Which fund to invest in Germany?

What is it about?In the last article, I told what are the basic principles of investing in stocks and why it is profitable to invest in funds. In this post, you will find out which fund is better for a beginner to invest in.

Exchange-traded funds are divided into active and passive. An active fund means that the fund manager decides when to buy which shares and when to sell which shares. Passive funds simply follow a certain stock index. A stock index is a predetermined basket of securities. The most famous stock index is the S&P 500. It reflects the total value of the five hundred largest companies traded on US stock exchanges. The most famous index in Germany is the DAX. It shows the capitalizations of the forty largest German joint-stock companies.

About 20% of all active funds outperformed their competing passive funds over a 10-year span, according to Morningstar analysis. In addition, active funds are usually very expensive to manage and will cost you about 2-3% of the invested amount per year. While passive funds cost only 0.2-0.3% per year. Therefore, I recommend starting with passive funds.

One of the most famous indexes in the world is MSCI World. It is ideal for beginner investors because this index includes more than 1,500 companies from 23 countries. Thus, MSCI World reflects the global economy well and allows you to diversify your risk. In addition, the index is time-tested, because it has existed since 1969 and shows an average annual return of about 7% per year. That is, by investing in MSCI World, you can count on a stable decent return with fairly low risks.

Once again, I want to draw your attention to the fact that investments are always a risk of losing some of the money. For example, in 2008, MSCI World lost 40% in a year, and in 1986, on the contrary, it grew by 43%. When investing for a short time, you may not be lucky and you will only lose some of the money. But even investments for 5 or even 10 years were not always profitable. If you had invested in MSCI World at the worst moment in the history of the index - before the dot-com crisis in 2000, then your portfolio would have shown a loss for 13 years. But even with this most unfortunate scenario, in 15 years your portfolio would grow by 50%. Therefore, consider an investment horizon of at least 15 years. In the next article I will tell how to choose a broker in Germany.