glossary

A country that has the best possible credit rating (namely AAA) from at least one of the three major rating agencies. States acquire debt by issuing bonds. The bonds are bought by private individuals, companies or banks. Anyone who buys a government bond grants the government a loan. The major rating agencies are Standard & Poor’s, Moody’s and Fitch. The rating scales have approximately 25 levels from AAA (best possible) to D (worst possible) – see the “Rating Agency” entry on Wikipedia. Each rating corresponds to a quantitative probability between approximately 0.03% (best possible) and 100% (worst possible) that there will be a significant payment default on the bond within one year. In March 2011, Germany had a rating of AAA (level 1), Spain BBB+ (level 8), Russia BB+ (level 13) and Greece B- (level 18). At the beginning of 2015, around 120 of around 195 countries in the world had a bond rating from at least one of the three major rating agencies. At that time, 13 countries had an AAA rating from the largest rating agency (S&P). An overview of the current ratings available for countries can be found on the English Wikipedia (keyword “List of countries by credit rating”). The second best rating is AA+, the third best is AA.

ABS stands for “Asset-Backed Security”: special, secured corporate bonds issued by “single-purpose companies”. The securities can e.g. B. Mortgages registered on residential properties, credit card claims or student loan claims.

The discount rate (also called the discount rate) is the interest rate at which a future payment must be “discounted” (discounted) in order to arrive at its → present value (present value). The risk of future payments is taken into account. High-risk (uncertain) payments in the future must be converted to present value at a higher discount rate than low-risk (less uncertain) payments. The discount rate is – so to speak – a backward-looking interest rate (see also internal rate of return).

In the context of evaluating a real estate market, the affordability ratio expresses the relationship between the average price of a standardized property (e.g. two-room apartment of medium value) and the average household income in the city, region or country.

An open-ended investment fund that invests its investors' assets in stocks (shareholdings in listed companies). Depending on the fund strategy, these shares can be shares in domestic or foreign companies as well as shares in large, medium-sized or smaller companies. On the stock market, “small” companies (also called second-line stocks or “small caps”) still have sales that typically amount to over 500 million euros per year. Traditional equity funds are “actively” managed by their fund manager (ongoing buying and selling of individual stocks). There are also index (stock) funds (or ETFs) that do not have an active fund manager. The purpose of an index fund is to represent a broad segment of stocks at the lowest possible cost. Index funds generate better returns than the majority of actively managed equity funds.

The total return from a stock investment (→ dividend yield + price return).

Stock market jargon for “excess return”, “extra return”, “additional return”, “outperformance” of an investment or an investment strategy compared to a sensible benchmark (comparison index). There is a lot of mischief in the financial industry with the quantification of alpha outside of scientific studies.

Companies and states issue bonds to obtain outside capital. In principle, anyone can buy a bond. In doing so, he gives the relevant company or state a loan. The only significant difference between a bond and a loan is that a bond is designed to be “tradable” from the start. This means that the buyer of the bond can resell it to a third party at will (and, this is important, without having to ask the bond issuer = debtor).

See annuity repayment. The annuity is the borrower's periodic capital service payment consisting of interest and repayment. It can be monthly, quarterly, semi-annual or annual. The amount of an annuity does not change during the interest rate fixation phase (interest rate fixation).

A specific repayment method for loans. With annuity repayment, the periodic debt service payment (sum of interest and repayment) remains unchanged over time, i.e. i.e., the borrower pays the same capital service (here annuity) in every period (e.g. month, quarter, half-year, year). This makes the borrower’s financial planning easier. When it comes to real estate loans in private customer business, annuity repayment dominates (cf. installment repayment). An example: If the loan amount is 100,000 euros, the interest rate is 4% p.a., the so-called initial annual repayment rate is 2% and a monthly payment is agreed, then this results in a monthly annuity (capital service rate) of 6% × 100,000 euros ÷ 12 = 500 euros (the 6% is the sum of 4% + 2%). These 500 euros remain unchanged during the period for which the interest rate is fixed, although the remaining debt decreases every month, because the monthly debt service installment includes a repayment portion. If the remaining debt decreases, one would normally assume that the interest burden in monetary units also decreases (this is the case with installment repayment). With annuity repayment, the saved interest burden is added to the repayment in each debt service period (the less interest burden, the more repayment), so that the total amount always remains the same (in this example, 500 euros per month and 6,000 euros per year).  

