“There are two times in a man’s life when he should not speculate: when he can’t afford it and when he can.” Mark Twain
Berlin, November 2011: I am waiting for my appointment with Deutsche Bank Wealth Management in Berlin/Germany. Our company got recently acquired by Google and I got from one day to another more funds than I needed for my daily living. A friend of mine got me in touch with a wealth manager from Deutsche. I did not know how I should manage my funds so I wanted to get more insights on how I shall invest my new wealth. Long story short: the meeting ended with me having more questions than answers and I got a bad gut feeling based on their recommendations (in retrospect, I am grateful that I have listened to my gut – I will get to this later in the article).
Thanks to this meeting, I started to embark on a journey to educate myself on the best way to invest my (private) funds. I conducted interviews with my internet “godfathers” such as Michael Brehm & Stefan Glaenzer. I got a handful of really good book recommendations (e.g. The Intelligent Investor of Benjamin Graham or The University of Berkshire Hathaway) and started to actively invest based on some of these recommendations.
Disclaimer: This is NOT considered any investment recommendation nor do I suggest you to invest in the same manner. Please do your own homework and read The Intelligent Investor and other sources before you embark on your own investment journey 🙂
Below you can find a summary of my painful and sometimes costly lessons learned. I hope they can be useful to you and your (future) investments.
- Invest regularly. Even if it is a small amount.
A lot of people asked me what is the “minimum” amount they need to invest. The minimum amount is $1. Really. The mantra that you need min. $1MM to invest is complete bullsh*t. This is only needed for wealth manager so that you are “big” enough so they can make money with you. Apart from this you can start as little as with $10 on a regular/monthly basis. Obviously there are transaction fees involved so usually it is recommended to invest min. $50 so that your monthly transactions fees are as low as possible. I was writing about how to live like a millionaire without spending a million – look at rule number 1: spend less than you earn. What you spend less you should invest.
2. Put your investment as fixed cost in your budget. Not as ‘left-over’ at the end of the month.
Something that I never managed to do in my first years as entrepreneur is to save money. Why? Because I tried to save “what is left at the end of the month”. And surprisingly this was most of the time 0 (or even negative as I touched upon my savings). The only way how I started to save & accumulate wealth was by starting to put it as a fixed cost and reduce it from my monthly income in the beginning of the month. Even before paying my rent. Why? Because it is considered “untouchable”. Even more important: you adapt your lifestyle accordingly. Your spending behaviour is different if you know you have $3,000 or $2,000 per month. And I can say one thing for sure: you will not miss anything. In fact, you feel even better (& happier) by knowing that you can survive with less and – on TOP – saved money for your (private) investments.
3. Diversification: Asset Classes and Geographies
One of my good friends in Germany (Damian Doberstein) recommended me a really good blog article (unfortunately in german: Vermoegenserhalt hat Prioritaet) about investing: investing is not about wealth creation but about wealth preservation. Meaning, a lot of people (incl. myself in my early investing days) thought that investing is about making (a lot of) money. No, it is about beating inflation and having a small % as your ‘margin of safety’ or gain. It is not about making 20–30% (or 3x profit/loss at your cryptos). It is about a moderate return on your accumulated wealth.
So how can you do this: I started to create a matrix file which essentially looks like this
- Investment amount: this can start at $100 – $100MM. Your distribution will likely change the more funds you invest. But let’s keep it as $100,000 for simplicity reasons.
- Asset class: this is then split by non-liquid (real estate, private equity investments, fixed-term deposits) and liquid (bonds, ETFs, public equities/funds, cash, metals and crypto) assets. I (try) to keep a balance of 50:50 between liquid and non-liquid assets.
- Geographies: very important and mostly under-valued. Invest across geographies and currencies. This will help you to counter-balance the performance of one market (e.g. European market) vs a more volatile one (e.g. ASEAN markets). On top of the different geographies you will likely invest in the local currencies (so you are not impacted by 2 factors: value of your investment and the value (appreciation/depreciation) of the currency). So you will have a basked of EUR, U$, AUS, ¥, S$ investments.
