Overview of Different Types of Capital Investments Such as Real Estate, Gold & Stock Investment

Types of Capital Investment Options from Property to Gold and Stocks

Even our grandparents saved their money first and foremost in the proverbial money sock and perhaps a little later in a savings account. Interest rates were low but it was a very safe investment. Meanwhile, interest rates, however, have dropped so low that everyone is aware that a savings account cannot really be a reasonable investment option. Other popular, safe deposits generate very low or no return on invested capital[1].

In the case of an Endowment Policy, it may even happen that you get paid less money at the end of the period than you actually deposited. Also, the restructuring of pension provision has resulted in the need for the various alternative investment options to be re-evaluated[2].

What is Capital Investment?

In simple terms capital is invested money in business or assets for generating income. Capital is broadly related to Wealth, Money and Income. Capital is part of one's wealth which being use for business purpose in expectation to more generate money.

In this article we want to give a brief overview of the individual capital investments from real estate to gold to stocks, which we would highlight in more detail in further articles.

property-and-gold

Types of Capital Investments

The different types of investments can be classified according to different criteria, which also partially overlap. One of these criteria is, the duration for example, which can significantly affect the liquidity of the investor. On the basis of this criterion, there are generally three types of investments:

  • Short-Term Investments that can be resolved in a short time and usually without loss
  • Medium-Term Investments with maturities between a few months and a few years
  • Long-Term Investments with maturities of more than 5 years

Based on this criterion,the choice of a financial investment is largely determined by how quickly the money invested must be available again. For instance, as an urgently needed improvement, this tends not to change until the fixed term deposit is paid six months later. In this case, you would need to obtain the money elsewhere, which often again eats up the return on your investment.

Another criterion for the classification of investments is the so-called security. Although there is no 100% safe investment (not even the money sock is protected against loss), the security of a financial investment is the main issue among many investors[3].

Always bear in mind that an investment of higher security is often associated with a lower rate of return on the invested capital. Generally speaking, we can identify five risk classes for financial investments:

  • Security-oriented: The probability of a loss is extremely low.
  • Conservative: The probability of a loss is very low.
  • Return-oriented: Probability of loss and returns are balanced.
  • Speculative: Higher returns through a greater default risk.
  • Highly Speculative: The risk of default is very high.

For a permanent asset management solution and securing your assets, it is important that you take advantage of the various capital investments and spread risk as well as return, as this promises in the long run to be the best investment.[4],[5]

In this article, however, we want to also give you insights into another type of classification of investments: The Collective and Non-Collective Capital Investment Schemes.

What is Collective Investment Scheme?

Collective Investment Scheme Definition: Collective Investment Schemeis an investment scheme where the total capital invested is raised from many different investors. Investors thus keep a certain amount of this total capital and they also receive a corresponding share of the profits earned from the investment of the total capital.

What is common to these investments is that the individual investor has no impact on how the total capital is invested precisely. This class of investments include, for example:

Collective investment funds includes:

  • Bond Funds & Pension Funds
  • Equity Funds
  • Hedge Funds
  • Private Equity Funds
collective-invest

Collective investments

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[6]. 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[7].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.[8],[9]

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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.[10],[11]

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 [5].

property-and-gold

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.

Equity Funds

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[3]. Only a small fraction of equity funds were able to "beat the market"; that is to achieve a greater return than the expected average[9].

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[12]. This shows impressively how ineffective the active management by the fund managers appears to be.

Hedge Funds

Hedge Funds (Funds of Hedge Funds (FoHF) as well as single hedge funds via certificate)[13]. FoHF is a fund that invests in various individual hedge funds in order to reduce the inherent high risk that most hedge funds have.

What is a Hedge Fund?

Hedge Fund is a pooled fund which is aggressively managed by fund manager using variety of investment strategies to get active return for their investors.

Classic Hedge Funds "hedge" investments which means that they secure the investment with an option or a short position.

Most single hedge funds can only be used by very wealthy private investors, as many have a minimum investment amount in the range of a quarter of a Million chf or more. The charges of hedge fund managers incurred are significantly higher than in traditional equity, bond or real estate funds.

Typically, hedge fund investments are not subject to strict national guidelines and are not openly sold to private investors. Thus, these capital investments can use all types of investment and also carry out short sales.

Most of the hedge funds companies also focus their entire capital to strictly limited areas, providing little or no diversification and consequently a high concentration of risk [14].

