Get an overview of your own finances

Start by taking stock of your situation. What shape are your finances in? Investment advisers will also ask you about your financial circumstances when you consult them.

A key item here is a summary of your assets and liabilities: 

• How much do your cash assets amount to? (e.g. balances on current accounts, call money accounts, fixed-term deposit accounts or savings accounts)
• How much do you hold in securities assets?
• Do you have any other assets (e.g. property)?
• Do you have debts (e.g. loans or other forms of credit)? How much do they amount to?

 You should also compare your regular income and expenses:  

• What regular income do you receive (e.g. salary, state pension, private pension, rental income, income from investments)?
• What regular non-discretionary expenses do you have (e.g. rent or loan instalments for owner-occupied property, ancillary costs for your house or flat, other loan payments, maintenance payments, insurance, food, clothing, mobility and other living expenses)? 

Once you have gained an overview of your finances and compared your income and expenses, you will have a rough idea of how much you can invest.

Set some reserves aside for emergencies

Even if you have some financial leeway, you should always be prepared for unexpected expenses such as major repairs to your car or replacing a faulty household appliance. You might need to act immediately and not have enough time to liquidate your investments.

Only secure and quickly accessible funds such as savings accounts and call money accounts are suitable as emergency reserves. 

This is because even if a financial product can be terminated immediately, it can take a while for the money to become available to you. Units in investment funds or easily traded shares are not suitable as emergency reserves. You should not put yourself in a situation where you might, for example, be compelled to sell shares at a low price.

Pay off debts

The regular interest payments that you have to make on existing loans are usually higher than the returns you could achieve by investing the same amount of money. You should therefore always check whether using your money to pay off your debts early would make more financial sense than investing it. 

This is particularly relevant in the case of overdrafts. If you overdraw your current account, you will have to pay interest. Therefore, you should always ensure that your current account has sufficient funds. 

It is a similar situation with consumer loans that are used to purchase, for example, a car or a kitchen. While the ongoing interest burden from a consumer loan is not usually as high as that from an overdraft, it is often significantly higher than the returns you would generate from investing the same amount. Therefore, if you currently have a consumer loan, you should check the loan agreement and ask your bank what options exist to make a complete or partial unscheduled repayment.  

Are you paying off a property loan? If so, you should check whether your contract allows you to make one-off or regular unscheduled repayments and whether there is a variable repayment rate that you could change. If such options exist, early repayment or increasing the repayment rate may prove more profitable for you than investing the money. The faster you repay a property loan, the lower the interest burden as well as your overall debt to the bank will be. 

But be careful: if you intend to repay your property loan in full before the end of the fixed interest period, your lender may impose an early repayment penalty or fee. You should check your loan agreement and talk to your lender about repayment options as well as any costs that may arise.

Set an investment objective

Do you intend to set aside some of your wealth or disposable income for retirement or for your children's education? Or are you planning a major investment, such as purchasing a new car or home? 

Those who invest their money usually want to achieve the highest possible return. At the same time, investors would like the risk to be close to zero and, ideally, for their invested money to be available at short notice. No investment exists that fulfils all three of these desires at once. Before deciding on any specific investment product, you should think about your individual needs and objectives. 

Security, availability and return are conventionally considered the three main investment objectives. 

• Security
  If you are the type of investor that prioritises security, you might focus on capital preservation and prefer to take fewer or no risks that could result in a loss of capital.
• Availability
  You should think about how long you can do without the money you are investing. This is especially relevant if you want to invest your money over the longer term in order to achieve higher returns. Keep in mind that you may one day need to access funds at short notice if, for example, you have to renovate your home to make it more accessible or you require assistance with household tasks.
• Return
  If you want to achieve high returns, you must be prepared to take similarly high risks. But are you willing to do so? Or are you a prudent investor who wants to rule out risks of loss to the greatest degree possible? In general: The higher the prospective returns, the greater the risk that you will lose your invested capital.

