wealth management
wealth management
Podcast
30.3.2022
Wealthy people invest their money in order to increase and protect it. But how do they actually invest their money and what can we learn from this? A study by FINVIA and the Handelsblatt Research Institute provides detailed insights into how wealthy Germans invest their money. It is striking that the focus is still very much on bonds and other interest-bearing products - in fact, almost half of wealth (42.6 percent) is invested in real estate. Equities account for 24.6 percent. Potential, e.g. from alternative asset classes, often remains untapped. We have compiled the 6 most common but avoidable (!) mistakes made by wealthy investors for you.
300 people aged 18 and over with total assets of EUR 500,000 and at least one investment product were surveyed. As expected, the majority of study participants do not pursue an overarching strategy when allocating their wealth. This is partly due to the fact that investors often find it difficult to find a professional advisor whom they trust and who can support them in this. Added to this is the lack of transparency in the financial industry as perceived by investors, which became apparent in the study.
As a result, alternative asset classes have hardly been considered in portfolios to date - even though alternative or so-called illiquid asset classes such as private equity or private debt have promised satisfactory returns to date and will continue to do so in the future. However, these asset classes are difficult to evaluate without professional expertise from analysts and consultants.
Around 75 percent of wealthy investors still rely on fixed-interest securities. Similar to a loan, the term is fixed, as is the interest rate during the term. In times of zero interest rates, however, it is hardly possible to make any profits at all with safe securities. Instead, investors have to be prepared to compensate for the double burden of negative interest rates and high inflation. In this sense, bonds are useful as a safety cushion, but they do not make a prominent contribution to long-term wealth accumulation.
The share culture in Germany has proven to be risk-averse in the past. A lack of financial knowledge and fear of loss play a major role in this. With a view to a global equity portfolio, the potential risks of individual shares, sectors and countries are balanced out. With a broadly diversified equity portfolio based on ETFs, individual shares and actively managed funds, it is therefore possible to weather a crisis well. As the study reveals, interest in equities appears to be increasing, at least among the younger generation.
Alternative investments such as private equity, infrastructure or real estate can be a valuable addition to a portfolio. However, these are often less liquid and therefore more difficult to trade than other asset types. For this reason, institutional investors have been predominant in this area to date. Nevertheless, returns in this asset class are noticeably higher than for equities. Private equity in particular has achieved an average annual return of 13.5 percent in recent years, while the MSCI World share index only achieved 8.2 percent. Alternative investments will remain an important driver of returns in the future.
When butter prices rise, people consume less of it. When investing, it is often the other way around. So those who invest money pro-cyclically end up swimming with the crowd - and usually tend to panic sell when prices fluctuate. Although the investors surveyed stated that they tend to invest for the long term, they often make changes to their investment strategy at short intervals. The reason for this is that they often review their own investment strategy on a weekly basis, which unfortunately draws attention to daily fluctuations and casts doubt on the long-term strategy. Another mistake is the strong home market preference. This so-called home bias (preferred investments in one's own country) reduces the achievable return opportunity compared to a globally diversified portfolio.
Real estate - whether houses, apartments, private or commercial properties for own use or as a rental - is the most popular form of "concrete gold" among those surveyed. On the one hand, they offer an attractive return and also have a reputation as a secure and stable investment. Climate change is also having an increasing impact on assets in the real estate sector, for example in the form of premature loss of value or even by causing additional costs. In addition, a higher proportion of equity will be required in future, which can be generated through risk-bearing investments, for example. Building society savings contracts or life insurance policies are unlikely to play a significant role (any longer), particularly due to the persistently low interest rate environment.
As wealth grows, external expertise from asset managers or family offices is increasingly being used. Nevertheless, it is clear that 63% of wealthy investors do not seek assistance with their investment strategy. This is largely due to a lack of trust in independent investment advice. However, investors often underestimate the risks associated with fixed-interest securities such as government bonds in highly indebted countries. This results in unrealistic expectations of their potential returns.
The results of the study underline the fact that the wealth management of Germans - especially when it comes to advice - tends to be less professional. The focus tends to be on long-term wealth preservation, which results in a below-average equity allocation and an above-average number of real estate investments. The fact that investors are focused on security when investing is also reflected in a strong home bias. At the same time, alternative forms of investment hardly play a role despite attractive returns.
We see a clear need for action in asset management. A portfolio spread across a wide range of asset classes and regions, for example, requires long-term guidelines based on the investor's individual objectives. This is where strategic asset allocation (SAA) comes into play, in which asset owners provide answers to questions about, for example, return targets, risk appetite or asset classes to be invested in. Dynamic management of wealth, which allows a rational response to changes on the capital market, also pays off in terms of return opportunities in the long term. Overall, external support is therefore likely to be beneficial for many investors.
Note: In the summary of the study conducted by FINVIA and the Handelsblatt Research Institute you will find an analysis of the most important findings.
wealth management
30.3.2022
Florian Reichenbach
Wealthy Germans continue to be risk-averse when it comes to alternative forms of investment - despite attractive returns. Family Officer Florian Reichenbach sees a clear need for action when it comes to investing. He explains here which mistakes can be avoided.