Although hedge funds are often advertised with the fact that by their higher risk they represent a financial investment with a higher return, the figures from about 10,000 hedge funds worldwide show that they often always achieve a lower return than comparable traditional equity funds or even Government bonds.[15]

Taking into account the high fees, so many investors have even suffered a significant loss with an investment in hedge funds.

Another disadvantage is that most top hedge funds operate with so-called lock-in periods in which the investor cannot withdraw his capital without a substantial loss. As a result, investors are generally less liquid than in other capital investments[14].

Private Equity Funds ( Leverage Buy-Outs, LBOs )

Usually, various investments are grouped together under the name "Private Equity Funds". However, because of this, only the LBOs (Leverage Buy-Outs) are actually interesting for private investors, only this form of corporate involvement will be discussed in this article. Just like hedge funds, LBOs are also portrayed as the most profitable collective investments which promise particularly high long-term returns.

What is a Private Equity Fund?

Private Equity Fund is a Collective Investment Scheme in which fund is raised from different private investors and this fund is managed by investment professionals of the Private Equity Company. Private Equity Manager uses this fund for making investment in different equities by making use of various investment strategies.

Private Equity Investors have the possibility to set aside capital through closed-end funds, ETF funds and corresponding certificates. This kind of investment aims to achieve a long-term profit through the better valuation of the shares purchased from companies that are not listed. The realization of the profits is also often associated with the breaking up of the company.[16],[17]

The average yields after deduction of the direct and indirect costs incurred ( eg. by loss of liquidity ) are mostly lower than generally perceived. Comparing this also with the average gains of the stock market ( public shareholdings ), then you quickly realize that private Equity investments generally make significantly lower profits ( e.g.4.7% compared to 5.3% for a term of 17 years, or -6.4% compared to 2.4% for a term of 5 years ) [18]

Conclusion On Collective Investments

Collective investments gather money from various local investors and then invest this on a large scale, more or less diversified in various assets. They enjoy great popularity in the German speaking countries and are usually sold by commission-based banks and financial advisors.

A large part of the collective investments is actively managed and usually achieves a significantly lower return than the overall market in the long run. Most fund managers do not stay long enough in office that one could obtain statistically verifiable figures on their overall performance.

The often advertised returns based on historical figures and usually provide no indication on future returns[7]. Also, the much discussed collective investments with a higher risk, such as hedge funds or private equity investments have not managed "to beat the market." [15],[18] Scientifically justified, passive investments can expect higher future returns.

Non-Collective Investment Scheme

The non-collective investments include all types of investments in which the investor himself makes his own independent investment decisions on the investment of his capital. These investments are associated generally with a higher risk and a significantly higher cost.

Nevertheless, higher profit can generally be generated with these higher risk investments, although this may be associated with a slightly higher risk. This risk should therefore be countered with a broad diversification.

The non-collective form of investment can also be useful to independent financial advisor who assist clients in making financial investment decisions. In Germany the form of non-collective investment schemes through coaches or honorary consultants is rather unusual.

This may be due to the fact that in Germany,annual regulatory cost of hundreds of thousands of chf or more are associated to a FINMA or BaFin registration as portfolio managers and Honorary Financial Advisors,because the lack of permission to implement the transactions in the customer name is not taken seriously and their service is not properly rewarded.

Studies also show that the customers of an honorary advisor often welcome the recommendations benevolently, but then, when it comes to implementing, they are not disciplined enough to maintain the planning.

In Germany, the minimum level of capital investment for many financial portfolio managers who can also implement the investment strategy on the customer account is often 500 000 chf or more. As a result, many German investors are forced to even implement investment strategies that have been designed by good honorary consultants on the relevant accounts.

Investment schemes, which are traded by investors themselves are usually below the performance of professional asset management companies by an average of 2%, because the private investors either do not stick to the strategies or they commit one of the 11 Biggest Mistakes While Making Investments.

The situation in Switzerland is quite different, where it is common that asset managers perform relevant investment transactions directly for the client and the client's account, ( i.e.perform financial portfolio management ). Since administrators directly performs the relevant trading activities themselves, there are fewer deviations from the investment strategy and hence a higher return.

In contrast to the collective investment, your money will always be invested in your own name in financial portfolio management. The term "segregated accounts" is common with this approach and this means that your capital is managed separately from the capital of other customers in a separate account under your name.

For collective investment schemes it may happen that your invested money falls into the bankruptcy estate and the issuer of the fund becomes insolvent. Depending on the contractual arrangements of the fund, it is also possible that the fund invested in other funds may be defaulted or other things which do not directly comply with your investment capital are undertaken.