English term for “asset”. Not only investment “goods” or “material assets” such as real estate, gold bars or securities can be assets, but also monetary claims such as. B. Loan claims, claims against private insurance companies or statutory pension insurance, a right of residence or a claim for damages. In other words, everything is an asset that has an economic value and is not a pure consumer good such as: E.g. food, clothing, flight tickets or services. See also → Asset class.

The division of a portfolio of assets into individual → asset classes. The importance of asset allocation is based on the fact that the long-term return of a diversified portfolio is determined to an extraordinarily high percentage (over 90%) by the selection and weighting of asset classes and not by the selection of individual securities within the asset classes. Asset allocation ultimately aims to optimize the return and risk of a portfolio, i.e. the best possible combination of expected return and expected risk from the perspective of a particular investor.

Asset classes are logically meaningful categories of investments such as: B. Stocks, corporate bonds, government bonds, money market investments (cash-like investments), real estate, precious metals, raw materials and collector's items. These main asset classes can be subdivided into sub-asset classes in a variety of ways.

Antique term from legal language. In real estate law, conveyance is the agreement between buyer and seller about the transfer of ownership (sale) of a property.

Generally synonymous with the terms counterparty risk, credit risk and issuer risk. The risk of negative fluctuations in the value of a security because the creditworthiness of the company to which this security belongs has deteriorated. In the narrower sense, the risk that the issuer of a bond will not meet its interest and capital repayment obligations or will not meet them on time.

The bank's profit margin. In the lending business, the spread between the cost of raising money and the interest rate when the loan is granted. An example: If a bank lends money at a loan interest rate of 6% p.a., while the bank in turn borrows this money from savers or commercial investors at 4%, then the bank margin is 2%.

Also called cash or liquidity reserve. Every conventional investment fund must invest part of its funds in cash in order to be able to buy back fund shares from investors at any time.

Present value (also called present value) is a fundamental economic concept. It is the value “in today’s money” of a payment or stream of payments that will only be received in the future. The value in today's money is calculated by "discounting" or "discounting" (technical jargon) the relevant payments in the future. An example. A payment in one year of 105 euros has a present value (BW) of 100 euros today with a discount rate of 5 percent, because if you invest 100 euros today with a 5 percent annual return for one year, you will then achieve a total of 105 euros. Therefore, both values ​​- 100 euros now or 105 euros in twelve months - at this discount rate - have the same present value. Cash values ​​can be used to compare payments that occur at different times. The formula for calculating a one-time future payment Z looks like this: BW = Z ÷ (1 + r)N, where r is the discount rate in percent and N is the number of periods, here 1). The formula for a series of future payments is similar but slightly more complicated. What the appropriate discount rate is depends on how “certain” or likely the future payment is. If it is definitely safe (“risk-free”), then the interest rate for risk-free government bonds of the corresponding term is appropriate; if it is less safe, then a higher interest rate is required, which results in a smaller present value. Using a spreadsheet program such as Microsoft Excel, you can easily calculate present values. There are numerous financing calculators on the Internet with which you can carry out simple and sophisticated present value calculations, e.g. B. www.zinsen-berechner.de and www.n-heydorn.de.

The present value benefit that arises when a given tax payment can be deferred into the future (e.g., several years) rather than being paid immediately. The tax present value advantage is a real economic advantage for the taxpayer (i.e. a real saving). The tax present value advantage is not identical to the pure liquidity advantage of deferring tax payments into the future. The latter is not a real economic advantage in the sense of cash values.

A company that typically commercially builds (“develops”) real estate on undeveloped land and then distributes (sells) it to buyers. The transfer of ownership can also take place before or during the construction phase.

The so-called “base interest rate” used in the formula for the advance flat rate for the taxation of dividends in accumulating investment funds (including ETFs) is not identical to the base interest rate regularly set by the Bundesbank in accordance with Section 247 Paragraph 1 of the German Civil Code (BGB), which is used as a reference interest rate in all possible civil law contracts (e.g. to calculate default interest in the event of legal disputes). The “base interest rate” in the advance flat rate is a separate base interest rate that is published annually for the upcoming tax year (calendar year) by the Federal Ministry of Finance (not by the Bundesbank) in accordance with Section 18 Paragraph 4 of the Investment Tax Act (InvStG). The base interest rate in the advance flat rate is roughly based on the → current yield for ten-year federal bonds. Googling the keywords “Federal Ministry of Finance base interest rate for calculating the advance flat rate” should lead to the page that lists the current base interest rate.

