investor profile, risk tolerance and ability, product knowledge and complexity, and diversification. In addition, the optimum mix of the various investment instruments is crucial to your investment success.

And, finally, every investment has its own advantages and disadvantages with regard to risk, complexity and volatility. To find the right products for your personal investment strategy, you should take a detailed look at the characteristics of your potential investments.

These considerations (and many more) are factored in when drawing up your investment strategy. Your strategy should be geared to the long term and aligned with your investment objective. Some investors may find this process overwhelming. But it's all the more important because it protects against spur-of-the-moment actions and steers investment success.

It's therefore advisable to rely on the know-how of your financial expert.

Investing requires broad and in-depth knowledge of the financial markets – not to mention a considerable amount of time. What's more, investors need to avoid some common mistakes. In addition, they often let themselves be driven by emotion, rather than keeping a cool head. Remember that having the right know-how can help you avoid some of the pitfalls.

The right advice can help you with the aspects you're unable to deal with yourself. With a bit of time, practice and regular reflection on your own investment behavior, building your wealth can not only be fun, but also generate long-term gains. Choose a carefully thought-out and forward-looking financial plan as well as a flexible investment strategy that's tailored to your situation. This will put you on the right path to investing successfully.