The BEST Way To Invest €100K (European Investor)

Having a significant sum of money, such as €30,000, €50,000, or even €100,000, often presents a challenge for European investors. Many individuals find themselves holding large amounts in bank accounts, acquired through property sales, business endeavors, or inheritances, yet are unsure how to invest it. Common questions arise regarding whether to invest a lump sum or incrementally, which investment platforms to trust, and how to navigate tax implications. A primary concern is the fear of making costly mistakes and risking life savings, leading to hesitation.

Holding cash in a bank account leads to a significant loss of purchasing power over time due to inflation. During periods of high inflation, such as when Latvia experienced 20% inflation per year, simply holding money meant a substantial loss of value. For instance, €50,000 could lose €10,000 in value in a single year. Even in normal times, with 2% to 3% annual inflation, €100,000 in the bank loses €2,000 to €3,000 annually. Therefore, investing as soon as possible is crucial to prevent the erosion of wealth.

While the desire to invest safely and avoid risking life savings is understandable, it is important to acknowledge that risk is inherent. Investors face a choice between the 'dumb risk' of allowing inflation to inevitably eat away at their money, which is virtually 100% guaranteed, and the 'smart risk' of investing. Intelligent investing, although carrying some possibility of loss, significantly increases the likelihood of not only beating inflation but also growing wealth over time. For short-term needs (within a few years), low-risk options like high-yield savings accounts or money market funds, offering around 2% per year, are suitable but often do not cover inflation. For long-term investments (7-10 years or more), stocks are identified as the most profitable asset class.

Many people perceive stocks as abstract financial instruments, but in reality, purchasing a stock means investing in a real company. For example, buying Apple stock grants ownership in a portion of Apple, meaning thousands or millions of employees work daily to increase the investor's wealth. However, the stock market carries significant risks. A major mistake is buying individual stocks, attempting to predict the next Nvidia or Apple.

A portfolio comprising only a few individual stocks is highly susceptible to significant losses, potentially leading to a complete loss of funds. Research indicates that as many as 11% of stocks in the market can go to zero over time, and up to 40% may experience catastrophic losses of up to 70%. To mitigate this, a diversified approach is essential, involving investments in hundreds of different stocks across various countries and industries. A portfolio with 200 to 300 stocks minimizes the chance of total loss, as it is highly unlikely all companies would go bankrupt simultaneously, significantly increasing the odds of multiplying money over time.

Building and managing a portfolio of hundreds of individual stocks is impractical due to the extensive research and high costs involved. Instead, index funds and Exchange Traded Funds (ETFs) offer a simpler and more cost-effective solution. By purchasing a single ETF, investors can gain exposure to hundreds of different stocks, effectively achieving broad diversification. In Europe, justETF.com is a recommended resource for finding nearly 2,000 stock ETFs, including popular options like the iShares Core S&P 500 UCITS ETF for large American companies, and the iShares Core MSCI World UCITS ETF for developed world countries. Selecting the best ETF requires considering factors such as age, goals, risk tolerance, and local tax rules. A step-by-step guide to choosing ETFs is available as a valuable resource.

When I was younger, stocks seemed like something really abstract to me. I would hear about the Dow Jones or the S&P 500 on the news. I would see these stock tickers going up and down and I just thought it had nothing to do with me. But actually, when you buy a stock, you invest in a real company.

While diversifying with index funds and ETFs significantly reduces individual stock risk, it does not eliminate market risk. Historical events, such as the 2008 financial crisis, demonstrate that even diversified portfolios can experience substantial downturns, with markets dropping by 50%. However, such severe disruptions are rare. On average, the stock market rises in three out of four years and declines in one out of four, usually by modest amounts. The emotional impact of large crashes often leads investors to fear future downturns despite their infrequent occurrence.

A significant challenge for long-term investors is maintaining composure when the market experiences a decline. Those who remain calm and stay invested typically see the market recover. In contrast, investors who panic and sell at the bottom of a crash lock in their losses. The ability to endure market volatility and avoid emotional selling is critical for long-term success.

The question of whether to invest a large sum at once (lump sum) or in smaller parts over time (dollar-cost averaging) has two valid answers. Statistically, market data suggests that investing the entire amount, such as €100,000, into the stock market at once yields better results. However, human emotions play a crucial role. For first-time investors with life savings, the idea of investing everything at once can be daunting, often leading to delays. Therefore, starting small and gradually increasing investments, even with just €100 initially, can help overcome mental roadblocks and build confidence for larger investments.

One of the most common mistakes among beginning investors with substantial capital is the inclination to delegate investment management to a bank without understanding the process. This approach is problematic for two main reasons. Firstly, relinquishing full control and knowledge of investment decisions can lead to exploitation or, at best, a lack of confidence and constant fear regarding the bank's strategy. Without understanding what constitutes a smart or dumb move, investors cannot discern if portfolio downturns are due to market conditions or poor management, leading to significant stress.

The second major issue with bank-managed investments is the fees involved. While fees of 1% or 2% per year might seem small, their long-term impact on returns is substantial. For example, €100,000 invested for 20 years at the global stock market's average 9% annual return (adjusted for 3% inflation to a real 6%) would grow to €321,000. However, a 2% annual bank fee would reduce the profit from €221,000 to only €119,000, effectively halving the gain. Learning the basics of investing allows individuals to achieve similar or better results with minimal effort, saving significant amounts over time.

When self-investing in ETFs, a financial intermediary known as a brokerage is necessary. Europe offers numerous options. While simple brokerages like Trade Republic, Trading 212, or Lightyear are often recommended for beginners, large sums typically warrant more established platforms. Interactive Brokers, a major American public company with a stellar credit rating, and Saxo, a financially strong Danish bank, are preferred choices. Interactive Brokers has a technical user interface built for professional traders, requiring a learning curve. Saxo is also technical, and its fees can be high depending on the European country. Resources like video guides on using Interactive Brokers and training programs like the Index Masterclass can help investors select and utilize these platforms effectively.

Understanding investment taxes is crucial for investors with significant capital. As soon as the first investment is made, individuals become subject to investment taxes. While small investments might go unnoticed by tax authorities, large amounts can lead to serious legal trouble if taxes are ignored. Therefore, it is imperative to comprehend investment tax obligations before starting. Key areas to focus on include tax residence, especially for expats, to determine where taxes are due. Additionally, understanding capital gains tax, which applies to profits from selling investments at a higher price, and dividend taxes, on income received from investments, is essential.

The goal should be to understand how to calculate, report, and pay taxes, and crucially, how to legally and ethically optimize them to reduce the tax burden. Wealthy individuals pay close attention to tax strategies to preserve and grow their wealth. Learning about the specific tax rules in one's country is indispensable. For those seeking comprehensive guidance, training programs like the Index Masterclass for European investors offer step-by-step instructions, including local tax briefings for various European countries, ensuring investors can start with minimal risk of expensive mistakes.