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ETF Pope Gerd Kommer: "Shares are the best investment on the planet"
Despite interest rates close to zero, Germans are betting on their savings account. Investment expert Gerd Kommer has a solution ready: index funds, also known as ETFs - "the simplest financial product in the world".
The interest on savings accounts or overnight money has been close to zero for years. Because of the rise in prices, known as inflation, savers even lose money in the long term if they leave their assets in the savings account.
The solution for many savers: index funds, also known as ETFs. These replicate an index like the Dax - so investors invest in all stocks that are listed in the index. The perfect method to invest your money - at least thinks Gerd Kommer.
The business economist has written several bestsellers on the subject of "Investing with ETFs" and knows the advantages of this asset class. He spoke to t-online about index funds and explained why one should invest even shortly before retirement.
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Mr. Kommer, the low interest rates will be with us for a long time. What can savers do?
Invest! They can invest the part of the assets that they do not need in the short term in a broadly diversified manner in stocks. Stocks are the best investment there is on the planet. They are more profitable than real estate, more profitable than gold, more profitable than packaged financial products such as life insurance. So if you don't have to touch your money for at least five, or even better ten years, because you have enough income or reserves, you should definitely build up your wealth and make provision for your retirement with globally diversified shares.
Now you haven't even used your three favorite letters: E, T, and F. How do you explain what an ETF is to someone who has never heard of it?
ETF is the abbreviation for Exchange Traded Funds, in German: exchange-traded fund or index fund. That sounds very technical, but it's basically the simplest financial product in the world. A fund collects the money from many individual savers and invests it, for example, in the stock market.
Just like a classic investment fund like the one offered by every bank.
Yes, but with one crucial difference: unlike conventional investment funds, there is no fund manager with ETFs trying to implement a complicated investment strategy.
An ETF invests the investor's money via computer control exactly as a certain securities index, for example a stock index, specifies. The best-known share index in Germany is the Dax. A Dax ETF thus replicates the composition of the Dax one-to-one and thus always generates the same return as the 30 German companies that are listed in the Dax. And the best thing about it: an ETF is very cheap, the fees are much lower than for a classic equity fund - because there is no manager who wants to see expensive money for his work.
If an ETF develops one-to-one like the index, that also means that it automatically participates in all price losses. Am I not doing better when a fund manager can take countermeasures?
To do this, the fund manager would have to be able to reliably produce a return that is above that of the market. But we know from 60 years of research that fund managers only produce the market return on average before costs - just like an ETF. The problem with this is that for a normal equity fund you have to deduct around 1.5 percent per year as a cost from the income generated. A comparable ETF will often only cost you 0.1 or 0.2 percent a year. In addition, a traditional "actively managed" mutual fund also has a higher one-time purchase cost than an ETF. This is why the effective "net return" of an ETF is higher in the end, i.e. the return that the investor receives in the wallet. Due to the compound interest effect, you can use ETFs over 20, 30 or 40 years to build up a final asset that is up to 50 percent higher than that of a comparable classic fund.
If ETFs are so much better, why doesn't my Sparkasse recommend one to me?
Because savings banks or other banks earn little or nothing from ETFs. In 19 out of 20 cases, an in-house, actively managed fund is recommended to you or a fund from another institution, which the bank pays with a commission for this sales service. As a result, the Sparkasse earns five to ten times as much with traditional investment funds as with passive ETFs.
The "ETF Pope"
Gerd Kommer is the founder and head of asset management based on index funds. Before that, he worked in investment banking for years. Kommer has written several financial guides, including the bestseller "Sovereign Investing with Index Funds and ETFs". Kommer, who studied business administration, tax law and political science, is also known in the media as the "ETF Pope".
ETF opponents warn that so-called "systemic" risks lie dormant in the product: If everyone only invests passively, the market collapses. What is the truth of the warning of the downfall of the global economy by ETFs?
For the most part, this is nonsense. The criticism comes almost exclusively from people who earn their money with actively managed funds. If you instead look at sources that do not have a major conflict of interest, such as statements from scientists or authorities such as the Bundesbank or BaFin, the result is always: There is no cause for concern due to the increasing market share of ETFs. Certainly, these institutions do not say that there are, in principle, no risks or that there could be no risks. But if you take your car to the TÜV and it passes the test, the TÜV doesn't guarantee that there will never be any problems.
So you say that everyone can use ETFs with a clear conscience.
Yes absolutely. ETFs are indeed an investment for the people, for each of us.
What would I have to do at a young age to do everything right for retirement provision?
It's very simple: if someone at the age of 20 or 25 has some money to spare, they should set up an ETF savings plan, save a little monthly - and stubbornly rely on autopilot. He can then increase the monthly savings amount over time. Here, direct bank accounts on the Internet are particularly suitable. There, the depots are significantly cheaper than at the savings bank or bank. Then you have to save and wait: you can't really go wrong for 20, 30, 40 or 50 years.