To put it simply, the percentage of debt capital in real estate financing, as determined by a bank. However, German banks apply certain “conservative” discounts when valuing the property, so that the loan-to-value ratio is usually slightly higher (“worse”) than the debt capital ratio based on the pure market value of the property

The estimated value of a loan security determined by the bank, which it expects with a high degree of certainty that it could be realized in the long term, even in unfavorable market phases. The loan value is inevitably below the market value. The loan-to-value value is not identical to the loan-to-value limit or the loan-to-value ratio. See also Loan to Value.

German scale or comparison mark. In the context of investments, a comparison variable with which the return and risk of an actively managed portfolio (e.g. a fund or a private investor's portfolio) can be meaningfully compared. Often the benchmark is a securities index, i.e. the “market”.

English term for standard stocks or large caps (i.e. stocks of established large companies with high market capitalization). This must be distinguished from mid caps (shares of medium-sized companies) and small caps, shares of small companies.

see → Default risk.

Typically translated as “break-even point” or “cost break-even point”; generally the point at which – depending on a certain influencing factor – a product or project A is cheaper or more profitable than product or project B or a different threshold (e.g. full cost coverage). Example cost comparison of diesel cars versus gasoline cars: A diesel car is typically more expensive to purchase. However, the additional expense is worth it once you reach a certain annual mileage, because the ongoing operating costs of a diesel and its loss in value over time are lower than those of a gasoline engine. With a break-even calculation you can determine what the minimum annual (average) mileage must be to make the additional expense for diesel worth it.

For loans, this is the interest rate at which a loan A is really the same price as a loan B, if you really take into account all relevant factors and cost components, including those that may not be included in the effective interest rate.

GDP is an economic indicator of the “value added” of an economy over a certain period of time, typically a year. GDP is the sum of all salaries, corporate profits, income from interest and rents and net government income (government revenue minus expenditure), without double counting. Most often, GDP growth is reported as a real (inflation-adjusted) figure.

The equity reported on a company's balance sheet. It is to be distinguished from market capitalization. It is the company's equity valued by the market.

German “buy and hold”; A buy-and-hold investor purchases an investment, such as a stock or property, with the aim of holding it for a very long period of time. The investor expressly does not pursue the goal of waiting for short-term increases in value (speculating) in order to then sell “expensively” and instead purchase another → asset that he considers to be cheap (undervalued). Buy-and-hold investing has the advantage that it minimizes → transaction costs and taxes (→ present value advantage) and is much easier and more convenient than ongoing → active investing (trading). Virtually all homeowners end up being buy-and-hold investors without realizing it.

German payment flow. From an investor's perspective, positive cash flows are payments received (inflows), negative cash flows are payments made (outflows).

Controlled Foreign Corporations Rules. This is the usual international term for rules of → addition taxation, in which the income of a foreign company is added directly to the company's domestic shareholder for tax purposes and is to be taxed directly by him in a timely manner.

In law, compliance with legal regulations or - interpreted in terms of the tasks of a company "compliance department" - all measures to identify and prevent legal violations or, to put it more generally, measures to ensure the lawful behavior of those involved. Compliance plays a particularly important role in banking and a role whose importance has increased dramatically over the last 20 years. Typical compliance regulations refer to (1) that financial service providers should know their customers exactly in order to avoid incorrect advice (“Know your customer rules” - KYC rules), (2) that illegal money laundering and tax evasion should be combated, (3) that action is taken against terrorist financing and (4) that the ongoing taxation of income is also ensured across borders through automatic exchange of information and exchange of information on request.

see → Credit default insurance.

The three countries Germany (D), Austria (A) and Switzerland (CH).

Also called “data snooping”, “data dredging”, “backtesting with overfitting” or “p-hacking”. The selective, unprofessional, or unethical use of historical data to produce a specific result. Data mining can also happen unintentionally. Data mining is particularly likely if the longest data series available are not used or if no “out-of-sample tests” are carried out (i.e. evaluations with other data samples that are not part of the original data set). The well-known one Sell ​​in May-Strategy could e.g. B. be the result of data mining. (However, the term data mining is also used and interpreted in completely different ways, for example in the German Wikipedia entry “Data Mining”.)

An active investor who trades securities (e.g. stocks) more or less daily, i.e. only holds individual securities for, on average, extremely short periods of time. From this author's point of view, an investment approach that makes no sense for private investors.

The opposite of inflation. Deflation is a sharp, sustained fall in the general price level of goods and services. The last time it occurred in Europe was during the global economic crisis from 1929 to 1937.

