And the appropriate strategy
I keep reading statements on getquin like "My goal is to read 50 books on finance this year and then finally start investing", "My strategy is to invest 300 euros every month" or "I have set myself the goal of increasing the value of my portfolio to 20,000 euros by the end of the year - buy & hold!". Don't get me wrong, I think it's great that you're all here, dealing with your finances and sharing your ideas and views with the community. And it's also much better to invest 300 euros every month - simply because you can - than to invest nothing at all. But there's so much more ... And that's what I'm going to talk about today!
Step 1: Be clear about what you want
@InvestmentPapa The words "hobbies - soccer, skiing and reading. Investing? A necessary evil with no chance of an alternative". And he's damn right. Investing is not a hobby. Money and asset growth are of absolutely no use to me if I don't use them. Be clear about why you want to invest money! Putting 300 euros into an ETF every month is not a goal. It's a measure that could help you achieve your goal. Having X euros in your portfolio at the end of the year but at the same time pursuing a buy & hold strategy including a savings plan is not a sensible goal either. The stock market fluctuates and if you are not actively trading, you have no influence on the short-term size of your portfolio.
Of course, the goal differs from investor to investor. But money simply for the sake of money makes no sense. For example, some people want to close their pension gap, buy a house, only work part-time, pass on as much as possible to their children, show off their assets to others, take a money bath or simply see a really big figure in their own account.
That's your goal. Or at least the first step towards it.
Step 2: Formulate your goal
Now you know where you want to go? Very good. Then make it more concrete. Embellish your wish with details. How big and luxurious do you want the house to be and when do you want to buy it? How much do you want to bequeath so that your children can lead a carefree life (who will probably be close to retirement themselves at the time of the inheritance)? How big is your pension gap and when do you want to retire? ...?
A concrete goal could be, for example, "I would like to reduce my working hours by the age of 50 at the latest and make up the difference to my full-time net salary through dividends!"
Step 3: Put your goal into figures
This is the part where you need all the things you learned about math in school that you thought you'd never need again anyway. Sorry.
To stick with the example from step 2: Just because you now know that you want to reduce your working hours at 50 and make up the difference to your full-time net salary with dividends, you don't yet know how much dividend you actually need. So you have to calculate the gap you need to fill. Or for other goals, for example, the capital you need at time X. Or how many coins will fit in your bathtub for a money bath.
For long-term goals in particular, it is important to take changing parameters - such as a higher salary or inflation - into account. Let's say you currently have a net income of EUR 2,000 to live on and you want to receive half of this in 25 years' time via dividends. Then you have to take into account that your cost of living will be significantly higher in 25 years' time than it is today due to inflation. If you calculate with an average inflation rate of 2.5% / year, you will no longer need 2,000 euros net to live on in 25 years, but 2,000 euros * 1.025^25 = 3,707.89 euros. To reach your goal, you will therefore need to earn a net dividend of around EUR 1,853.94 and not just EUR 1,000. It could also be that your lifestyle changes in the next few years - e.g. children, more luxury due to a higher salary, moving to a more expensive city, ... and therefore your needs may be higher in 25 years' time. You need to make assumptions here and take them into account accordingly. Overall, I recommend calculating a little higher rather than too low.
So add concrete figures to your goal. Make it more tangible. Make it calculable. "I would like to reduce my working hours by the age of 50 at the latest and make up the difference to my full-time net salary through dividends. To do this, I need a net dividend of EUR 2,500 / month in 20 years, taking into account any salary increases and a reduced tax burden due to the lower income".
Step 4: Write down your options and calculate the required return
You thought that was it with the math? Sorry, this is where it really starts.
You now know your goal and the figures behind it, but you don't yet know how to get there. Accordingly, you now need to be clear about your financial options. Do you have a large sum at your disposal that you can invest immediately? Would you like to save monthly and how high could the savings rate be? Could this savings rate increase or decrease by the time you reach your goal?
Once you are clear about this, you need to calculate the required rate of return. For example, if you need 300,000 euros in 20 years and can currently invest 50,000 euros once, the calculation is 50,000 euros * x^20 = 300,000 euros. Wolframalpha [1] calculates x to be approximately 1.0937. You therefore need a return of 9.37% per year to achieve your goal.
Another example: You want to invest monthly and receive a payout of EUR 2,000 per month after 25 years without capital depletion. The first thing to do here is to calculate the required capital. For EUR 2,000 per month or EUR 24,000 per year and assuming 25% tax on income, you can achieve the target with a payout ratio of 2% and capital of EUR 1.6 million, for example: x*0.02*0.75=24,000. Are you calculating with 3.5% payouts? Great, then 914,286 euros is enough.
What return is needed to generate this capital? You can use Excel or tools like [2] for this. With a monthly savings installment of EUR 500, a target amount of EUR 1.6 million and 25 years, you need an annual return of 15.906% [3]. If you think a certain return is realistic, you can of course turn the calculation around and calculate the monthly savings rate required for the return and target capital.
