Investing is a term hardly anyone properly understands today as investing needs to be separated from other forms of monetary activities such as hoarding or saving. As an investor one needs to be careful not to be fooled by the many scammy offers that exist out there. At the same time, it makes sense to have a long-term horizon, while potentially outsourcing the art of investing to true experts that know that they hardly know anything.
For many people, investing money into assets is a book with seven seals. Investment decisions are directed towards the future, appear less imminent and are therefore easier to neglect. Especially in times of material abundance, this impression is reinforced and widespread. Some people come to the conclusion that investing one's money is at best an option at an advanced age. Others have a positive balance between expenses and income, but leave their savings in the form of bank deposits in their bank account. This does not do them any favors, however. The wealth gap has widened in recent years, not least because the middle class, in particular, hardly invest their money. But those who do not want to be left behind must revise their thinking and start getting invested.
In order to invest one needs the necessary funds in the form of savings. To acquire savings one has to renounce consumption: Surplus income is not spent today but set aside for the future. Far too often, however, consumption is ideologically seen as the counterpart of thriftiness. But that doesn't make sense since both of them depend on each other. People consume thoughtfully today in order to retain the option to consume tomorrow. In the end, saving is not an end in itself, but a means to save and transfer quality, meaning and added value into an uncertain future through regulated abstinence from consumption. However, modern economic science has disavowed saving. Their credo is demand and thus consumption, which would keep the economic engine running, so the argument goes.
Applied to the individual, this macroeconomic perspective seems all too naïve and unrealistic. As people with limited lifetimes, we are well aware that our biological clock is ticking. Due to our time-related nature, we have to counteract the dwindling of our creative and vital energy the older we get. It is therefore only logical that we should build up assets with our income at a young age so that we can later convert them into income if necessary.
For thousands of years, hoarding has been the easiest way to build up wealth. In a way, it is a direct exchange with yourself in time. You hoard today what you later dishoard. Ever since the act of hoarding has been accompanied by an amazing dynamic. Through the accumulation of private hoarding, seemingly inconspicuous persons could suddenly outsmart and outperform all others. Of course, this was seen as potentially destabilizing for collective society. It is hardly surprising, then, that hoarding has faced strong political opposition throughout human history. Hoarding deprives society of financial assets. In the sense of compensation, countermeasures must be taken from above by means of inflation. But in the end, inflation is a persistent, hidden expropriation of the saver. He will no longer be rewarded for his renunciation of consumption.
Savings held as deposits on the bank account or cash in a safe are completely exposed to constant devaluation. This does not have to be the case with everyday consumer goods, but it does with assets that are much more important from the perspective of the old-age saver. Particularly since money saved in the piggy bank and bank account is constantly melting away, people are being forced into the financial markets to make effective provision for their old age. Zero-interest rates, inflation and, increasingly, nominal negative interest rates make long-term saving of assets impossible. As a result, ever larger masses of "dumb money" are pushing onto financial markets. What sounds derogatory is ultimately the observation that an above-average number of inexperienced and unenthusiastic people have to mimic the trader or investor. Not all of them remain loyal to their banker in this respect, oftentimes with a bad outcome for these people.
The continuous inflation of our time finally undermines the market-clearing forces in the investment world. "Dumb Money" hardly vanishes off due to bad investment decisions, because there is no discipline. Bad money is always followed by good money. The general impression that there is an above-average number of fraudsters and charlatans in the financial world is precisely this. In search of the next big thing, an investor succumbs to speculation and soon finds himself in the clutches of a pyramid scheme.
In order to evade scammers and pitfalls, common sense calls for serious and professional asset management. But beware: bankers, asset managers and financial advisors also have their own interests and are by no means omniscient professionals. The cyclical distortions of asset prices resulting from the continuous inflation of our days can even distort the supposed experts' "professional" thinking. The inflationary trend also increases the existence of bad incentives. Quite a few professional asset managers are blind in one eye to asset price inflation because their commissions are driven by it.
At the same time, our zero interest rate environment is eroding asset managers' margins. Investors are also becoming more fee-sensitive due to falling yields and returns. Low-cost passive products such as indices and ETFs are therefore becoming comparatively more attractive, which is why an increasing proportion of the financial world is turning to these investment products. Active managers, on the other hand, are lagging behind, performance-wise. An above-average number of them have not managed to beat the markets in recent years in terms of cost. Here, too, the assumption is that it is not the players who have gotten worse in executing their profession, but the markets that have become more unpredictable due to monetary distortions. Ultimately, today's complexity means that an effective investment by asset managers is made using passive, inexpensive instruments without having to forego active management. The interventions of central banks and governments make active action and reaction indispensable.
Asset managers are a dime a dozen these days. The biggest differences between them lie in their respective investment philosophy, but when it comes to specific products, the differentiation is often not so great. Another point of differentiation is whether one is getting a helping hand from complex algorithms or rule-based structures. How successful asset managers really are can be seen in downward phases or even crises - it is the exact time when the wheat is separated from the chaff. The focus and goal of an investment advisor must be to minimize large losses in the markets. If financial markets tick up again, it is important to keep up with the market as best as possible. Rebalancing, i.e. returning assets to their original state only needs to be done where it makes sense. No back and forth, because in the end that just empties an investor's pockets.
As human beings, we all too often see the world through the glasses of emotions - whether we like it or not. However, as studies show, the performance of anything is significantly lowered and impaired if captured by emotions. In order to have the best possible countermeasures in place, one should therefore rely on rule-based investing to eliminate human emotions from the investment process as far as possible. What is needed are algorithms that evaluate as much relevant data as possible in the largest possible number as efficiently as possible. Since, in the end, never all relevant data can be considered and data is always backward-looking, even the best system in extraordinary scenarios requires a certain amount of human intuition. Successful investors have always used a combination of systematic and human intuition.
Albert Einstein once said: "The greatest invention of human thinking is compound interest. Even if men have invented neither interest nor compound interest, Einstein is right: The cumulative force of compound interest, where capital already saved by interest is reinvested at the valid interest rate, is exponential and therefore not comprehensible for human linear thinking. When it comes to investing money it is of crucial importance though. "Missed years" in financial markets at a young age can hardly be made up later. All the more important that one begins as early as possible with the investment of funds.