Money can be invested in many different ways. However, the long-lasting low interest period has led to limited worth in a variety of investments, because they offer a low rate of return. For most investors in German speaking countries, at the mention of capital investments, what comes to their minds are the so-called "safe investments", because they offer the lowest possible risk, the best course they would want to take.
However, analysis have shown that you do not only run the risk of not getting the most out of your invested money, but that you may often end up losing money over the years.Here, we will explain to you the so called collective investments, which enjoy a particularly great popularity, and we will point out the problems associated with them.
Collective Capital Investments include all type of investments in which several investors collectively raise money, which is then combined to form a total capital. Thus, the individual investor owns a certain proportion of the total capital, which gives him a right to the corresponding dividend.
In Collective Investments actual decisions on the investment of the total capital, is however not taken by the investors themselves, but by a third party, such as the fund manager. Classic examples of collective capital investments are all types of funds, such as bond, property or equity funds.
In contrast to this, in Non-Collective Investments, the investment decisions are made by the investors themselves.These include for example all direct capital investments with investments in commodities (gold, silver, copper, coffee, etc.), shares, private firms, real estate purchases, homes, etc.
We will present several examples of these collective investments and show you "Why these are not often optimal investment options".
Bond Funds & Pension Funds
Immediately after the savings account that still don’t often offer paid interest, follows the bond funds on the popularity scale of investments in the German-speaking world. They also offer a high level of security, but very low yields as well, because the underlying capital investments also yield small returns.
Somehow bond funds and pension funds are related because in most of the countries the government forces the pension funds to have high shares of bonds in their portfolio. This is due to the old wisdom that at least government bonds do not lose value. But it brings problems to pension funds because nowadays bonds with negative interest lose money in the pension funds. The pension funds have to re-invent their investments and this will be a big task because the pension funds would have to work with the government to change the pension funds laws.
Bond funds are repeatedly described in the relevant print media, online and television as the ideal investment for private investors who wish to mind their money as little as possible. Unfortunately, these investments are usually sold by commission-based banks/financial advisors or insurance brokers.
Thus the investors have the advantage of not having to pay anything for the advice, but cannot be sure if the best investment or the product sold to them with the highest commission.
In a pension fund, each investor pays a sum of money in order to participate in the total capital of the fund. The fund manager then decides where to invest money to get good returns and exactly how this total capital is invested.
While the Fund Manager typically makes all active investment decisions in order to get best return on investment which means he hopes to achieve an above-average return with this investment and thus "to beat" the market in the long term.
The downside, however is that the underlying investments of the pension funds have little intrinsic yield or ROI (return of investment) and thus it is very difficult to generate above-average profits.
Looking at the development of largest pension funds in recent decades it quickly becomes clear that this average only generates a very low yield.,
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The assessment of the overall pension funds performance is very difficult, because many of the fund managers take care of individual pension funds only for a relatively short time, but the general picture is still shockingly clear.
The profit that the entire market was able to generate in the reference period fell significantly higher in the majority of cases.,
When we consider the some of the best performing pension funds which have earned a higher return than the market, it raises the question of whether one can generalize this for their future development, it still shows a similar bad picture.
Almost no pension fund was able to achieve higher return on investment than the average return in a period, this creates a second, equally long period. On average, the yield for the funds was 0.5 to 1 percent for the medium-term Government bonds .
The graph shows the proportion of Government Bonds with a Negative Yield on March 2015, on average, 60% of all global Government bonds already have a negative return ( weighted by value ).
The future performance of government investment bonds should be assessed, because the value of a Government Bond is related to the interest rate of newly issued Government Bonds.
For example: You have a Government bond with a value of chf 100 000 and an interest rate of 5%. Newly issued Government bonds of the same class currently have an interest rate of 0.5%.
The interest value of your old Government bonds with 5% is ten times higher than the value of comparable Government bond with 0.5%. The theoretical interest value of the old Government bond is 1 million chf and if you sell the government bond you get well over chf 100 000 in the market.
This context is precisely the reason why the pension and bond funds had no major problems so far, because in markets with falling interest rates, the market value of the long-term Government bonds often rise.
In times of rising interest rates, this effect will exactly reversed and the abundance of low-interest Government bonds, holdings in pensions and bond funds will fall in price. While it is possible that the interest rates on Government bonds will continue to fall over the years, the problems of the Fund will however only emerge when interest rates rise and worsen the currently already poor returns.
You must know "What is Equity?" and "What is an EquityFund?" before you proceed with any type of collective investment scheme.
Equity can be defined as value of the shares issued by a company.Equity Funds or Stock Funds are the funds in which entire capital is invested in stocks, it has the same basic requirements as Pension Funds but here money is invested in stocks instead of Government bonds.
Depending on the type of fund, the types of stocks in which the fund invests are restricted differently (there are for example pure Asian equity funds that invest only in Asian shares).
Thus, although the investors can influence the decision for the investment of a particular equity fund to a certain extent, however for equity funds the fund manager is the real "master of the money". Fund Manager has deep knowledge of how to invest in the stock market and what stocks to invest in.
Many studies have been carried out on equity funds in the last decade, these studies looked into the question of how an investment pays off in an equity fund. When you consider that only equity investment enjoys great popularity in the German speaking countries, it is amazing how little the results are communicated to the public.
One reason is the strong lobby of the dependent financial advisors for financial investments, living off the generous commissions of equity funds. The result is that these investments are still frequently and easily sold.
On the other hand there is the general perception of the population that stock funds offer by their diversification, a particularly good relationship between risk and return and that one also can achieve a reasonable diversified investments with smaller sums.
Equity funds are generally considered as actively controlled capital investments "Active investment". Compared to the pension funds, equity funds and their fund managers have the advantage that stocks exhibit higher volatility than Government bonds and can have a positive effect from a possible faster information advantage.
However, considering the actual returns of some equity funds over long periods ( > 5 years ), it quickly becomes clear that the active management of the investment only offers little or no advantage at all. Only a small fraction of equity funds were able to "beat the market"; that is to achieve a greater return than the expected average.
The cost of active management may have contributed to, in addition to the official 1-2% "total expense" many costs such as commissions, milestone payments, issuing premium and trading costs (in accordance with legal requirements) are not included in the total cost.
Also in this case, some studies have however tried to explain whether above-average returns can be transferred to the future. So they are investigating the question of whether the success of an active fund management in the past can be reflected in the performance of the following years.
The accurate assessment of such issues is of course difficult, as it is extremely rare for the fund manager to take care of the fund for long periods. Of the funds which achieved an above-average return in the first year (the best 25%),only half were above the average in the following year.
After two years, there were not up to 2% and after four years, none of these top funds could be found in the top quality of returns. This shows impressively how ineffective the active management by the fund managers appears to be.