Now add to your goal the framework conditions that are given (your financial possibilities) or necessary (the required return) in order to achieve it.
Step 5: Select a suitable strategy
Now that you know your goal, your financial possibilities and the required return, you need to select a suitable strategy. Your strategy describes how you want to achieve your goal given your financial resources. There are plenty of options, from "I'll just buy a world index on a regular basis" to trading and "back and forth empties my pockets". In addition to the classic buy & hold approach of a globally diversified portfolio, different strategies are also repeatedly presented on getquin. You can find some examples in the sources under [4], [5], [6] and [7] (the naming of these strategies is not a recommendation from me, you can find my strategy under [8]). It is important that you inform yourself about the expected return for each strategy (historical data, does it extend far enough into the past to be reliable? ...?) and the risk (how likely is it that the return will be achieved, what is the maximum loss in a worst-case scenario, how likely is the strategy to fail? ...?).
You should opt for the strategy that is most likely to achieve your target return with the lowest risk. The risk should also be <= your personal risk tolerance. If you're gasping for breath because your portfolio is down 0.5%, you should steer clear of crypto. In addition, the strategy should match your skills (existing or learnable in a reasonable amount of time) and capabilities. There is no point in deciding to trade on the basis of technical analysis if you have no idea about it and live as a hermit in a desert in Africa without electricity or internet.
Sometimes it can make sense to apply strategy A (asset accumulation) for a few years and then switch to strategy B (asset management / consumption). In doing so, you should take into account any taxes on your profits when reallocating and set a higher target for wealth accumulation to compensate for this.
Step 6: Nothing is set in stone
Our world is very fast-moving. Things change from one day to the next. Personally, locally and globally. You should therefore regularly review your goal and your strategy and readjust it if necessary, but please don't throw it overboard every year and start from scratch.
Congratulations, you have now set yourself a sensible financial goal and chosen a suitable strategy.
What? You are a low-income earner with ambitious goals and have not found a strategy that brings your goal within reach with your given financial means? Then please read the next steps.
Step 7: You can't achieve your goals in your current situation? Then improve your situation
Important: Be focused and rational. It makes no sense to read 50 books on finance. Investing in your human capital is right and important. But please be targeted. It makes more sense to look at what will actually help you. Can you significantly increase your income through further training? If so, then continue your education and apply for a better-paid job. Does an active strategy promise a higher return that will help you achieve your goal? Then acquire the necessary skills.
Further training and new skills can be an incredibly powerful lever for achieving your financial goals. Don't underestimate them, but use them wisely and don't invest time and money in topics that won't help you achieve your goals. Sometimes it makes sense to take a few steps back to get a running start.
Step 8: You can't improve your situation? Then you need to adjust your goal
The first financial goal in particular is often simply too ambitious or your options are too limited. In this case, there is unfortunately no way around adjusting your goal. But that's okay. Defining a meaningful goal is usually an iterative process. However, thanks to the preliminary work, you should now have a feeling for what is realistic and what is not. Adjust your goal and your strategy with your newly acquired knowledge and under your given circumstances.
Conclusion
Not worrying about your financial future is easy. Saving / investing a few euros a month takes more work and energy. So I think it's great that you're here and that you're probably already doing this. But it takes a lot more than that to set yourself really sensible financial goals. You have to deal with it, you have to calculate, you have to deal with different strategies, you have to regularly check and correct and maybe you also have to leave your comfort zone and increase your human capital. But it's worth it. Not only does it increase the likelihood of actually having achieved what you want / what is important to you "later". A goal and a strategy will also help you sleep more soundly, say goodbye to unrealistic ideas and enjoy your life today rather than in 30 years' time. Why? If you know where you want to go, what return you need and what financial resources are available to you, you don't have to invest every penny you have left over at the end of the month. No, you can spend it with a clear conscience - you know that you will reach your goal with your strategy even without that cent.
What is your goal? Have you already found the right strategy?
You're welcome.
Your StrategyDonkey
Sources
[1] https://www.wolframalpha.com/input?i=50000*x%5E20%3D300000
[2] https://www.zinsen-berechnen.de/
[3] https://www.zinsen-berechnen.de/sparrechner.php?paramid=eifzwfp7mj
[4] World Index + Titans of @Chefkoch256
https://app.getquin.com/activity/SzlYKFECjG
[5] Overview of various strategies from @GetRichorTryin
https://app.getquin.com/activity/oNRQtDbTcO
[6] Global Tactical Asset Allocation from @Epi
https://app.getquin.com/activity/OpanTqOJoV
[7] 3x Leveraged Rotating Strategy from @meta (but currently gone under the Bitcoin Maxis) https://app.getquin.com/activity/YWrjxizhqG
[8] https://app.getquin.com/activity/NhIGEJGCTA
#learn
#strategie
#strategy
#esel