Derivatives are securities or types of transactions derived from the value of other “original” securities (“underlyings”). See example → put option.

See → Discount rate.

Division (diversification) of total assets across different assets (assets and asset classes) in order to reduce the overall risk of the → portfolio. Diversification doesn't mean putting all your eggs in one basket or putting all your eggs in one basket.

English Dividend Yield. Key figure in which the annual dividend (or the total of dividend payments in a year) is divided by the annual average share price (before the dividend is paid). Can be calculated for both a single stock and an entire stock market. The dividend yield on the global stock market has been around 2.5% p.a. in recent years. In a given year, more than half of all companies worldwide do not pay a dividend.

The fund domicile is the country of legal headquarters of an investment fund. The clear majority of all investment funds sold in Germany are domiciled outside of Germany. When it comes to ETFs, the market share of funds domiciled in Ireland and Luxembourg is over 90%.

General Data Protection Regulation.

The return on the equity invested in contrast to the return on the property (equity = the funds/own funds paid in by the investor). An (optimistic) example: A property is financed with debt and equity in a ratio of 80:20 and cost 100 euros. In a given year, the property value increases by 5.5 euros, the net rental income is also 4.5 euros and the interest is 4 euros. This means that the total income is 10 euros (4.5 + 5.5) and the net income is 6 euros (10 euros minus 4 euros). The property yield is therefore 6% (6 euros ÷ 100 euros). However, the EKR is 30% (6 euros ÷ 20 euros). The return on equity is the return that really counts from the owner's perspective (see credit leverage effect). To put it simply, the equity is the original down payment (use of equity) plus all loan repayments made in the meantime.

In Switzerland and some other European countries, the rent saved on an owner-occupied residential property (the fictitious rent) is added to the property owner's taxable income and is therefore taxable. In return, the owner is allowed to deduct maintenance costs and loan interest from his taxable income (but not depreciation for wear and tear).

Cash investments (current accounts, savings accounts, time deposits, etc.) are de facto a loan that the investor/saver grants to his bank. Such “loans” – as with any other loan – are fundamentally associated with the risk that the borrower (i.e. the bank) will not be able to repay the loan (the cash deposit). Deposit insurance instruments reduce this risk, but do not eliminate it completely. It is important to note that securities investments, including investment funds, are not affected by this risk because, in the event of the bank's bankruptcy, these investments - in contrast to the forms of cash investments mentioned - do not fall into the bank's bankruptcy estate. For securities and fund investments, the bank is normally just a depositary, but not the investor's “borrower” in the above-mentioned case. senses. In Germany, deposit insurance is regulated by the Deposit Insurance and Investor Compensation Act. 100% of deposits are protected up to a maximum value of 100,000 euros per customer and an additional 90% of liabilities from own securities (i.e. bonds issued by the respective bank) up to a maximum value of 20,000 euros. All the more lavish promises of voluntary deposit protection by banks, regardless of the type of bank (private bank, savings bank or cooperative bank), are just that – voluntary and private. There is no legal right to them. Anyone who carefully reads the “small print” in the deposit protection regulations of the individual bank types (private bank, savings bank or cooperative bank) will find such provisions there. You should therefore only make cash investments with banks (including savings banks) up to a maximum of 100,000 euros per person and banking institution. If you want to make more cash investments in banks, you should spread them across several different banks. However, the Augsburg branch and the Ulm branch of Bank XYZ are not different banks in this sense. Foreign branches of a German bank are also not subject to German state deposit insurance. Similar, but not necessarily identical, deposit insurance exists in most EU member states. The entry “Deposit Protection” on Wikipedia is worth reading.

A specific repayment mode in which there is no ongoing repayment, but rather the entire repayment is fixed at a point in time when the entire loan balance is paid off in a single repayment payment. Final loans are also (somewhat strangely) called “fixed loans”.

The amount of money (or general wealth) relative to the beginning of the year asset value that an individual withdraws net from a portfolio (or general wealth) each year in distributions and/or share sales (any deposits are considered to be net of distributions and share sales). Example: Peter's total assets on January 1st amount to 2.0 million euros (1.5 million euros in shares and 0.5 million euros as rented property). In the year in question, he withdraws/receives 37,500 euros in stock dividends for consumption purposes, sells shares worth 50,000 euros and receives 15,000 euros in net rental income from the property. Thus, the withdrawal rate is (37.5 + 50.0 + 15.0) ÷ 2,000 = 5.13% (taxes and costs have been ignored here for simplicity).

