Why do investment strategies fail

5 investment strategies in comparison: which one is right for you?

There are many ways to invest your money and build wealth:

You can invest actively or passively.

In individual stocks or in funds.

It works with real estate and without it.

Decide for yourself which path is the right one for you:

In this article I'll compare five popular investment strategies taking into account important aspects such as return, costs, time expenditure and risk with each other ...

Contents overview:

A quick note in advance: My considerations on investing do not represent pure teaching. The transitions between the strategies are sometimes fluid and the boundaries are therefore inevitably chosen arbitrarily.

Investment strategy 1: Active investing in individual stocks

Under this strategy I subsume all stock market investors who either ...

All variants are based on the belief that they can pick out promising stocks from the overall supply of the market and buy or sell them at favorable times.

The declared goal is Outperformance. So you want to do better than “the market”, in other words: the average of all investors.

Therefore, constant action must be taken.

To take profits from stocks that are doing well and to minimize losses from stocks that are not doing well.

Check-up: Active investing in individual stocks

features: Stock picking and market timing

Investment horizon: short to medium term (months to years)

costs: high - due to the transaction fees that arise from frequent trading

Expenditure of time: high - through necessary research and frequent action

Risk diversification: low - due to a lack of systematic diversification (the focus is on the price gains that individual securities promise)

Expected return: below average (taking into account the costs), even most professionals (fund managers) fail with this strategy in the long term.

rating: Due to the high expenditure of time with below-average expected returns, this strategy probably only makes sense for investors who simply like to deal with the stock market. And indulge in the idea that what matters most on the stock market is the ability of the investor.

Investment strategy 2: trading

Followers of the first-mentioned strategy usually delve into the securities they have selected. And they are not infrequently looking for a good "investment story".

For real traders, this aspect hardly matters.

You just look at bare numbers and diverse Trading signalsthat promise the prospect of successful "trades".

What a trader invests in tends to be sausage to him or her. The main thing is that it brings a lot of money. And that zz, so pretty quickly.

The goal is returns in at least the double-digit range, i.e. everything from a minimum of 20 percent upwards.

Per year of course.

The range of trading strategies extends from sophisticated, computerized trading systems to day trading with stocks, ETFs and derivatives to banal gambling with binary options.

Check-up: Trading

features: Stock picking and market timing, trading signals (based on chart analysis)

Investment horizon: extremely short (minutes to hours) to short (days, weeks, possibly a few months for trading systems)

costs: high - due to many trades and the associated transaction fees

Expenditure of time: high - because money can only be earned by being present at the computer (exchange of time for money); Exception: (partially) automated trading systems

Risk diversification: practically nonexistent due to the “everything on one card” principle; Exception: trading systems with long and short sides (both rising and falling prices are set)

Expected return: For most traders, the return they strive for will be short-term at best, but hardly in the long term

rating: For 99 percent of all private investors trading is Not the strategy of choice for long-term wealth accumulation. The above-average expected return is offset by a high risk of losses. A few mistakes can cost you a fortune and not just a profit.

Investment strategy 3: Passive investing in individual stocks

Of course, you can make money with stocks even without a speculative approach. Dividend strategists and other value investors fall into this category.

Supporters of the dividend strategy specifically select companies with a high dividend yield for their portfolio, which guarantees regular distributions (“cash flow”).

Value investors, on the other hand, are specifically looking for undervalued companies whose potential for price increases they rate as high based on fundamental analysis.

Check-up: Passive investing in individual stocks

features: Stock-picking and buy-and-hold

Investment horizon: long (years to decades)

costs: low

Expenditure of time: different - depending on the research intensity and the number of individual titles in the portfolio

Risk diversification: low to medium - depending on the portfolio size and any overweighting of sectors and regions

Expected return: Good long-term thanks to the buy-and-hold approach (the long-term average return on the stock market can serve as a point of reference - see strategy 4)

rating: Suitable for building up the wealth of private investors with compromises (time investment, limited diversification).

