What is a good return

With these investments you achieve a high return

Valeria Nickel, April 14th, 2021

No question about it: every saver wants to achieve an attractive return. Overnight money and fixed-term deposits, a savings plan or savings account cannot offer these due to the current low interest rates. Investors must therefore look for an alternative capital investment in order to make a profit. When investing, you have to make the difficult decision between return and risk. But why is returns so important and where do you currently have high-yield investment opportunities?

What does the term return mean?

The return is calculated in order to make various investments with one another to compare to be able to, each of which incurs different costs and profits. The return indicates the ratio of the payouts to the deposits. This can be used, for example, to calculate which interest rate is required to get the same payout result with several investments.

Return versus profit

The return is not to be confused with profit: Imagine lending someone € 1,000 as part of a loan project and getting € 1,100 back - that is € 100 more. As part of another loan project, you lend € 2,000 and receive € 2,200 back - € 200 more. Which of the two loan projects will you get the greater return on?

The "return" in the second deal seems higher at € 200. However, you are lending twice as much money as the first time. So when calculating the return, you need to take the profit based on the capital employed to calculate. 100 € are 10% based on 1,000 € capital investment. € 200 is also 10% based on € 2,000 capital investment. So both loan projects have the same return.

The important criterion investment period

Another factor that should not be disregarded when calculating the return is that Investment period. Imagine the example of loan projects again: You lend € 1,000 and receive € 1,100 back after six months. In another case, you will only get the same amount back after a whole year. If you compare the profit with the capital employed, you get 10% of the capital employed in both cases.

However, the period in which you give away the money varies. In the financial world, the standard period is one year - the famous "p.a." (Latin for “per annum”). In the first case, the return is 20% p.a., in the second case 10% p.a. It is always extrapolated to a year, even if the actual investment period is shorter, so that the returns of different investments are comparable.

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Phase of low interest rates: has Germans' saving behavior changed?

In principle, German savers have a reputation for not caring much about returns and instead relying on security. After all, that is Savings book in the bank, the epitome of mini interest, your most popular investment.

The persistently low interest rates have so far only had little effect on the safety-oriented savings behavior of Germans. According to Eurostat, the savings rate of private households in Germany even increased again in 2019: from 18.32% to 18.42%. The situation is completely different in the rest of Europe: According to Eurostat, the entire EU average (excluding Great Britain) was around 10% in 2018 and 2019.

Call interest no longer compensates for the inflation rate

The fact that Germans are not careless as investors are positive is positive - however, it is for investors to be satisfied with low or no returns disadvantageous. As an investor, you naturally need a lot of motivation to change your investment strategy and investment goal and to develop a higher risk affinity. In the current phase of low interest rates, however, this can only be worthwhile. The problem with low interest rates is that Inflation rate.

In recent months and years, the interest on an average overnight money account has always been below the inflation rate. The so-called real interest rate, which describes the relationship between inflation and overnight money, was consistently negative.

Development of the real interest rate (2017-2020)


* average overnight interest up to € 5,000


Sources: destatis.de and tagesgeldvergleich.net, as of January 2021

Due to positive inflation, money is constantly losing value - which is in measure good and right for a country's economic development. A saver who invests money in returns below the inflation line practically loses money because he or she can buy less of the money at the end of the investment period than at the beginning of the investment. It is therefore important for private investors to base their savings on the level of interest. At the moment they cannot avoid risky and speculative financial products in order to generate a decent return.

What are high return investments?

shares

The classic in investments with high potential returns are stocks of companies. According to the Bundesbank, they have been generating an average annual return of a good 8% since 1991 for a medium to long-term investment. So they are the ones Most profitable form of investment. In addition, shareholders receive an annual dividend. The other side of the coin is that high fluctuations in value on the stock exchange. Once a stock has suffered a major loss, it can take a long time for the investor to recover the money that was lost.

Equity funds, in which you can invest in different companies at the same time, offer one way of diversifying your own portfolio. Investing in a stock index fund or ETF (Exchange Traded Fund) is also becoming increasingly popular. These are listed funds that track a specific index such as the DAX, which ensures that the fund's performance always moves in parallel with the index.