Depending on which of these three investment objectives you prioritise, you will usually have to accept compromises regarding at least one of the other objectives.

Before deciding whether a financial product is suitable for you, you should make sure it aligns with your investment objectives, your risk tolerance, your financial situation and, crucially, your ability to incur losses. It is also important to take your knowledge, experience and sustainability preferences into consideration. With regard to sustainability, you should decide whether environmental and social topics are important to you before selecting an investment, and whether you would prefer to invest in companies with sustainable corporate governance practices.

Don't put all your eggs in one basket 

Do not invest all of your capital in just one asset. It is better to spread your resources across different forms of investment. This reduces the risk of loss and means you can expect your returns to be more stable overall. 

Balanced asset diversification is crucial as it improves the odds of any losses from any one investment being offset by gains from others. In other words, if you spread out your investments sensibly, you minimise the risk of losing your invested capital entirely, even if one particular investment product ends in a complete loss. 

Your portfolio should therefore contain as varied a range of investments as possible, spanning different asset classes with various maturities and – depending on your individual risk appetite – diversified risks. You should also discuss this with your investment adviser. Investment advisers are required to recommend investment products that are appropriate for you and that function in a way and have risks you can understand.

Find the right investment

There are many types of financial products with investment objectives that vary significantly. 

Although you need a current account to manage your regular income and expenses, it is not a financial product that is suited to saving or investing money. 

Money that you do not need on demand should be spread across different types of investment that are suitable for you.

Conventional investment products include, for example, call deposit accounts and passbooks. The interest rates of these products determine how much income your deposits will generate. These forms of investment are also suitable as an emergency reserve because you will be able to access your money quickly if you need it.

You will be able to obtain a higher interest rate if you can invest some of your money over a longer period of time, e.g. in a product such as time deposit account or a savings bond. 

If you invest in securities such as shares and bonds, you generally run a higher risk of losing capital, but the potential returns may be higher. Depending on the type, class and issuer of securities, the level of risk can vary significantly. 

Shares in investment funds and index funds such as exchange-traded funds (ETFs) are also considered securities. If you opt for a fund, an asset management company will invest your money in various assets in accordance with the principle of diversification, e.g. in a selection of securities. This means that the risks will be spread out to some extent. 

Certain securities are considered highly speculative, for example warrants and many types of certificates. The risk of loss can be difficult to quantify with such financial instruments and they may even result in a total loss of capital. Only persons with in-depth expertise and extensive experience should invest in such products.

With regard to shares, history has shown that the longer the investment period, the greater the chances of stable returns.

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You can also invest your money in tangible assets, such as real estate.

If you are planning to buy a property, you should first obtain sufficient information about what condition it is in. You should also factor in ancillary costs relating to the purchase as well as renovation, maintenance and upkeep costs – especially in the case of older properties.

Write down some notes for yourself. These can also be used to prepare for a consultation with an investment adviser and you can take them to your appointment. Investment advisers will pose the same or similar questions and may also ask you for more detailed information. Investment consultations also give you the opportunity to talk about the investment goals and requirements that matter to you.

Suitability reports can help you decide whether a securities product is suitable for you. Investment advisers are required to provide you with a document containing such a report before any agreement is concluded. This is to ensure that you can understand the rationale for your adviser’s securities recommendations.  

BaFin’s German-language booklet „Anlageberatung – Was Sie als Kundin und Kunde beachten sollten“ (Investment advice – what customers should bear in mind) describes the structure of a typical consultation with an investment adviser, what information they must provide to you as well as the applicable record-keeping requirements. 

If you want to decide whether an insurance product is suitable for you, you can find out more by arranging a consultation with an insurance broker, insurance agent or independent insurance adviser.

Check and compare the costs and commissions  

Investments can entail a variety of costs that reduce returns. These may include, for example, initial commissions, sales charges (front-end loads), annual management fees and administrative costs. 

