No fear of the stock market you have to recognize the risk

Saving no longer works in 2020 as it used to. Savings accounts, call money and time deposits offer hardly any interest. "If you want to save in the long term, you should familiarize yourself with the stock market," says economist Prof. Martin Weber.

For many savers, however, stock market transactions seem primarily risky. Is that right? And can you change that? In an interview with dpa-Themendienst, the expert gives tips for investors.

Why should you study the stock market?

Prof. Martin Weber: If you want to save a little, i.E. Transport today's money into the future, you have to invest your money. To do this, you can invest in different asset classes, such as real estate. Stocks are another asset class that has many advantages and for some people, disadvantages as well.

For example, the returns can be significantly higher than, say, overnight money. But also the risk of making losses.

Prof. Weber: More return is only possible with more risk. This is the deep insight of the financial industry, even if it sounds quite simple. As soon as someone says you can safely get a higher return, it's a scam. In this respect, the expected return on the stock market is of course much higher, with overnight money it is zero or even less – but you have to accept the risk for that.

Many find it difficult. Can you get used to risk?

Prof. Weber: I don't know if you can get used to the risk, but you first have to recognize it. For this, it is not necessary to see the stock market as an abstract, but it is best to look at a reasonably good product on the stock market. So not a single share, but a broadly diversified investment fund geared to long-term investment, or an ETF. There I can see how it has fluctuated in the past.

The fact that you might lose 30 percent in one year, but usually gain something again the next year. With the help of tools you can see how it worked out.

How to deal with this knowledge?

Prof. Weber: I have to decide whether I want to accept the fluctuations, and in what amount. For this, one has to make a risk-return trade-off for oneself. How much risk can I bear financially – and do I want to bear this risk, i.E. What is my attitude to risk?. This hardly changes in the course of the life. I can also say I don't want anything to do with risk, but then I shouldn't have any expectations of return either.

How can I make it easier for myself if I respect losses?

Prof. Weber: There are two questions: Do I want to save at all?? And the second: How do I then invest?? To the first part: We don't like to save if we have to spend the money out of our own pocket. From the profit area one is more willing to save something. So if grandma gives me 100 euros as a present. I should save 50 euros from this. There I still have 50 euros more.

Another example is to save what is left from your salary at the end of the month. Or, according to the safe-more-tomorrow plan of two American professors, one saves two percent from the next three percent salary increase and only gets paid one percent more. So I don't have to do without money, I just get less more. This way you can trick yourself.

The other question is how I invest to save. This can be approached rationally and see that you have a positive expected return in the stock market. In the U.S., it's been an average of six or seven percent a year for the past 190 years. Or one sees it more emotional. Also think about meta questions. I mean, if the rich only get richer and richer because they invest in shares and I'm not rich, then I'd have to think about copying the strategy. What is really possible today through ETF or broadly diversified funds.

What is the best way to start?

Prof. Weber: For example, you can save 100 euros every month in a broadly diversified investment. Then I notice the stock market goes up and down and on average I gain what. This is how I learn to live with uncertainty.

And that I don't have to do much. In studies, investors have been divided into people who buy and sell their stocks or other investments often and those who trade little. After costs, those who act little are much better off. For this there is the wonderful saying: back and forth, pockets empty.

Martin Weber is a senior professor at the Faculty of Business Administration at the University of Mannheim. Among other things, it researches how market participants make financial decisions.

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