Reverse Convertible Bonds

A lucrative one Alternative to stocks Reverse Convertible Bonds are for buyers of fixed-income securities or corporate bonds. A reverse convertible is a contract between an issuer (e.g. a bank) and investors, which on the one hand functions like a bond: the investor receives a fixed interest coupon over a clearly limited term and the issuer receives the capital provided by the investor.

The interest rates on reverse convertibles are higher than on classic corporate bonds, because there is one variable type of repayment. The issuer has a choice: Either he pays back the nominal value of the bond as a monetary amount on maturity or a certain, predetermined number of shares or their equivalent. Reverse convertible bonds are a combination of a high-yield bond and a bearer bond, the value of which is based on a share.

Of course, the issuer selects the one that is most favorable for him from the two possible final scenarios. If the price of a share rises, the investor only gets back the amount that he once made available as a bond; If the price of the share falls, the issuer delivers the number of shares specified in advance. In this case, the investor's return is reduced because the current market value of the shares is less than the nominal amount that he once invested in the bond. This means that the chance of profit for the investor is in contrast to the share in a reverse convertible bond capped at the top. That is the price for the interest rates, which are usually well above the market level. In the unlikely event of the company's insolvency, however, the situation is exactly the same as with a share: investors then have to accept a total loss.

Exotic investments: classic cars

If you like it even more unusual, you can also rely on exotic investments such as classic cars when looking for a good return. The most expensive car in the world is a vintage car: the Ferrari 250, built in 1957. In 2011 it changed hands for € 12 million. A constant increase in value is - with proper care of the car - likely.

The market is particularly large for oldtimers and classic cars. Real assets are also relatively independent of the global economic situation. The car investment is also less volatile than most stocks. According to the Dox classic car price index, classic cars in Germany have increased in value by an average of 6% since 1999.

But beware of “bargains”: Cars with a purchase price of less than € 100,000 usually have to be bought first expensive restored become. It usually makes more sense to spend more money directly on a fully restored classic car. In any case, you should consult an expert before you make a purchase decision.

A nice - and important - Side effect: Classic cars should be driven regularly so that the seals do not become porous and the moving parts do not rust. Here, enjoying your investment does not mean wear and tear, but value retention.

Equity crowdfunding

With the advent of FinTechs, crowdinvesting or crowdfunding is celebrating great success as an alternative investment option for the assets of private investors. In crowdinvesting, many investors join forces on an internet platform in order to be able to invest large amounts together. How to get there Threshold to the high-yielding asset classesthat were previously reserved for professional investors - with an acceptable risk.

Together with new providers of crowd investing, more and more credit platforms (crowdlending) are emerging on which private borrowers and lenders can find each other. As an investor, you can also use the mostly high-interest loans as a high-yield capital investment - however, particularly high risks are to be expected, since the creditworthiness of the borrower is difficult to assess.

Crowdinvesting volume in millions of euros

Crowdinvesting has been around for the past few years More and more popular and investors are constantly investing more capital in the young market. In the Corona crisis year 2020, there was a subtle decline in the annual investment volume compared to the record year 2019. However, initial estimates of the quarterly figures for 2021 again show a significant increase in volume. In the first quarter of 2021, the investment level of 2019 was reached again.



Annual crowdinvestment volume in Germany from 2011 to 2020, source: crowdinvest.de

Real estate crowd investing as a sensible alternative

Real estate crowdinvesting could be of interest to those who adapt their strategy to the phase of low interest rates and trust in the stable value of real estate. On the BERGFÜRST crodwinvesting platform, you benefit from several advantages of real estate crowd investing.

  • You can invest in real estate projects from as little as € 10 and without any fees
  • You can gradually build up a diversified portfolio and thus achieve a good spread of your risk. This means that you don't have to put everything on one card as you would when buying a property
  • During the term, you can sell your investment via the trading center, the secondary market on BERGFÜRST, and thus remain flexible

In summary, crowd investing is a very good alternative investment to stocks and reverse convertibles for self-determined investors who are willing to take a slightly higher risk. This is especially true in the current phase of low interest rates, in which the return on overnight money, fixed-term deposits and other savings is exceeded by inflation. Find out about current investment opportunities on BERGFÜRST.

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