- Create your personalised investment matrix: It can look something like this:
- Calculate the weighted expected return (based on the allocation above): In my case, the goal is to generate +4% on average per year. Yes, you read it correctly 4% not 40% and definitely not 400%. Yes, one asset class (e.g. Crypto) might grow by 30% (or hopefully by 400%) but as my relative asset allocation to crypto is very low (around 1%) I am not as much affected on swings. And as the saying goes: the higher the risk, the higher the reward. There is also the other side of the saying which is usually not mentioned that often: the higher the risk, the higher the potential loss. And I prefer to have a normal sleep and not worry (next to running a business) also about my private funds. I got enough challenges on my plate as entrepreneur 🙂
- Check/adapt it 1x a year: Yes, you also reading this correctly. I am checking once a year (usually around June) on my overall portfolio and then decide whether to invest/divest. I usually divest if one asset has grown too much in value (usually above 40%). Why? I prefer to have a 40% return than 0 or loss. So you learn to be more disciplined. Same with the loss. If the value drops by more than 20% I am starting to ask myself whether I want to stop the loss there or (if I truly believe in the asset class) sit it out until next year. This is usually the more difficult question. BUT, I only do this 1x a year at a fixed date. So I am not influenced (too) much by short term swings & thinking. My lawyer doesn’t believe that I check my crypto-investments only 1x a year. I am afraid, Dr. Leber – this is the case and this is why I generated positive returns over the last years.
Before you start to create your personalised matrix and invest in wealth preservation I would like to caution the following points (that I have under/overestimated);
- Value investing: There is a reason why Berkshire Hathaway is successful over a long period of time. I am a strong believer in value investing and did in fact my best investments by following their approach (see also The Intelligent Investor). But as I stopped having enough time to analyse stocks I moved to ETFs which are by far the best (and cost-wise most affordable) option in the market to participate at a certain market or composition of equities.
- Non-liquid assets: There is a reason why I consider certain assets non-liquid assets. Yes, you can make money over time. But it takes time. In my case, I bought a very good value-for-money apartment in the Philippines. The problem: I wanted to divest it +6 months ago and it is very, very difficult to find a buyer thanks to a certain political situation. I will definitely make money on the apartment but I will have to sit on it for a long(er) than expected time period. Do not underestimate if an asset class is liquid (=you can sell it today) or non-liquid (=it takes time to ‘liquidate’ it and it is mostly out of your control)
- Cost averaging: This is an approach highlighted several times by Warren Buffet. Long story short: you will not beat the market and will find ‘the perfect moment’ to invest. The best way to invest is regularly at a fixed interval with a fixed $$ amount so that you can benefit from up/downswings. Important point is to invest a fixed amount regularly. E.g. People who have seen my calendar know that I put 1x a quarter a fixed entry “Buy Gold/Silver” with the note 3:1. I invest a fixed $$ amount in a ratio 3:1 on a quarterly basis. By doing this I will make sure that I will ‘cost average’ my investments. Meaning, I buy more assets when the prices are low and less assets when the prices are high.
- Cash is king: I learned it the hard-way. In my mid-20’s I was on on ‘full-risk’ mode. I really didn’t care if I make or loose money: I wanted to go all-in with a Big Bang. This works as long as all external factors are working in your favour. In my case, it hit me really hard as I had technically a lot of assets (several apartments, equities in companies, paintings, etc) but I was allocating only 1% to cash. Yes, 1% of my wealth was allocated to cash as I didn’t deem it as an important asset class. Then: we had to re-invest in two of our portfolio companies. Heavily. Shit – I needed money for our companies but had just some cash for myself for the next couple of months. This was my “a-ha” moment and now I allocate up to 5% of my wealth to cash equivalents. As one of my business partners once told me: “Cash, though, is to a business as oxygen to an individual: never thought about when it is present, the only thing in mind when it is absent.”
These have been my lessons-learned in investing privately in different scenarios with a goal of wealth preservation. And looking at my recommended investments from Deutsche (most were Deutsche products with up to 5% asset-based fees) I am happy that I listened to my gut back then. At least now I am having a rational approach towards investing. Thanks to Deutsche 😉