An Ingeniously Simple Strategy for Wealth Accumulation

Behavioral finance research agrees that hours of stock analysis, questions about the optimal market entry, and daily monitoring of portfolio performance are completely unnecessary for private investors. Instead, research shows it is more important to be aware of one’s own investment horizon and personal risk tolerance in order to find one’s optimal investment strategy. In their recently published guidebook, “Die genial einfache Vermögensstrategie”, the authors Heiko Jacobs, Christine Laudenbach, Sebastian Müller, Philipp Schreiber, and Martin Weber show how financial independence can be achieved in an ingeniously simple way.

The topics of saving and investing money are of great concern to many people. For private investors, however, hours of stock analysis, questions about the optimal market entry and daily monitoring of portfolio performance are completely unnecessary. In an easy to understand matter, Martin Weber, one of the most influential economists in Germany, and his co-authors, including Prof. Dr. Sebastian Müller, Professor of Finance at the TUM Campus Heilbronn, show, how a financially worry-free life becomes possible. Based on latest research findings, an easily implementable wealth strategy for all situations in life – regardless of whether you are at the beginning or end of working life – is suggested. Apart from explaining the way to a retirement free from financial worries, the authors also point out various possibilities of how suitable dissaving plans could be structured in old age.

The right investment strategy for every life situation and every risk type is easy to find, if a few simple to implement principles are heeded. The authors know what is important and what can be confidently neglected. It is, for example, much more important to become aware of your own risk tolerance than to think about ways of how to beat the market. “If there is one thing that researchers learned from the study of financial markets, it is the fact that higher returns are associated with higher risk. As we witnessed over the past two decades with the burst of the dot.com bubble in 2000 and 2001, the financial crisis in 2008 and 2009, and now the Corona crisis, this risk can materialize quite regularly. To remain calm in such situations, it is imperative for an investor to understand, how much risk he or she can bear and how much risk he or she is willing to bear without having sleepless nights. For instance, a strategy to invest 100% of your wealth into risky assets like stocks is likely not a suitable advice for most investors”, says Prof. Müller. What does this ingeniously simple strategy therefore look like? Prof. Müller explains: “Without going into the details – for that matter you should consult the book – a sound investment strategy is surprisingly simple and should be based on three principles: First, broad diversification across asset classes and regions. Second, selection of low-cost investment vehicles like index funds or exchange-traded funds. That is because after all costs are certain, while returns are not. Third, simplicity, which means that a strategy should be chosen that is easy to implement and monitor over time.”

Prof. Dr. Sebastian Müller, Professor of Finance at the TUM Campus Heilbronn

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