Why are you not carrying cash
Overnight money, stocks, Bitcoin, gold: how safe is your money?
We spend less money in Corona times. Conversely, more of it ends up in our accounts. Maybe you put a few euros in a call money account or you followed the trend and bought stocks, ETFs - or Bitcoin.
Perhaps you have taken out mortgage lending and financed a house or apartment because of the persistently low interest rates? Or as a “safe haven” in the crisis, some gold has been in the safe for a long time.
For all of these forms of investment, we ask the question: How safe are they actually? So what happens to your credit balance or shares, for example, if the bank with which you have your account or securities account gets into payment difficulties? When can you lose it all?
In the article we present the risks and regulations for the various financial investments - so that you can decide on one or the other well-informed.
What are the risks of investing?
We have to distinguish between three risks. There's the risk that
- Your balance per se fluctuates in value and may become worthless (risk of the asset class),
- the body that keeps your money for you (bank, depository provider) gets into financial difficulties or
- the publisher of your investment (issuer, i.e. the stock corporation or fund company) goes bankrupt.
Let's go through the individual forms of investment.
- Savings on bank accounts
- Stocks, equity funds and ETFs
1. Savings in bank accounts
Regardless of whether Savings book, current account, overnight money or fixed-term deposit: These deposits are considered to be the classic "safe investments". They don't fluctuate in value, sometimes you can even earn a few euros in interest. If you are lucky, this will make up for the so-called inflation a little. That is the moderate price increase wanted by the central bank over time.
As assets become more expensive, companies have an incentive to offer goods and services and to develop them further, so the idea. For the euro area, the European Central Bank (ECB) is aiming for a price increase of just under 2%. So if in doubt, your system loses that much value every year.
Statutory deposit insurance
Up to 100,000 euros are secured as savings for you - for each bank. So if you have € 100,000 in savings at one bank and € 100,000 in overnight deposits at another bank, both would be safe. In special cases, for example the proceeds from a house sale, up to 500,000 euros per bank are insured.
Behind this is the statutory deposit insurance that applies across the EU. For Germany it is mandatory that all (private) banks pay annual contributions into the “Compensation Institution of German Banks” (EdB). The EdB steps in when a bank is insolvent and can no longer pay out your deposits.
What exactly happens in the event of a bank failure
If a bank actually goes bankrupt, such as the Bremen-based Greensill Bank in March 2021, the financial supervisory authority Bafin usually takes action: It can prohibit the bank from doing further business and freeze accounts in order to check whether there are still ways to close the bank rescue.
If this is not the case, the supervisory authority can, with the consent of the bank, open preliminary insolvency proceedings and then determine what is known as the compensation case. Only then can the Compensation Scheme of German Banks (EdB) take action.
According to Bafin, it has to "examine the depositors' claims for compensation immediately and take the appropriate compensation measures". As a customer, you will be contacted by the EdB by post. The EdB should then compensate you within seven days.
Voluntary deposit insurance
In addition to the statutory deposit protection, there is also the voluntary deposit protection fund of the Federal Association of German Banks. Private banks, such as Deutsche Bank, Commerzbank or ING, put more money back for this. According to the banking association, deposits of up to 750,000 euros per customer are protected.
Savings banks and Volks- und Raiffeisenbanken also have to adhere to the statutory deposit insurance. Further reserves that they build up serve the so-called bank security - this money would not be used to compensate customers, but instead tries to absorb the bank as such financially.
2. Stocks, equity funds, and ETFs
With stocks and equity funds or ETFs, you invest in one or more companies; Overall, therefore, in the economy or economic strength of an industry, a country or the world. Your shares or your fund shares can fluctuate in value.
Stock prices are made on the stock exchange
How much shares fluctuate in value depends on how much investors demand the shares on the stock exchange. Demand usually rises when investors believe in a good future for certain companies, industries or countries. For example, shares of technology companies have recently been successful, while banks and airlines have lost value.
