The Basics: Investing
Remember to observe the 10 commandments of investing:
6. Do not be tempted by sales calls over the telephone, terminate unwanted telephone calls that are trying to approach you to do business immediately! (Show content for: 6. Do not be tempted by sales calls over the telephone, terminate unwanted telephone calls that are trying to approach you to do business immediately!)
9. Write up a log regarding meetings with advisers and the granting of orders immediately. Have witnesses accompany you to the meeting or let them listen in on telephone conversations. (Show content for: 9. Write up a log regarding meetings with advisers and the granting of orders immediately. Have witnesses accompany you to the meeting or let them listen in on telephone conversations.)
The Financial Market Authority plays an important role in strengthening and making the Austrian financial attractive by means of its supervisory functions. Investor confidence in a functioning financial market is a significant factor. It is of particular importance for the Financial Market Authority to create confidence in the Austrian financial market.
The following information for investors are some basic hints about what considerations to pay attention to when investing. The Financial Market Authority neither recommends specific investments nor discourages investors from specific types of investments. That is not the Financial Market Authority’s task. The Financial Market Authority instead prefers to make investors aware of what should be considered in meetings with advisers and when concluding contracts, as in which cases caution is advised.
The imparting of financial knowledge, in particular in relation to risk and yield associated with investments is a core part of the OeNB Financial Cockpit (available in German only), and you can also find information there.
Prior to any investment, the following considerations should be addressed:
- What is the goal of my investment? e.g. Inheritance, old age provision, for consumption at a later day, speculative capital;
- What amounts do I want to invest?
- How long do I want to tie my money up for?
- Do I want to be able to access the invested money instantly?
- Am I like to have increased expenses in the near future (e.g. building a house, renovation or buying a car) and do I have adequate money set aside for that?
- Do I also have money available for smaller purchases, which I can access at any time?
- What investments do I already have?
- Do the investments match my investment goals as a whole?
Furthermore, you should also take the following points into account:
The following principle applies: A greater return is always associated with a higher risk. The longer the capital is tied up for, the higher the interest rate is as a rule. When consulting your adviser, allow the risks associated with an investment to be explained.
Always ask about the return that can be obtained from a low risk investment by a blue chip issuer or debt instrument (e.g. government bonds). The difference to this interest rate acts as a good indicator about the risk entailed. Remember that a return of 8% has one hundred per cent more yield, than a return of 4%.
The three pillars of investment
The three pillars of investment are: yield, security and availability. As an investor it must be apparent to you that no investment is able to combine all three of these pillars optimally. Security is provided at the expense of yield (interest), and yield at the expense of security or availability.
The risk profile of different groups of products
Even though the risk of a specific product depends on numerous factors and the categorisation of risks over have a limited degree of informative value, product groups as a rule differ as follows based on their risk profile: Investment forms like savings account books (in this case the only risk is that of the insolvency of the bank and in this regard also the deposit guarantee) and building savings and loans can be deemed to be relatively safe. They have a lower yield but greater security.
Higher risk investment forms include other types of bonds, shares and investment funds. The potential yield is higher, but there is also a greater potential for losses to be incurred.
There are considerable differences in terms of the level of risk between the groups of products named, as well as within an individual group of products: For example, not all shares are equal; the size and image of the company, the sector to which it belongs, the stock market on which it is listed and liquidity are all factors that can influence the risk profile of a share. Talk to your adviser about this particular issue.
In the case of investment funds, you should definitely ask the question about whether the investment fund is authorised in Austria for sale to the public (such authorisations have been granted by the Financial Market Authority since 1 April 2002). In the event that no such authorisation exists, you must be aware that the fund product has not been subjected to an authorisation process, and therefore is not supervised by an authority.
Diversification of risk
One of the principle arguments that is cited time and time again by financial service providers when selling investment funds is the legally standardised diversification of risk. While the diversification of risk reduces the investment risk, the risk profile of a specific investment fund ultimately depends on the instruments in which the fund invests. Ask your adviser to explain the current composition of the fund and the investment strategy being pursued by the fund management in detail.
Highly speculative investments
If you are interested in highly speculative investments, there are investment forms available like options and futures, which can provide you with high profits at a very high risk, but which can equally also result in the total loss of the invested capital, or possible even lead to the obligation of additional investments.
Hedge funds are a highly speculative form or investments, which do not only consist of investment funds, but also as a rule frequently feature investment pools, that are frequently registered in tax oases and which are not subject to any restrictions in relation to what they invest in.
The historical performance of securities and fund-based products provides no indication about their future development.
Promises of high yields
You should be cautious of promises of high returns, which bear no relation to the normal market returns. It is basically not possible to promise or guarantee higher returns. This also applies for life assurance policies with a capital market component. Caution should be exercised above all if you are promised higher returns without the associated risk of loss of capital, since the principle applies that: the higher the return, the greater the risk involved.
- How much are the costs in total (e.g. for buying, selling, management or brokerage) for your investment?
- As the fees taken into consideration in the depiction of the past performance?
- What does the performance of your investment look like once fees have been deducted?
- How high is the cost/fee level of the financial services provider in comparison to the sectoral average?
- Is the cost/fee structure of the financial services provider presented prior to investment?
The adviser is obliged in accordance with the Securities Supervision Act of 2007 (WAG 2007 – Wertpapieraufsichtsgesetz 2007) to establish to what extent you are familiar with individual investment forms, in order to be able to find a “tailored investment form” for you.
Provide your adviser with precise information about your previous experience with securities. It is important for example to know whether you already have invested in securities or previously have done so. If you have, then were these less risky or highly risky securities? Have you already privately informed yourself about securities, and are you therefore able to display a certain basic level of knowledge?
It is particularly important that you realise what purpose for investing your assets you wish to pursue (e.g. saving in order to acquire something, old age provision, speculation…). Share this information with your adviser and also ensure that the adviser understand it in the way that you intend.
Such information are intended to give the adviser the opportunity to provide you with personalised advice that is tailored based on your personal experiences. A sensible investment depends on a several considerations, which should be the basis for your future investment. It ultimately is about ensuring that your adviser finds you the optimal investment product that is suited to your requirements.