Because you can just sit out crises?
Exactly! With a broadly diversified ETF that tracks the MSCI World share index, for example, you invest in the entire global economy. As long as there are people in the world, stock prices will rise for the very long term. You can also see that in the Corona crisis. The losses that occurred in the first half of 2020 have now been made up for those who invested in broadly diversified equity ETFs and simply did "nothing". For more than ten years, Corona is no longer relevant for stocks.
Not even with someone who is about to retire?
Yes and no. There is often a mistake in reasoning here. Because the money does not have to be "already saved" with the pension and is then used up immediately. Assuming that you have saved up to 100,000 euros before you retire: You won't be bogging down this money on the first day of your retirement. Even if the person withdraws money from the deposit every year after retirement, the "investing" will continue for years. It can take 10 or 30 years for the depot to be used up completely. Sometimes much longer if only a little is taken and the deposit is inherited. Ultimately, it can be said that even with 60-year-olds, the remaining investment horizon is usually well over ten years.
So does age make no difference at all?
People who are about to retire should invest much more conservatively than young people. The rule of thumb is: The equity quota for your own investment should be 100 minus the current age. For a 60-year-old that would mean 100 minus 40 = 40 percent equity quota, provided you can handle it mentally. That means: add a security aspect to your broadly diversified ETF in your portfolio, for example government bonds, or put part of your assets in the overnight money account. In the calculation example this is the remaining 60 percent."ETFs are indeed an investment for the people, for each of us," said Kommer. (Source: private)
How do I tell a good ETF apart from a bad one?
First of all, you can't really go wrong with any ETF as long as it tracks a "broad", well-diversified index. Of course: There are a lot of ETFs in Germany, more than 1,700. But: These ETFs are very strictly regulated. Even if you don't understand too much, you probably won't have any problems with ETFs, or at least less than with any other financial product.
But there are differences between ETFs that I should be aware of when buying, right?
Naturally. An important difference is whether an ETF distributes income or is accumulating.
That might sound complicated to many people.
It is not at all. A distributing ETF transfers the current income it generates - dividends in the case of equity ETFs - directly to your account. An accumulating ETF reinvestments immediately. I am a great friend of the latter. It is precisely because they reinvest the income that accumulating ETFs are better suited for retirement provision - especially for those with a long investment horizon.
Because they protect investors from simply squandering the money they receive right away. In addition, even if you were to invest the money you distributed in a disciplined manner, you would have to pay for it every time. With an accumulating ETF you save these "transaction costs". You also have a small tax advantage over distributing ETFs.
The topic of sustainability is also becoming increasingly important to many investors. Is a green ETF worth it?
If you really want to change something for the better in this world, I think there are better ways than investing sustainably. Because you only rarely buy the sustainable security directly after it has been issued. Usually you buy it from another trading participant. This means that no new money comes into the market, which means that the influence on business decisions is minimal. In my opinion, it is much more efficient to set sustainable accents through your own consumption - for example, when you opt for an electric car instead of a diesel one or when I donate for charitable purposes.
Suppose it is still important to me to invest my money sustainably. Do I have to accept a lower return for this?
In the past ten years, investing according to sustainability criteria has not suffered any disadvantages in terms of returns. Depending on the study, sustainable investments even achieved slightly better returns than the conventional stock market. But statistics can lie. Because the shares of high-tech companies - such as Google, Facebook or Amazon - usually appear in green ETFs - with a comparatively high proportion. This stock segment in particular has risen sharply in recent years and thus in a certain way distorts the return statistics.
So better hands off?
I wouldn't say that across the board. Ultimately, everyone has to decide for themselves. It is gratifying that we now have a good selection of sustainable ETFs. It was different a year or two ago. But I claim: In the very long term, sustainable investments will return a little less - even if it was different in the past ten years. But if you want to be charitable and socially active, you should be prepared in principle to make sacrifices.
If you hear that, ETFs seem like the perfect investment for investing money over the long term. So why doesn't everyone in Germany already have shares in an ETF?
It is a very human quality to say that "now" is not the right time. Shall we build a house now? Shall we have a child now? Very often we and many of us hesitate forever, or at least until it is too late. This is particularly bad when it comes to investing. We always find any reasons here, be it Corona, be it the US presidential election, be it the allegedly overvalued market, be it risk X or Y or be it our lack of knowledge.
How do I finally get started?
Just try it out with 500 euros or with a monthly savings plan of 50 euros! Your existence does not depend on it - but you can gain a lot, namely entry into the most profitable long-term investment of all. Instead of just starting out, people see incredible complexities in stocks. With residential real estate, people go on adventures, build a house, take out a loan three or five times their annual income, all without a clue or experience - and with stocks they don't even invest a few euros a month . My appeal is therefore: Dare to use stocks and ETFs!
Thank you for talking to us, Mr. Kommer.
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