Wealthy people invest their money in order to increase and protect it. But how do they actually invest their money and what can we learn from this? A study by FINVIA and the Handelsblatt Research Institute provides detailed insights into how wealthy Germans invest their money. It is striking that the focus is still very much on bonds and other interest-bearing products - in fact, almost half of wealth (42.6 percent) is invested in real estate. Equities account for 24.6 percent. Potential, e.g. from alternative asset classes, often remains untapped. We have compiled the 6 most common but avoidable (!) mistakes made by wealthy investors for you.
300 people aged 18 and over with total assets of EUR 500,000 and at least one investment product were surveyed. As expected, the majority of study participants do not pursue an overarching strategy when allocating their wealth. This is partly due to the fact that investors often find it difficult to find a professional advisor whom they trust and who can support them in this. Added to this is the lack of transparency in the financial industry as perceived by investors, which became apparent in the study.
As a result, alternative asset classes have hardly been considered in portfolios to date - even though alternative or so-called illiquid asset classes such as private equity or private debt have promised satisfactory returns to date and will continue to do so in the future. However, these asset classes are difficult to evaluate without professional expertise from analysts and consultants.
Around 75 percent of wealthy investors still rely on fixed-interest securities. Similar to a loan, the term is fixed, as is the interest rate during the term. In times of zero interest rates, however, it is hardly possible to make any profits at all with safe securities. Instead, investors have to be prepared to compensate for the double burden of negative interest rates and high inflation. In this sense, bonds are useful as a safety cushion, but they do not make a prominent contribution to long-term wealth accumulation.
The share culture in Germany has proven to be risk-averse in the past. A lack of financial knowledge and fear of loss play a major role in this. With a view to a global equity portfolio, the potential risks of individual shares, sectors and countries are balanced out. With a broadly diversified equity portfolio based on ETFs, individual shares and actively managed funds, it is therefore possible to weather a crisis well. As the study reveals, interest in equities appears to be increasing, at least among the younger generation.
Alternative investments such as private equity, infrastructure or real estate can be a valuable addition to a portfolio. However, these are often less liquid and therefore more difficult to trade than other asset types. For this reason, institutional investors have been predominant in this area to date. Nevertheless, returns in this asset class are noticeably higher than for equities. Private equity in particular has achieved an average annual return of 13.5 percent in recent years, while the MSCI World share index only achieved 8.2 percent. Alternative investments will remain an important driver of returns in the future.
When butter prices rise, people consume less of it. When investing, it is often the other way around. So those who invest money pro-cyclically end up swimming with the crowd - and usually tend to panic sell when prices fluctuate. Although the investors surveyed stated that they tend to invest for the long term, they often make changes to their investment strategy at short intervals. The reason for this is that they often review their own investment strategy on a weekly basis, which unfortunately draws attention to daily fluctuations and casts doubt on the long-term strategy. Another mistake is the strong home market preference. This so-called home bias (preferred investments in one's own country) reduces the achievable return opportunity compared to a globally diversified portfolio.
Real estate - whether houses, apartments, private or commercial properties for own use or as a rental - is the most popular form of "concrete gold" among those surveyed. On the one hand, they offer an attractive return and also have a reputation as a secure and stable investment. Climate change is also having an increasing impact on assets in the real estate sector, for example in the form of premature loss of value or even by causing additional costs. In addition, a higher proportion of equity will be required in future, which can be generated through risk-bearing investments, for example. Building society savings contracts or life insurance policies are unlikely to play a significant role (any longer), particularly due to the persistently low interest rate environment.
As wealth grows, external expertise from asset managers or family offices is increasingly being used. Nevertheless, it is clear that 63% of wealthy investors do not seek assistance with their investment strategy. This is largely due to a lack of trust in independent investment advice. However, investors often underestimate the risks associated with fixed-interest securities such as government bonds in highly indebted countries. This results in unrealistic expectations of their potential returns.
The results of the study underline the fact that the wealth management of Germans - especially when it comes to advice - tends to be less professional. The focus tends to be on long-term wealth preservation, which results in a below-average equity allocation and an above-average number of real estate investments. The fact that investors are focused on security when investing is also reflected in a strong home bias. At the same time, alternative forms of investment hardly play a role despite attractive returns.
We see a clear need for action in asset management. A portfolio spread across a wide range of asset classes and regions, for example, requires long-term guidelines based on the investor's individual objectives. This is where strategic asset allocation (SAA) comes into play, in which asset owners provide answers to questions about, for example, return targets, risk appetite or asset classes to be invested in. Dynamic management of wealth, which allows a rational response to changes on the capital market, also pays off in terms of return opportunities in the long term. Overall, external support is therefore likely to be beneficial for many investors.
Note: In the summary of the study conducted by FINVIA and the Handelsblatt Research Institute you will find an analysis of the most important findings.
About the author
Florian Reichenbach
Florian Reichenbach is a Family Officer at FINVIA and the first point of contact for our prospective clients as well as being responsible for the holistic management of our mandates.
After training as a banker at Sparkasse Freiburg and a stint at Commerzbank in London, Mr. Reichenbach studied economics in Freiburg and Australia. Before joining FINVIA, Mr. Reichenbach worked for more than six years in various roles for the digital asset manager LIQID in Berlin, most recently with a focus on managing complex mandates in the context of wealth management and alternative asset classes.