The excess return that the general stock market produces compared to the “risk-free investment” (super-safe short-term government bonds).

My economist loosely formulates the “expected” increase in value or the expected return of a → asset class as the likely long-term average value for this return based on the publicly available information known today. By definition, around half of all concrete (realized) returns for a certain time interval are above this value, the other half are below this value. The expected return is often determined on the basis of very long-term historical figures (30 years or more), which are adjusted for certain correction factors. The expected return tends to increase after significant price declines (losses in value), and to decrease after significant price increases (value increases).

“Exchange traded fund”. German: exchange-traded fund. From a legal perspective, ETFs are normal open-ended investment funds that are subject to the same regulations as non-exchange-traded, traditional investment funds. In particular, investment funds and ETFs are “special assets”, which means that the bankruptcy of the fund company or the fund’s custodian bank does not mean a loss for the special fund because these and the assets of the fund company or the fund’s custodian bank are strictly separated from each other. One of the important differences from an investor's perspective between a conventional (traditional) mutual fund and an ETF is that ETFs are designed from the outset to be bought and sold on an exchange, while conventional funds are usually purchased directly from the fund company and sold back to them. Almost all ETFs are passive investment funds, i.e. index funds. Compared to active investment funds, ETFs have lower additional purchase costs and ongoing costs.

A general reference interest rate (market interest rate) for short-term funds in the European Monetary Union in euros. The interest rate is not determined by a single bank, but is a neutral and transparent average rate for loans between many European banks. It is published in the media daily and for terms ranging from a few days to twelve months (e.g. 6-month Euribor). Real estate loans in euros with variable interest rates should refer to this interest rate, as it cannot be manipulated by a single bank.

German event risk. Sometimes called tail risk. This refers to risks that, by definition, cannot be calculated, cannot be reasonably predicted, or lie far outside the scope of a probability distribution. An example is the likelihood of purchasing a home that later turns out to be heavily infested with dry rot. The data for calculating this specific risk is unlikely to be available in a meaningful form. This is typical for event risk. A key characteristic of event risk is that it is often overlooked and underestimated, and its damage is difficult to quantify.

“possible debts”. A surety bond is a contingent liability. The guarantor does not normally become a debtor, but only when the actual debtor cannot pay his debt himself and the guarantor is held liable under the guarantee. There are also contingent liabilities that do not result from guarantees, e.g. B. → deferred taxes.

European Economic Area. The EEA is the 27 members of the EU plus Norway, Iceland and Liechtenstein. The EEA is a free trade area in which the “four fundamental freedoms” of the EU Treaty apply (in simple terms, free movement of goods, services, workers and companies).

German: exposure, being exposed. Example: A 40/30/20 portfolio of Berlin real estate, globally diversified stocks and → money market investments has a 40% exposure to the Berlin real estate market, a 30% exposure to the stock market and a 20% exposure to the “risk-free” asset, to the “risk-free” investment (money market investments).

Also called smart beta investing. The overweighting of certain scientifically identified “factors” or factor premiums in a securities portfolio in order to achieve excess return or a more attractive return-risk combination. Factor investing is explained in detail in Confident Investing with Index Funds and ETFs (2018).

see → Factor Investing.

see → Factor Investing.

The Foreign Account Tax Compliance Act (Act) is a US law that came into force in 2010 and requires US taxable individuals and companies with a habitual residence or place of business outside the US to report certain data to US tax authorities, in particular data relating to foreign accounts. The purpose of the law is to combat tax evasion and money laundering by US taxpayers in international settings. Through the legal implementation of FATCA outside the USA, third countries participate in the enforcement of US tax law. This is inherently “unusual”. The US income tax law is linked to citizenship and residence - and this is almost unique in the world. However, the international norm for this is “residency only”. This means that US tax law contradicts European and actually global tax law principles in an elementary respect.

“Fiat”: Latin for “let it be.” A monetary system in which the central bank (government) uses various instruments to determine the money supply. The commercial banks are used as “agents” of the central bank. In principle, the money supply can be increased or decreased “arbitrarily” by the central bank. (Increasing the money supply does not necessarily mean increasing consumer goods inflation.) Virtually all monetary systems in existence today are FIAT monetary systems. Their basic counterpart are monetary systems backed by precious metals (the classic gold standard) or the full money system (see Wikipedia "Full money system. In the classic gold standard, the volume of precious metal belonging to the central bank (or the state) determines the value of a currency unit. Here the central bank cannot influence the money supply "arbitrarily", but must first acquire gold if it wants to increase the money supply. Whether the lack of influence by the central bank on the money supply in a gold standard is an advantage or Scholars argue that it is a disadvantage.