If you invest in a single share and the company cannot hold its ground in the long term, you as a shareholder can lose your entire stake. If you invest widely in the most successful companies in the world (via a fund), on the other hand, there is a good chance of increasing your commitment. You can also read our guide to stock indices.
You are the owner of your stocks and funds at all times
If you have share balances, i.e. individual shares, funds or ETFs in your securities account, this is not covered by the deposit protection. Because the bank or your depository provider manages these assets only for you. You are and will remain the owner of your shares and fund shares.
In practice, the bank or custodian provider store your shares and fund units from the outset with a separate custodian bank. Good to know:
- Should your bank or your custodian go bankrupt, this custodian would take over the administration of your shares and get in contact with you. You can then consider, for example, whether you want to transfer your securities to another securities account.
- If something happens to the custodian bank as the actual “depositary” of your shares, a trustee usually steps in, arranges the transfer of the shares and gets in touch with you.
Fund assets are special assets
If the issuer of your fund or ETF gets into financial difficulties, your shares still belong to you. For the fund company, securities balances are so-called special assets and therefore not even part of the bankruptcy estate.
In practice, it would appear that a fund company or an ETF provider would be taken over by another (larger) and integrated into the business. Then your fund shares might have a different name at the end, but the content would remain the same.
As a shareholder, you bear the risk
It is different with stocks: If the company (issuer) in which you have shares goes downhill, you are in the (sinking) boat. Your stock will lose value and, in the worst case, become worthless. You can avoid this risk by not just betting on the shares of a single company.
Gold follows a millennia-old tradition as a means of payment. Because the precious metal is also rare, it will always have a certain material value. However, it is never quite certain what exactly you can buy with an ounce of gold (31.1 grams): The gold price has fluctuated greatly in value over the years and decades.
We can only observe that gold is in demand, especially in times of crisis, and is therefore more expensive. The gold price recently rose when the corona pandemic, trade disputes with China and a seemingly unpredictable US president created an uncertain economic situation in the summer of 2020. Previously, the fear of bankruptcies had pushed the gold price up in 2012.
Perhaps you feel more secure and sleep more peacefully when you have gold in the safe at home or in the safe at the bank. Or if you have securities (so-called ETCs, Exchange Traded Commodities) in your depot that simulate the gold price and for which you can insist on the delivery of the gold in an emergency. In that case, you can consider adding a little gold as part of your investment.
Properly insure gold at home
If you store your gold coins and gold bars in a safe deposit box, the bank is liable for their security. On the other hand, if you keep physical gold at home, you should make sure that the gold is kept safe.
Household contents insurance often only pays if the valuables are stowed in the safe. Gold, silver, pearls and the like are often only automatically insured up to a value of 20,000 euros. If your gold is worth more, you should increase your insurance coverage.
Gold ETCs are not a special fund
The same applies to gold in the form of securities as to funds: You are the owner, even if the bank or depository provider goes bankrupt. However, if the publisher of the ETCs gets into financial difficulties, you have to register your claims with him: ETCs are not a special fund.
We therefore advise you to only buy commodity securities that also include the right to delivery of the physical commodity. In the case of gold, the ETC issuer should store physical gold in the amount that you purchased as security. However, there is a certain risk that this gold will not reach you in an emergency or will only arrive late.
The cryptocurrency Bitcoin was originally conceived as a payment system that did not rely on the established banks, in which payments were virtually impossible to manipulate - and both payers and recipients remain anonymous.
Because of its complex encryption technology, Bitcoin was popular with computer experts, and later with those who distrusted traditional payment systems. Today, basically anyone can simply invest in Bitcoin - and that also attracts speculators.
Speculator Elon Musk?
What happens when a prominent entrepreneur puts billions of dollars into Bitcoin, we observed in early February 2021. Tesla boss Elon Musk had barely placed his buy orders when the price of the cryptocurrency picked up and quickly climbed to more than 40,000 euros - the highest it has since the Bitcoin invention.
