Investing money is a complicated subject. And yet, if you prepare yourself and follow the simple rules of our little investment basics, you will be better equipped for the sales pitch with supposed advisors. Or you can even take your finances into your own hands.

The most important thing in brief:

• Clarify your needs: how long do you want to invest and how much? Can you pay off expensive debts? How much risk can you take for the chance of higher returns?
• If you are hoping for advice from sellers of financial products: be skeptical!
• Document what was said or take a witness with you. You can also ask your consumer advice center for a second opinion.
• The two most important criteria for the success of any investment are a broad risk diversification and low costs

Investing is a complicated subject. And one that poses many dangers for careless and inexperienced investors. Nevertheless, anyone who follows the simple rules of our little investment basics will be well equipped to avoid the worst investment pitfalls and invest their money successfully.

These are the 10 principles you should always keep in mind when investing money:

1. Be clear about your goals

It sounds banal that you have to be clear about your goals before investing money. However, it is by no means a given that you should think carefully about your goals. However, it is essential for good planning and making the right decision.

Take your time and write down what you expect from your investment – and from your life situation.

• Do you have any major purchases planned in the medium or long term?
• Are you planning to move or start a family?
• Perhaps your professional situation is uncertain or you are about to retire?
• Will you have higher or lower monthly payments in the future?
• Are you on stable financial footing or is the overall situation uncertain and the future difficult to predict?
• Do you want to invest money once or would you rather save something every month?
• Divide your funds: do you want to invest part of it for the long term and still have it available in case of emergency?

Investments must match your individual goals. So think about where your priorities lie: is it high returns, constant availability or absolute security? No investment can achieve these three goals simultaneously. You can only expect high returns by foregoing availability or security.

These are all questions you should ask yourself because they will provide information about which investment best suits your personal needs.

2. Debt repayment takes priority over investment

Before you invest money, remember one thing: credits and loans are expensive. They generally cost more interest than you can earn with the same amount of money invested. This means that you should always try to pay off debts before investing money elsewhere. Paying off credits and loans is usually the best investment you can make.

There are exceptions to this rule, for example when taxes reduce the loan interest rate, which can be the case with rented properties. Some old building society contracts offer returns of up to 4 percent due to the bonus interest . And classic life insurance policies taken out before 2004 have tax advantages and, depending on the provider, the guaranteed returns after costs can still be around 2 or even 3 percent.

You can certainly hope for returns that are higher than the current low loan interest rates, particularly with low-cost investments in stocks using ETFs . However, this is uncertain. There have also been phases in the past lasting 10 to 15 years without any significant returns on the stock market.

If you are debt-free and have sufficient reserves, you can avoid overdrawing your checking account in the future if damage to your home or car needs to be replaced or repaired. The best option for this is a high-interest savings account at a bank with German deposit protection.

Loans and credits: You can also save money when borrowing money

3. Insurance can protect assets

Certain events can have serious financial consequences. The most solid investment can disappear in an instant if, for example, you are liable for damage with your own assets. If you have a family to support, you may not want to put them in financial difficulties if you die unexpectedly or can no longer work due to illness or accident. Consider these risks. Many of these are well covered in our welfare state, but not always to an extent that allows you to maintain your usual standard of living.

If you don’t want to jeopardize your standard of living if certain risks occur, you can buy the appropriate insurance cover . Only you know which risks you want to cover and which risk protection you feel more comfortable with. Also consider how high the insurance cover should be. For example, do your surviving dependents need to be provided for until you retire, or is five years enough because this is enough time to adjust to the new situation? Avoid the rules of thumb and checklists that salespeople like to use. What matters is your personal needs.

4. Can and do you want to take risks?

The more risk you take, the higher the returns can be. So risk is not something that is bad per se. And security has its price, the returns are simply lower: with the current inflation figures, it is not possible to compensate for inflation with safe investments. The purchasing power of your money is therefore currently shrinking.

Since there are no safe investments that can guarantee inflation compensation, there is only one way out: you have to decide for yourself what level of risk is acceptable for your needs. You have to feel comfortable with the investment. There should be no nasty surprises when the stock markets go crazy again. And you should still be able to sleep well. The extent of potential losses should therefore be clear to you in advance and you should be able to deal with them.

With our online return calculator you can get a feel for the return opportunities and risks of different investment allocations. Important: This only applies if you invest widely in stocks. More on this in the next step. 

In connection with personal willingness to take risks, risk-bearing capacity is also important. Not everyone who would like to have a higher return can afford to take a higher risk due to their life situation. Anyone who has to make a living from their assets should generally avoid fluctuations in value, unless the assets are so large that fluctuations are not a factor.

5. Spread the risks

Regardless of whether you want to invest a large sum of money once or just a small monthly savings plan: spread the risks! Capital markets always involve risks, even if the newspapers paint a rosy picture of the future. Share prices can always collapse and interest rates can change at any time. But don’t confuse risk diversification with simply buying several products. If you only have savings certificates, call money and bank savings plans, you are not spreading the risks! What is more important is the asset class that you represent with the product.

