If I had to start Investing from zero today as a foreigner in Germany. Absolutely no Investments what so ever, this would be Exactly how I would start Investing. Step by step of what I would do to grow my net worth. Stocks, ETFs, Crypto you name it.
If you want to know about the what options you have with investing in Germany, you can read my guide on Investing for Beginners in Germany. In this guide I will be sharing an EXACT PLAN on the investing path I would take.
I would be starting from Zero Euros invested. What I am also assuming is that I have some income coming in. It doesn’t have to be a large amount, as long as I have something that can help me with my basic expenses like rent, food, travel etc.
The first step is always the hardest. Dont waste time and start your investing journey now!
Open a Comission Free Broker Account
The first step to start investing as a Foreigner in Germany would be to open a broker account. I would open this broker account with a Commission free Broker.
My Favourite Broker is Scalable Capital which is probably going to replace Trade Republic as my primary investing platform pretty soon. So once my account is verified I would buy 1 share of the cheapest stock I can find.
It does not matter which company it is, the cheaper the better. 40cent or a couple of Euros, I do not care. I would do this because getting started is the most difficult part. And most people get stuck on this step for the longest time and regret not starting sooner.
Now that I have created an account and made my first trade; I will be motivated to learn how to invest as a beginner in Germany instead of thinking IF I should invest.
Make a Budget
This step is where most foreigners in Germany struggle. Once we get our salary we do not know where our hard-earned cash is going. Food, rent , groceries, travel its all good but knowing how much is spent on each of the big categories is absolutely essential.
So I would just open up my banking app and analyze my income and expenses for the last 90 days. To do this you have to make a budget, you can download a free budget planner if you want a starting point.
If you want to go analog, all you need to do is take a pen and paper, make two columns. Write down Money coming in on one side and money going out on the other side. Rent, Phone bill, utility bills, insurance, groceries, clothing, all of the expenses.
What should be the goal for making a budget?
See your monthly savings, which would be money coming in minus money going out. If this amount is less than 15% of your income I would try to reduce my expenses. The higher the savings the more you can invest and grow my net worth. Obviously this goal can be very subjective. For example my goal for the first couple of years was at least 30% savings but with time this amount reduced as my obligations increased.
Create an Emergency Fund
Creating an Emergency Fund is crutial if you wish to start investing, specially as a Foreigner in Germany. The emergency fund size varies from person to person and their expenses. I would start with at least 1000€ first.
If I am able to save this amount then I would save 3 months’ worth of expenses. You can have a larger emergency fund, but for me 3 months worth of expenses are enough.
To help me create this emergency fund I would first create a separate Free bank account in Germany, there are many banks where you can open a bank account for absolutely no fee. For Each salary I get, I would automatically send a set amount to this account. This way I can create my emergency fund as quickly as possible.
You can also utilize some Simple tips to save money in Germany. This will help you build your Emergency Fund in Germany way faster!
Set an Investment Time Horizon
Investment Time Horizon is basically how long you will have your money invested.
The farther your time horizon goes out, the more risk you can take with your investments. As the time horizon of your investment increases, statistically speaking you have a higher chance that you’re going to have a positive return on your investment so you can take more risk as statistics are more in your favor.
Let’s say you invest your money for 2 years. The market crashes at the end of year two resulting in a loss of half of your investments. You will be in big trouble but if the same market crash happened in year 2 of a 10 year investment time horizon. You will still have 8 more years for your money to recover and continue to grow.
If we look at the 2020 crash, it was a huge deal. But with time the market recovered and grew even higher. So anybody who was invested for the long term with a diversified portfolio, their net worth not only recovered but most probably grew as well.
As a result based on my goals I would set an investment time horizon of between 5 to 10 years. This will help my money grow and recover from any dips or market crashes.
Assess your willingness to take risks
Now, this step is essential as most of us think that we have a high-risk tolerance but in reality, we misjudge our risk-taking ability. To assess my willingness to take risks, I would ask myself what would be the largest drop I would be willing to take in my investments in order to stay invested.
As I said you may think you can take on more risk and sleep at night but until you’ve actually experienced it, you can’t really be sure. The last thing you want to be doing is panic selling at a loss. That means that you have realized your losses. If the market recovers and that stock gains its value back, you will not be able to recover from the loss. And will have to buy back into the market at a higher price actually doubling your loss.
How I lost 6% in Just a Day as a Foreigner in Germany
I experienced my first dip in the market just 20 days into investing. In a single day, my portfolio lost about 6% of its value. 4% was actually because of the market dipping and me selling all of my investments. The other 2% was because I actually bought into the market after it had not only recovered the 4% loss but actually went up by 2% since my selling.
Had I actually assessed my willingness to take risks before I started investing, I would have not sold at a loss of 4%. I have set my maximum loss tolerance at about 20% of my invested capital. So in combination with my investment time horizon, the recent market downturn in the market has had very little effect on me.
Learn about Investment options as a Foreigner in Germany
There are many different kinds of Investment options available, from Stocks to ETFs, Crypto to NFTs, Real Estate, and Commodities. Collectibles like Pokemon Cards and precious metals like gold and silver etc.
But for simplicity’s sake, I would just talk about Stocks, Index Funds, and Crypto today. But you can read my extensive guide on Investing for beginners in Germany to learn more on this topic.
Investing options for beginners in Germany
If I had to start Investing from scratch I would start with a broad market Index Fund like the S&P500 Index. This fund follows 500 of the biggest companies in the US.
In my opinion, the S&P500 is the most stable investment with a balanced risk to reward ratio. With an average annual rate of return being 7%. Now this 7% is for long-term investment time horizon.
In the past 10 years, the S&P500 Index fund has given a 13.76% annualized return. But if you started investing in January 2022, your portfolio would be down about 15.16% in just the past 5 months.
Starting with a Broad Market Index Fund
That said I would have kept 100% of my investments in the S&P500 index fund for at least my first 6 months of investing.
During these first 6 months, I would further educate myself about Individual Stocks, what are company financials: Assets and Liabilities, revenue and Profit, EBITA, EPS, etc. So that I can analyze how a company is performing and how its trajectory is going to be in the future. Once I have familiarized myself with the ins and outs of stock analysis, only then would I invest in Individual Stocks. With time I would Increase my investments in Individual stocks to 10% but not more than that.
High Risk, High Reward for Investors in Germany
In addition to educating myself about investing in individual stocks as a foreigner in Germany. I would also look into the Blockchain, and what It actually is. What is Bitcoin, What is Ethereum and what are altcoins. Get familiar with some of the bigger crypto projects like Solana, Cardano, etc as well.
Even though I am a big believer in the Future of crypto, I still think the crypto market is in its infancy. So I would only invest the amount which I am willing to lose totally.
As the probability of a 50% drop in crypto value is pretty common, I would only invest a small percentage of my net worth into crypto. No more than 2%.
Investing as a Foreigner in Germany
The biggest key for successfully investing as a foreigner in Germany is consistency. The more you save and invest the faster your net worth will grow. With consistently dollar cost averaging into the market you can grow a very small investment into a large amount with time.
Having a fixed amount automatically invested in stocks or ETFs each month would be the key. I have setup multiple savings plans which execute automatically. This automation helps me invest passively as a foreigner in Germany. So don’t waste time and register with a broker now!
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Disclaimer: None of the content in this article is meant to be considered as investment advice, as I am not a financial expert and am only sharing my experience with stock investing. The information is based on my own research and is only accurate at the time of posting this article but may not be accurate at the time you are reading it.