A single man is therefore able to drive the price up: He may have motivated quite a few (private) investors to do the same and join at comparatively high prices. However, the same applies in reverse:
Big investors and strategic speculators can throw their bitcoins back onto the market overnight., Many private investors would probably only react and sell when the prices are already in the basement.
Total loss possible
Bitcoin, like gold, is also a scarce resource - the "mining" of coins on the computer becomes more and more complex and expensive over time (the inventors wanted to limit the maximum number of Bitcoin). However, digital coins have so far not had a commodity value per se - nor have they had a long tradition as a means of payment.
So it is quite possible that bitcoins will one day be replaced by another cryptocurrency and investors lose interest again. However, nobody is liable for your system. As a private investor, you risk losing all of your stake. We therefore advise private individuals to put at most a little "play money" into the digital coins - even if only to be able to have a say.
Bitcoins only safe in the wallet
You buy Bitcoins at special trading places or exchange exchanges, in Germany for example Bitwala or Bison. Your digital coins are only really safe if you transfer them to a digital wallet and not leave them on your exchange account.
During the first Bitcoin hype in 2017, there were repeated attempts to hack Bitcoin exchanges, which in some cases succeeded. In that case your coins are gone - officially nobody is liable. If your Bitcoin is in the wallet, you also have to be careful: You must not lose the key code for your digital wallet, otherwise you will no longer be able to access the coins.
5. Real estate as an investment
Where savings are hardly worthwhile, stocks fluctuate and Bitcoins are rather insecure, property appears to many investors as a financial investment with a comparatively good ratio of security and prospects of returns. But it's not that simple.
Because to be clear: This is not about your own home that promises you rent-free living in old age and protects you. It's about a house or apartment as a valuable asset that you can ideally rent out or sell again at a profit.
The return has to be right
It is true that real estate can currently be financed more cheaply than seldom before. But that alone doesn't get you any further. Because many properties are more expensive than ever - whether in the big city or in the (well-connected) rural area. In the end, you can only achieve a good return if you take a close look at the conditions before buying - and stick with it: Prepare yourself for an extensive search and many comparisons.
We advise you to include a number of factors in your calculation. It starts with the purchase price, ancillary purchase costs (real estate transfer tax, broker, notary) and financing costs. In addition, the following points are important:
- Location: Is the property attractively located, i.e. in a place where people will still want to move in a few years' time? If it's not a city, how well is the rural area connected?
- Status: In what condition is the property when you buy it? For example, do you have to remove the core from the romantic half-timbered house in the old town, re-insulate it and install a new heating system?
- Additional costs: How many costs are there per month, such as property tax or, if you are the owner of an apartment building, costs for purchases or maintenance (an elevator, a new driveway)? For this you usually pay the so-called house money.
- Rental income: How much cold rent can you realistically ask for the house or apartment? In the case of new buildings and after renovation, there is usually no rent cap, but you should still orientate yourself on the rents in the area.
What you can take with you
Different forms of investment come with different risks. savings are "safe" because they do not fluctuate in value per se. You only lose money when interest rates are lower than inflation.
Stocks and funds are always yours. While you can be sure that fund shares are still there if the publisher (the fund company) goes bankrupt, as an individual shareholder you can lose everything if your company goes bankrupt.
Whenever we are unsure of how the economy and currency will go on, we feel safe with a little gold in the safe. But the gold price is strongly demand-driven and can fluctuate. If you have gold at home, you should insure it with your household effects.
Bitcoins serve as an object of speculation for many large investors, although the original idea of the digital currency was different: namely to design a means of payment that could not be manipulated. At most invest a little "play money".
It makes a difference, one Property to buy to enjoy the evening in it, or with it as an investment To make return. In the second case, consider: cheap financing is of no use if the purchase price is incorrect or if you have too many additional costs. It is possible to find a good investment property - but you will need patience to find it.
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