The following options are available:

• Investments in companies, in the form of shares or, even more broadly, in the form of globally invested equity index funds (ETFs) .
• Debts, often also called monetary assets. This category includes all loans, including overnight money, savings certificates, government bonds or pension funds. Classic life insurance policies also fall into this category, as they primarily buy debt securities from states and banks.
• Real estate, in the form of a home, a rental property or in the form of open-ended real estate funds and real estate investment trusts (REITs), which offer access to this asset class even for small amounts. Be careful of closed-end real estate funds. 
• Speculative assets such as raw materials or precious metals. These investments offer no interest and their performance is highly uncertain. However, gold is probably the oldest means of payment known to mankind and every paper currency (category: debt) has survived. Information on investing in gold can be found in this article. 

Asset classes generally develop differently. For example, when stocks tend to be weaker, bonds have often been ahead in the past – and vice versa. When the value of stocks and debt collapsed worldwide during the financial crisis, the price of gold boomed. It was similar during the Corona pandemic: here an investment in gold stabilized the portfolio. If you spread your assets across all of these asset classes, you practically eliminate the risk of total loss and stabilize the overall return. Spreading risk is also called diversification.

If you no longer want to leave your investments to an advisor or salesperson, but want to take them into your own hands, you can read how to do this in this article .

Read also when too much risk becomes critical.

6. Be skeptical of salespeople

Bank advisors and other financial intermediaries are usually paid on a commission basis. In other words, they are salespeople. Therefore, you must assume that these advisors will only recommend products that the salespeople can earn a decent living from. This also applies to savings bank advisors, of course, even if they personally do not earn anything from the sale.

Savings banks and cooperative banks also sell their own products or products from third parties with appropriate sales cooperation and set sales targets for their employees (read also: Why commissions are a problem in financial advice ). What can you do about it? Nothing. You can ask other competitors for advice who are also salespeople and who may then suggest other products to you, but this doesn’t exactly make it easier to make a decision.

Unfortunately, there is no guarantee that you will receive better advice from so-called fee-based advisors. They often sell ETF savings plans under the guise of insurance and charge outrageous fees for them , as an example from the consulting practice of the Baden-Württemberg Consumer Advice Center shows.

If you want to form your own opinion, you can rely on independent sources, such as test reports from Stiftung Warentest , online seminars and advice from consumer advice centers .

7. Look critically at past performance

We all know the situation: In order to sell you a product, you are presented with beautiful graphics with upward curves. That is the development so far, you are told, that it is a top-notch paper with which you can only win.Be careful! No expert in the world can predict how a security will develop in the future. It has long been a well-documented truism among researchers that the forecasts of experts and analysts are at least as often wrong as they are right.

If someone says the opposite during a consultation, you should get up and leave immediately. Such forecasts only serve to sell products and constantly reshuffle securities. They have nothing to do with serious advice, which should always place value on appropriate risk diversification.

8. Minimize costs and commissions

Costs and commissions reduce the return you can achieve with an investment. The costs are certain, you always have to pay them, while interest income and positive price developments are often uncertain.

Depending on the investment product, different costs apply. You can find an overview of different product types in this article and in our guide. Avoid unnecessarily high costs for financial products. Commissions, also known as allowances, can generally be negotiated.

In the case of funds and other products, fees are still charged even after the sale. The annual fees can be found in the so-called key investor information, also known as the basic information sheet or product information, under “ongoing costs”. Because of a follow-up sales commission that the fund company pays to the bank, your bank automatically continues to earn money from you even after the sales talk.

So take a close look and ask if in doubt. The cost burden is one of the most important criteria for evaluating investment products. Even the most brilliant performance in the past and the rosiest forecasts for the future should not stop you from taking a sober look at the costs. There are also cheap products with no commissions.

9. Document what your investment advisor advises you

Most people cannot or do not want to manage their assets completely independently and without advice. Many go to a bank or to a so-called independent advisor , who can and must only sell products. Some also turn to fee-based advisors, who also pursue their own interests , or robo advisors , who are paid by the customer and do not earn anything from the sale of products.

No matter who you turn to, advice is a matter of trust. Anyone who needs advice doesn’t know any better than the advisor and therefore can’t judge whether the advisor is doing their job well. A checklist that you can use to find out about qualifications, for example, won’t help. Anyone who wants your trust should earn it.
Tell your advisor that clearly and unambiguously. This assumes that your advisor stands 100 percent behind what he told you during the conversation.Write down the advisor’s statements about the risk, 

return and availability of the recommended product. Also ask on what basis the recommended product was selected. Because it is “the best”? Because the fund managers are “good” and can see into the future? Because it is cheap? Anyone who wants to earn your trust should be prepared to sign all your notes so that they can be used in court if necessary.

10. Regularly check your goals and strategies

You have clarified your goals, gathered sufficient information and made a well-founded investment decision. And now?

As a rule, it makes no sense to restructure your investments every few months because that only incurs additional costs. An old stock market saying rightly states: “Back and forth makes your pockets empty”.

Nevertheless, you should deal with your finances at regular intervals. Life situations can change and unforeseen events can occur. After a while or after an inheritance, you may no longer be concerned with returns, but rather with liquidity because your plans have changed and you need to have access to the money quickly. Therefore, take the time at least once a year to check: how are my finances? Has anything fundamentally changed in my situation? Do my investments still meet my needs? Only if you keep an eye on all of this can you be sure that your investments will still meet your needs in a few years’ time.