Whether and to what extent there are costs depends not only on the financial product and its original provider or issuer, but also on the service provider that brokers the financial product and that may receive a sales commission for doing so. 

In order to determine whether investing in a particular financial product will be profitable for you, you must find out how high these costs are and how they affect your returns.

In many cases, insurance undertakings are also required to provide their prospective policyholders with product information sheets before any agreement is concluded. These sheets contain information on costs and other details. 

It is vital to know the associated costs when deciding on an investment. Information on costs will enable you to compare the product recommendations you receive to other similar products. 

Take your time and read the information carefully, especially information provided to you by the adviser, such as product information sheets and any specific information on costs.

When receiving advice, the following sample questions may help you to better estimate the costs relating to the investment and their effects on your returns from a given financial product: 

• Which costs or fees are one-off and which are paid annually? How much do the costs amount to in total? 
• When purchasing the product, are there any costs, commissions or fees for the services of the adviser or intermediary? How high are these costs? 
• How much are the total costs? 
• What impact will the total costs have on your returns?

Gather information about financial products and providers 

Before you make a particular investment, you should understand the financial product and gather information about the issuer or provider. You can obtain such information, for example, from the following sources: 

From BaFin

Information on whether a particular company has obtained authorisation from BaFin can be found in BaFin’s database of companies. If BaFin finds that unauthorised financial business is being conducted, it has extensive powers to ensure that the relevant companies promptly cease and wind up the business operations concerned. You can view BaFin’s orders to cease and wind up business here. Please note, however, that due to the large number of fraudulent providers and their ever-changing methods, the warnings on the BaFin website can never serve as an exhaustive listing.

On its website, BaFin provides information on how the most important banking products, insurance products, securities and other forms of investment work and outlines the risks they entail. 

BaFin makes this information available in order to provide initial guidance to consumers and make it easier to compare offers. However, it does not recommend any particular product or provider.

From consumer centres

The Federation of German Consumer Organisations (Verbraucherzentrale Bundesverband e.V.) as well as local consumer centres (Verbraucherzentralen) provide information on investment topics.

From the issuers or providers  

Key information about the issuer, the product offered and the associated risks can be found in the relevant securities prospectus or securities information sheet or in the relevant capital investment prospectus or capital investment information sheet. These documents must be published by the issuers, providers or applicants for the authorisation of securities as well as by the offerors of capital investment products. 

BaFin’s databases can provide you with an overview of the documents that have been submitted to us.

Beware of dubious offers

It is not always easy to recognise dubious offers. This section describes the warning signs and how you can identify untrustworthy providers.

When investing in securities or other investment products, you should also bear in mind that BaFin approves prospectuses and authorises the publication of information sheets for securities and capital investment products. However, BaFin is not tasked with checking the factual correctness of the content of these prospectuses and information sheets. Therefore, BaFin is not able to check the creditworthiness or reliability of the issuer. We also cannot check whether its business model is functionally viable or economically sound.

BaFin can only check whether the prospectuses are complete, include all legally required information, are worded in a comprehensible manner and are internally consistent. In the case of information sheets for securities and capital investments, BaFin checks whether all the minimum information required by law has been provided in full and in the required order. 

Therefore, if BaFin has approved a prospectus or authorised the publication of an information sheet, it does not mean that the products are reliable, that investing in them is advisable or that the provider is trustworthy. 

You should also remember that not all companies

Review your portfolio regularly

As a general rule: if you have investments, you should review your portfolio regularly. 

Significant changes in your plans and objectives or in your financial and personal situation might mean that your investments are no longer suitable. In such cases, you might want to reconsider your investment. Reconsideration is also advisable if either the market or individual financial products have not performed the way you anticipated.

operating on the financial market are supervised by BaFin. Some offerors do not require any authorisation and are only obliged to fulfil a few legal requirements. The market segment in which these providers operate is known as the grey capital market. You should always bear in mind that the grey capital market is only lightly regulated.