Statements about return and risk or other important characteristics of investments (including real estate investments) that are disseminated as “information” by the media, on the Internet and by the financial industry, but which are not serious from a scientific perspective. Probably 90% of the statements that are made in the media, on the Internet and by the bank and real estate industry about the returns that can be achieved in the future or the risk of real estate are, from a scientific perspective, wrong, one-sided, oversimplified, exaggerated or otherwise unrealistic.

In the broadest sense, measures taken by the state to gradually reduce its debts at the expense of its citizens. The most widespread form of financial repression is the influence (increase) of the inflation rate by the state (the central bank). When inflation rises, the government's tax revenue increases while the amount of government debt repayment remains constant. Low nominal interest rates influenced by the state and thus possibly negative real interest rates can also be a form of financial repression because it makes it easier for the state to service its debts.

English acronym for Fear of Missing Out. FOMO stands for the unpleasant human emotion that, depending on the situation, is fueled by envy, impatience, ignorance and gullibility of chasing after “opportunities” that, a year or five years later, the person usually shakes their head about taking advantage of or even bitterly regrets chasing after, if it caused real damage and was not just harmlessly stupid.

The percentage share of an investment (asset) that is not financed with equity (100% - equity in % = debt in %). For real estate or a small business, debt capital is typically a bank loan. For a large company or a government, debt capital can also be a bond. A property that costs 500,000 euros and was financed with a loan of 400,000 euros and 100,000 euros of equity has a debt ratio of 80%.

If securities indices are adjusted (typically) every six months, certain popular small-cap or other narrow indices may cause hedge funds to influence the prices of the securities in question through their targeted trading activity to the detriment of index fund investors and reduce their returns.

The FW of a household (or company) is its “home currency”. To put it more precisely in economic terms, it is the currency in which the household is likely to spend most of its spending in the future. For households living in Germany that have no firm intention of moving to a country outside the Eurozone, the functional currency is the Euro.

English Counterparty Risk. The risk that a counterparty to whom one has or could have a claim for payment currently or in the future will not/cannot fulfill this claim for payment. Counterparty risk is closely related to → default risk or credit risk.

see → Present value.

English Bid-Ask Spread or Bid-Offer Spread. The spread between the buying price and selling price of a security, currency or other security from an investor's perspective. The “market rate” (mean rate) is approximately halfway between these two rates. Ultimately, the GBS represents the dealer margin. The more liquid a security (the higher its average trading volume per unit of time), the tighter, i.e. “cheaper”, the GBS tends to be. GBS changes over time, often even within a day. In a market crisis, GBS become wider and therefore more expensive. The GBS may also differ on different exchanges at any given time.

From the perspective of a domestic investor, money market investments are short-term, liquid, “risk-free” investments (not in foreign currencies), such as time or fixed-term deposits, savings accounts, accounts with interest on deposits, money market fund investments or investments in bonds, provided the remaining term is less than 18 months. As a rule, it is assumed that money market investments are low-risk investments and have only a low or at most medium credit risk. Longer-term interest securities are assigned to the bond market (bond market).

From an investor's perspective, money market investments are short-term, liquid, "risk-free" investments in their → functional currency, such as time or fixed-term deposits, savings accounts, accounts with interest on deposits, money market fund shares or investments in bonds, provided that the remaining term is less than 12 months. As a rule, it is assumed that money market investments are low-risk investments and have only a low credit risk. Longer-term interest securities are assigned to the bond market (bond market).

see → Money market investment.

The interest or return on → money market investments.

A specific way of calculating the return on an investment. The geometric average return must be distinguished from the (generally less meaningful) arithmetic average return, from the → internal rate of return and from the cumulative return. In his book “Investing Confidently with Index Funds and ETFs,” Kommer goes into detail about these different types of return calculations.

“Typically German” fund structure in which a private investor participates in an investment project (real estate, aircraft, ships, containers, wind farms, solar parks, etc.). The private investor is regularly a limited partner in a GmbH & Co KG (the fund). Closed-end funds are extremely risky and have been a spectacularly unsuccessful form of investment for private investors over the past 50 years.

