Getting Rich For Normal People

I love stock photo images. Is it a trader? Is it a DJ? who knows?

Discussions about the stock markets are ubiquitous. Right before the daily evening news on TV you often see successful looking people telling you “the Dax is now 20 points down” as if that were something immediately relevant to every citizen’s life. Only 6% of Germans directly own stocks. Who cares? Sure, a stock crisis is news. But the daily ups and downs? Why don’t they show something that is more useful to the audience, especially the more financially vulnerable? Like “here are 3 tips on how to fill out social security forms” or “how best to invest in your retirement funds without falling prey to predatory insurance companies”. I really do find this immensely elitist and quite enraging. Rant over – please excuse.

I don’t know how to fill out social security forms. But I do have some advice on how to get rich for normal people. The usual path to immense wealth is of course very easy: The trick is to start off rich and then get richer. But even for the less fortunate of us, there is a couple of things we can do.

  1. Invest in stocks. If you are young and have any money to spare, invest in stocks. Over long horizons, annual stock returns tend to be very high and positive. Over the last 15 years, annual return of the S&P500 was 5.1%, over the last 20 years it was 2.5%, over the last 30 years it was 6.3%, and over the last 40 years it was 8.2%. Annually. This includes major crises like the 9/11 attacks, the 2008 financial crisis, the Euro crisis and the current coronavirus crisis (Is this a good moment to talk about replacing capitalism!?)
  2. Diversify Invest is as many different assets in as many different countries and industries as possible. This allows you to maximize profit given a certain risk (or minimize risk for a given profit). Also think about your personal career as a form of diversification. If you’re working for a tech company, don’t invest more in tech companies, because any hit will hit your professional live as well as your finances
  3. Don’t try to be smart. Don’t buy and sell individual assets. Usually the other person who is trading with you knows more about what they’re doing. Don’t trust others who tell you they are smart. One way actively managed hedge funds are able to make high profits is to trade a very small risk of total failure (due to rare “black swan events”) against a high probability of success. The problem though is that these rare events are usually more common then you would expect. The average actively managed fund performs worse than the stock market. Also the majority of actively managed funds perform worse than the stock market.
  4. Pay attention to fees. Many pension funds, life insurances, and your local banks will charge you large annual fees. If you are paying 1.5-2.5% in fees every year, this will be a ton of a lot of money after 40 years. Think about exponential growth. A small increase or decrease in the growth rate makes a big difference over time.
  5. Buy ETFs. This is basically the sum of 1) to 4). Exchange Trade Funds (ETFs) are funds that try to replicate large indices, such as the S&P 500 or the MSCI World. This indices are much more diversified than individual assets.
  6. Adapt your portfolio over time. If you’re young, make sure you have a very high share of stocks in your portfolio to reap the benefits of a high annual return. Once you get older (or have kids), gradually shift your assets towards safer havens like bonds.
  7. Make use of federal / employer based pension subsidies. In Germany, this is something like Riester and Rürup contracts. In the US this would be your 401k pension plan. Invest the minimal amount necessary to get a high bonus. Invest anything else directly in ETFs, as fees are usually lower there and the share of stocks is higher. Again: pay attention to fees.

If you want to start investing in ETFs, finanztip has a (German) list of depots they recommend (I personally use onvista, TradeRepublic seems like the cheapest choice). You can also “rent” me if you need advice or help with your depot, although I’m not in any kind a professional financial adviser.

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