Accumulating Assets Through Funds

If you want to build up a fortune with funds, avoid these common mistakes.

Mistake 1: Lack of diversification

"Don't put all your eggs in one basket" is one of the best-known stock market principles. Indeed: if you put all your eggs in one basket, you increase your risk of loss. You should, therefore, check your portfolio positions: You have several funds and stocks in your portfolio - but they are all in similar sectors or come from the same index? By diversifying across different countries and economic sectors and also varying the type of fund (e.g. equity funds, bond funds, real estate funds), you can achieve a better risk-opportunity profile and reduce correlations. However, you should not overdo it with the diversification; it is easy to lose track if you have too many securities. It is recommended that you choose between eight to ten shares, with a maximum of 20 different ones, as an orientation. If your investment fund is already diversified, it is possible to reduce the number slightly.

Mistake 2: False actionism

Another popular saying is "too much trend-chasing leads to the poorhouse" which also contains some truth. Every trade is associated with transaction costs, which reduces the expected profits. Not only broker fees and spreads are to be paid; hectic portfolio rearrangement also has a behavioral component. Those who make hasty decisions tend to confuse luck with stock market knowledge - and overestimation of one's own capabilities is just as much a bad advisor as exaggerated trading activity in the investment sector. Even if the advice of stock exchange guru André Kostolany: "Buy shares, take sleeping pills and don't look at the papers anymore" is no longer effective in our fast-moving times, you should still find a healthy mixture of both. After all: ...

Mistake 3: Too much passivity

Caution: Too much passivity can also have a negative impact on the performance of your portfolio. If a loss phase lasts a long time or if the fund manager does a bad job, it is better to part with the securities. In principle, you should critically review your portfolio about once or twice a year: Do the securities still match individual targets, how has the market changed, have there been serious changes in living conditions or will liquidity be needed in the foreseeable future? Those who take this time and act consistently can prevent undesirable developments.

Mistake 4: Tunnel vision

Have you ever experienced this? You get a hot stock market tip and really everything seems to speak for it. Psychologists call this phenomenon selective perception. It is treacherous because you only perceive certain parts of reality. Referring to the insider tip, you would find yourself in a tunnel of positive reinforcement, negative aspects or warnings would be faded out. However, you can prevent such an uncritical attitude: Search purposefully for counterarguments, carefully evaluate them and then make your decision.

Mistake 5: Unnecessary costs

What many investors do not realize is: Investing is always associated with certain costs - be it custodial fees, the issue surcharges for investment funds, or trading costs. These costs diminish your return, especially if you set up your securities account with a classic bank. After all, financial institutions have to finance their branch network and the consulting services they provide, wherefore they demand good payment for their services. Much more favorable are online direct banks and it is still more inexpensive to "interpose" a fund broker such as FondsDISCOUNT.de. This way, one can permanently dispense with the usual industry surcharges when buying a fund, manage one's securities account free of charge, and enjoy other benefits such as flat fees on the stock exchange. The service is aimed at investors who want to set up a new portfolio or convert their existing portfolio to savings tariffs.

Mistake 6: Staying close to home

Home bias refers to the tendency of investors to prefer to invest in their home market. As a result, German investors' portfolios, for example, contain a disproportionate amount of DAX investments. This tendency has various causes, for instance, the information advantage. One is usually much better informed about the companies on the home market than about foreign markets. In addition, transaction costs may be higher when investing abroad, and there are also exchange rate risks. However, if you want to avoid mistake 1 - lack of diversification - it is essential to look beyond national borders.

About the Author

Thomas Soltau has been active in the fund industry since 2003 and knows the industry, especially the behavior of customers, better than anyone else. With this background, he began his career at FondsDISCOUNT.de in 2006 and was appointed CEO on 1 January 2014. Since then he and the Berlin team have been concentrating on the continued development of the company, maintaining intensive contacts with investment companies and issuing houses, and continuing to actively support customers.

The DISCOUNTER principle: "High quality at the best prices" is the motto of FondsDISCOUNT.de. The fund broker enables independent decision-makers to avoid the issue surcharge for more than 20,000 funds and also gives them discounted portfolio conditions with all partner banks. The service is permanently free of charge for customers.

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