See open or closed real estate funds.

a → limited partnership in which a (limited liability GmbH) acts as a general partner (full liability). In the concept proposed here, a foundation and, if necessary, family members act as managing limited partners as limited liability partners.

Income tax in Germany, as in most countries, is “progressive”. This means that the tax rate starts at a low level when income is low and then gradually increases as income level increases. The entry tax rate in 2021 was 14% (for income that exceeded the income tax allowance of 9,744 euros per year). The top tax rate in 2021 was 47.5% for income from 274,613 euros (with solidarity surcharge, without church tax). Since in a progressive tax tariff system the tax rate only applies to that portion of income that exceeds a certain threshold, an average tax rate results for the overall income. This differs fundamentally from the marginal tax rate on the “last” euro, so to speak. The marginal tax rate is the highest tax rate bracket applicable in a specific case. For low incomes, the average tax rate is well below the marginal tax rate; for high incomes, the two gradually converge, although for arithmetic reasons the average tax rate never quite reaches the marginal tax rate. For methodological reasons, most tax calculations must use the higher marginal tax rate, not the average tax rate. Example (basic income tax table 2021): With a taxable annual income of 25,000 euros, the average tax rate is 14.5% and the marginal tax rate is 28.3% (including solidarity surcharge, excluding church tax); With a taxable annual income of 50,000 euros, the average tax rate is 24% and the marginal tax rate is 38.7% (including solos, excluding KiSt).

The regular mandatory payments made by the owner of an apartment to the homeowners' association in order to finance future (or already completed) maintenance on the common property.

see → Credit leverage effect.

A fund that attempts to generate so-called “market-independent” returns, sometimes also called an “absolute return fund”. There are over 10,000 hedge funds worldwide and over a hundred different types of hedge funds. In most countries (including Germany), hedge funds are not permitted for general distribution to private investors because they are less regulated than normal investment funds (UCITS funds). The hedge fund sector's returns have been disappointing over the past 15 years.

German hedging, exchange rate hedging. The hedging of a certain price, interest or course level by using certain financial products or, in a figurative sense, by adding particularly low-risk asset classes.

see → functional currency.

From the perspective of the tax authorities in country A, the additional taxation includes the taxation of “passive” income of a foreign subsidiary in country B from the domestic shareholder in country A (the domestic shareholder is assumed to have unlimited tax liability in country A). The additional taxation is intended to prevent unlimited taxpayers in Germany (Country A) from transferring certain assets (e.g. bonds and shares) from within the country to a company controlled by them based in a low-tax country (Country B) and then no longer being subject to tax in the country on this income. Examples of “passive income” include dividends and interest. The “addition” breaks the usual shielding effect of the foreign company in B from taxation in A, since the foreign income (which remains abroad) is also subject to domestic taxation (this does not mean distributions from B to A - these would in principle always be taxed in A).

The predominantly irrational tendency of private investors to prefer (overweight) investments (e.g. stocks) from their own region or country over comparable investments from a more distant region or country. It has been shown many times that home bias worsens the achievable return-risk combination in the long term.

The present value of all income payments (salaries) that an individual or household is expected to receive in the future. For working people, who represent the normal case, human capital is normally the largest single asset up to the age of around 55 years, assuming no inheritances or lottery winnings. By definition, when you have finally finished working, your human capital is zero. Journalists often use the term human capital differently to refer to the collective level of education or knowledge of a national population. Trade unions often use the term in a derogatory and unscientific way. Both ideas about human capital differ from the academic-economic idea presented here.

Open “passive” investment funds or ETFs that follow the investment strategy of index investing, that is, their composition replicates a specific securities index (for example the DAX, S&P 500 or MSCI World) as precisely as possible. An active investment strategy with the aim of exceeding the market return is not pursued. The fund invests the fund money in the securities underlying the index in the same proportion as the index. The additional purchase costs and ongoing costs of index funds are far lower than those of actively managed funds.

Also called the “money illusion”. A better term would be “real value illusion”. The inability of a normal person to distinguish apparent increases in wealth or purchasing power, which only come about through inflation, from real ("real", inflation-adjusted) increases. Example: If my wealth grew “nominally” (i.e. including inflation) by 3% in year T1, while the inflation rate (the increase in consumer goods prices) was 4%, then my real (inflation-adjusted) wealth (its purchasing power) shrank by 1%.

