Financial education and the German education system – they don’t really go together. While students can analyze poems from every era after graduating from high school, the financial literacy looks poor. Many people see the stock market as a kind of game of chance and avoid long-term investing with ETFs – no wonder, in a country where the finance minister swears by his savings book without interest. The compound interest effect, which Nobel Prize winner Albert Einstein praised as the greatest invention of human thinking, seems largely unknown. Why else would you let the more or less hard-earned money go to waste in a savings account?
Everyone knows that financial education in Germany can be expanded – but which five facts about money are decisive for financial success and do you not study at school?
Paper money has no value
Most Germans assume that the bills and coins in their wallet have exactly the stated value. As a result, the 5 euro note is worth five euros, while the 50 cent coin is only 1/10 of the value. Strictly speaking, however, this is not correct. It is only about coins and colored paper. The respective value results only from the trust of the population. For a long time, the countries relied on the so-called gold standard. This means that the face value of a currency was completely backed by gold. However, this changes a few years ago. Today paper money basically only has the value of the material. The rest is done by people’s trust.
In addition, the purchasing power of money has been falling for many years. Inflation destroys the value of money – very few people know that. When students stash their pocket money under their pillow, they assume that it will retain its value or purchasing power. However, this is by no means the case. Most of the time, inflation has exceeded the interest rate in the past, leaving savers to look to negative real returns.
Diversification lowers the risk
According to surveys, almost one in three Germans is not aware that the risk of investing money with diversification across several asset classes decreases. If you park all your money in the fixed-term deposit account, you are by no means playing it safe. The inflation described above sends its regards! The greater the diversification, the lower the risk.
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In the long term, interest rates keep falling
The savings account may have been worth it for parents and grandparents. Today interest rates tend to zero. More and more banks are even charging negative interest rates to take care of their customers’ money. Falling interest rates are nothing new. Since the Middle Ages, global interest rate developments have only gone in one direction. While interest rates in the double-digit range were still common in the Middle Ages, this changed in the centuries that followed. As early as 1900, interest rates were hovering around 4%. After the Second World War there was an opposite correction. In the meantime, savers could even earn double-digit interest rates. In the meantime, however, the development has again approached the long-term downward trend. Many savers look in vain for interest on their money.
Long-term, the equity markets have been the best returns
The return on stocks has been the best over the past few decades. Despite all the stock market crashes and economic crises, the largest indices are looking at an average return between 8-10%. For example, those who bought the iShares Core MSCI World UCITS ETF (Acc) (ISIN: IE00B4L5Y983) when it was launched in 2009 can look back on an average annual return of 12% today. The originally invested capital has more than tripled.
However, those who shy away from the risk of investing in the stock market can look at the risk of loss in the past. Long-term investors almost always look to a positive return. As the investment horizon increases, there is almost no point in time for entry at which the return is negative. At MSCI World, this period is 15 years.
The savings book was yesterday, the future belongs to the stock market
In most school subjects, financial literacy does not play a role. Teachers don’t say a word about targeted asset accumulation. A stock exchange company is more the exception than the rule in schools. The well-deserved stock exchange grandma Beate Sander was a commendable exception. But the students should learn one thing: the popular savings book as a standard German investment has no future. The historically ever-decreasing interest rates and inflation eat up any returns. After several years the purchasing power of money will have decreased. Asset accumulation is different!
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Long-term, the equity markets have been the best returns. This is unlikely to change in the near future. Because there are good reasons that the stock markets will continue to rise in the long term. If you want to reduce your risk and still participate in this development, you should think about investing in ETFs. Very few students learn what an ETF is in school. Nevertheless, the future belongs to the stock market. Anyone who understands this can, as a young adult, lay the foundation for a growing fortune after leaving school, while his 08/15 teacher is confronted with the falling purchasing power of his savings account money.
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