For Non-Collective Investments risk of bankruptcy does not exist in general. In the segregated account in your name, you can see exactly all the values that are logged into your account. The following investments fall under this class of non-collective investment schemes:

  • Homes
  • Real estate
  • Independent capital market investments (stocks outside funds)

The real estate investment whether it is a condominium or the popular investment in nursing homes is seen as a special case of investment types. Investing in property such as homes or apartment blocks is often influenced by emotional factors.

In the case of Real Estate Investment,net return for private investors is often only between 1.5 and 2% (LINK), The risks of real estate investing are however largely hidden.The Property Investment (be it a flat for rent or an apartment block) is a musch focused financial investment.

To an extent, it is sufficient for a large employer in the city or surrounding area to cease to exist or relocate. There are also special risk of property damage in the form of unpredictable heavy rain or water damage caused by the forces of nature, which sometimes cannot be covered by insurance.

Real estate investors often too emotional about the real estate investment, which is only be perceived as offensive for an objective discussion on the investment decision.


This chart from the FRED database provides a overview about the most common investment options like the total stock market (measured by the Wilshire 5000 total market index invented by Warren Buffett, the Gold price and two real estate indexes). This chart is updated automatically and will show the most recent up to date data automatically.

Conclusion and Summary

In this article, we have brought you closer to the different criteria for the classification of financial and capital investments. In the next articles, we will dwell on specific forms of investments and describe their advantages and disadvantages more precisely. As a result,you would be optimally prepared to make your own informed decisions regarding your capital.

  1. http://www.focus.de/finanzen/banken/nullzinsen-bei-der-ezb-diese-geldanlage-lohnt-sich-trotzdem-noch_id_5350827.html
  2. http://www.handelsblatt.com/finanzen/vorsorge/versicherung/altersvorsorge-die-wichtigsten-aenderungen/7176520-2.html
  3. [3.1],[3.2]http://www.sueddeutsche.de/karriere/generation-d-was-existenzgruender-erfolgreich-macht-1.1407481-2
  4. Peter Albrecht, Raimond Maurer: Investment- und Risikomanagement. Schäffer-Poeschel Verlag Stuttgart, Stuttgart 2008, ISBN 978-3-7910-2827-9
  5. [5.1],[5.2]Meir Statman: How Many Stocks Make a Diversified Portfolio?. In: The Journal of Financial and Quantitative Analysis, Band 22, Nr. 3, 1987, S. 353–363, doi:10.2307/2330969
  6. http://www.focus.de/finanzen/banken/nullzinsen-bei-der-ezb-diese-geldanlage-lohnt-sich-trotzdem-noch_id_5350827.html
  7. [7.1],[7.2]http://www.welt.de/finanzen/immobilien/article144753087/Mit-Lebensversicherungen-wird-der-Hausbau-zur-Falle.html
  8. Standard & Poor’s Indices Versus Active Funds Scorecard (SPIVA) 2006/2010
  9. [9.1],[9.2]Christopher Phillips: „Debunking some misconceptions about indexing“, Dezember 2010, Vanguard Research
  10. BVI, Deutscher Fondverband, https://www.bvi.de/statistik/
  11. Gjergji Cici, Scott Gibson: „The Performance of Corporate-Bond Mutual Funds: Evidence Based on Security-Level Holdings“, 2010, AFA 2011 Denver Meeting Papers
  12. Standard & Poor’s: „The S&P Persistence Scorecard (SPIVA): Does Past Performance Really Matter?“, November 2010
  13. Investitionsgesetz (InvG vom 01.01.2004), Kapitel 4: „Sondervermögen mit zusätzlichen Risiken (Hedgefonds)“, Gesetzestext unter: http://www.gesetze-im-internet.de/kagb/
  14. 14.1,14.2Dieter G. Kaiser: „Hedgefonds, Entmystifizierung einer Anlagekategorie“, 2. Auflage, 2009, ISBN: 978-3-8349-1388-3
  15. [15.1],[15.2]HedgeFonds Research (HFR), Bundesbank, MSCI, Dimensional Fund Advisors
  16. Rico Baumann: „Leveraged Buyouts“, 2011, ISBN: 978-3-8349-6711-4
  17. Vassil Tcherveniachki: „Kapitalgesellschaften und Private Equity Fonds: Unternehmenskauf durch Leveraged Buyout“, 2007, ISBN: 978-3-5031-0351-5
  18. [18.1],[18.2]LPX, Dimensional Fund Advisors, MSCI

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