Investment strategy 4: Passive investing with index funds (ETFs)

The idea of ​​passive investing is based on investing in all stocks - the market as a whole - to invest and hold the securities for the long term.

Since you cannot practically invest in all stocks that are out there, you choose those companies that represent the market as well as possible. These stocks are included in stock market indices.

Investing in indices is in turn possible through the purchase of exchange-traded index funds (ETFs = Exchange Traded Funds).

Check-up: Passive investing with index funds (ETFs)

features: Buy-and-hold and diversification

Investment horizon: long (20+ years)

costs: low - the total expense ratio of ETFs averages only 0.4 percent p.a .; if a robo advisor or financial advisor is commissioned to manage the securities account, their costs are added

Expenditure of time: minimal (once the portfolio is set up)

Risk diversification: maximum (with a well-structured global portfolio)

Expected return: Corresponds to the long-term stock market return less costs and taxes (approx. 3-4 percent real return p.a. depending on the equity allocation in the portfolio appears realistic).

rating: From my point of view, passive investing with ETFs is the best, because it is the most rational, way to build up long-term assets without significant effort.
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Investment strategy 5: Investing in rental properties

Those who do not really know what to do with securities and who literally prefer "tangible" investments will find an alternative way of building up their assets with rental property.

The challenges that followers of this investment strategy face are significantly different from those of securities investments. Why, surely no less demanding.

Suitable properties have to be selected and evaluated and checked for profitability in a moderately transparent market under high competitive pressure from the large number of other potential buyers.

Check-up: investing in rental property

Investment horizon: long (10+ years)

costs: high - due to ancillary purchase costs of approx. 6-10 percent (in addition there are expenses for capital rent, i.e. interest)

Expenditure of time: initially high, later medium to low (depending on the extent to which the management of the property is delegated)

Risk diversification: few to hardly available (with only one or a few objects)

Expected return: depending on the rental yield (easily calculable) and the value development (hardly calculable) of the individual properties

rating: Due to high transaction costs and various organizational hurdles (purchase contract, loan approval, land register entry, etc.), real estate, unlike securities, cannot be bought and sold on the stock exchange as quickly as you want.

With that comes the Property selection is of crucial importance in the inefficient real estate market and gives the skill factor - in contrast to securities investments - greater weight.

For private investors who do not know what to do with securities, rental properties are a tried and tested way of building wealth. Provided that there is a willingness to deal intensively with the topic and to develop the necessary know-how.

Home ownership is not listed as an investment strategy at this point. Since it is not a pure investment, but at least in equal parts an item of consumption (which costs money and does not bring it).

Five investment strategies - the bottom line

Which investment strategy is the “right one”? My favorite is and will remain passive investing with index funds (ETFs).

For me, however, the decision is not a dogma. I am not denying that there are other ways to build wealth.

In contrast to the other strategies mentioned, however, index-oriented investing is based on financial knowledge, which simply suits me as a scientifically influenced person.

Of course, the scientific method is not the ultimate answer either, as it is like looking in the rear-view mirror:

Rules, patterns and relationships can be derived from the past. However, statements about the future should be treated with a degree of caution.

Despite all the empirical evidence - that is, facts that are gained from experience - in the end it always comes down to which investment strategy you choose believes.

Or want to believe. Because to believe means not to know.

And who knows what the future will bring?

There is a simple method with which you can make provisions for old age and build up a lot of wealth thanks to a return of 6-7% p.a.

  • without to spend significant time on it
  • without to take too big risks
  • without Getting addicted to the bank or a financial advisor
  • without To have to go into debt up to your ears for a property

Click here to read more.

Note: This article was first published in April 2016 and has been completely revised and updated since then.
Hello, I'm Holger Grethe, ETF investor and founder of Zendepot! Since 2013 I have been helping private investors to build up their wealth on their own in a time-saving way. You can find out more about me and this website here.