Government bonds that do not have a fixed “nominal” interest rate (interest coupon) like a normal “nominal” bond, but rather an interest rate that is set as a (low) real interest rate, to which an inflation compensation component X is added. X is read retrospectively from the inflation of the previous six or 12 months. With inflation-indexed bonds, the issuer bears the risk of an increase in inflation; with a normal bond, the investor (bond owner) bears the risk of an increase in inflation

Defined somewhat briefly, an information efficient market (often inaccurately referred to as just an "efficient" market) is a market in which, taking into account costs and risk, it is not possible to "systematically" (permanently and repeatedly) achieve an "excess return" over the corresponding average market return, except by chance. This means that all publicly available information is most likely already included in the current market price of the relevant security or property. On the basis of such information (including rumors or assumptions), no systematic excess returns over the market return are possible.

Mathematical designation of the effective interest rate. The internal rate of return is the discount rate at which the sum of the discounted positive cash flows (income) and negative cash flows (expenses) occurring over a given period of time equals zero. In other words: the present value of the entire cash flow is exactly zero at this discount rate. The internal rate of return is typically the most reliable method of calculating investor returns. It can usually only be calculated using a spreadsheet program such as Microsoft Excel.

In a so-called open investment fund (and this is the only one we are talking about here), the investment company pools the money of many investors in order to invest it in marketable assets, for example in stocks or → bonds, in accordance with the principle of risk diversification and defined investment principles. For this service, the fund investor pays an ongoing management fee, which is taken from the fund assets and reduces the return. Private investors should only invest in “passive” index funds, because in the very long term these have higher returns than the average “actively” managed investment fund (see also → ETF, → equity funds, → bond funds, → index funds). It is impossible to reliably identify in advance the comparatively few “good” investment funds in the future, although the financial industry always claims the opposite.

The first ten grades of the rating scale of the well-known bond rating agencies form the investment grade range up to “BBB–”. The remaining (worse) approximately 15 notes form the significantly riskier sub-investment grade area (“junk bonds”).

In a market economy in which prices are essentially freely formed and market actors can act somewhat freely, market participants direct (“allocate”) the resources of the economy to their most economically sensible use through their buying and selling decisions. This steering function of the markets applies to consumer and capital goods.

The sum of interest and repayment that the debtor has to pay on a loan or bond per period (for example per month or per year). Also called “debt service.” See also → Annuity.

A capital company, e.g. a limited liability company (GmbH) or a stock corporation (AG), is established through the contribution of a certain amount of capital and a formal founding act (e.g. before a notary) by one or more shareholders; In return for their investment, the shareholders receive shares in the corporation and thus remain owners of the corporation; A corporation – unlike a partnership – has its own legal personality.

This occurs with a loan when the interest is not paid on an ongoing basis by the debtor, but is instead added to the loan amount, i.e. increasing it.

Capital market investments refer to listed investments and bank deposits. You could also say “liquid investments”. This includes the → asset classes stocks, bonds (interest-bearing investments), gold and raw materials, as well as all “packaged” financial products derived from them - such as capital-forming life insurance, private pension insurance, investment funds, → certificates, → derivatives, etc.

Corporate bonds typically issued by large insurance companies. The payment profile (return profile) of “cat bonds” (catastrophy bonds) is primarily based on how frequently and intensely defined natural disasters (e.g. tropical cyclones) occur in a certain area and a certain period of time relative to a long-term average. An attractive feature of cat bonds is that their payment profile has a near zero → correlation with that of the general interest rate market and the stock market.

A partnership typically formed for commercial purposes, which must have two types of partners: (1) the general partner is a natural or legal person (e.g. a GmbH) who must be liable for the limited partnership's business with all of his private assets and (2) the limited partner is a person who is only liable with a certain monetary contribution. In a →  GmbH & Co. KG, a GmbH is the general partner who is liable with all of its assets (which often only consist of a minimum deposit of 25,000 euros).

A key figure from statistics that measures the degree of parallelism in the development of two random variables (series of numbers), for example the price changes of two securities or → asset classes over time. Correlation is measured in the form of the correlation coefficient, which ranges between +1.0 and -1.0, where +1 stands for complete correlation (exact parallel development), 0 for completely independent (or random) development and -1 for exactly opposite development. The lower the correlation between two financial assets, the better they are for diversification in a portfolio. Just like returns, correlations also fluctuate over time, but less violently.

English Credit Default Swaps (CDS). An investor who buys a bond can also purchase protection for a specific term in the form of a CDS. This pays if the bond issuer does not service its capital (interest, repayment) in accordance with the contract. The cost of this insurance reflects the market estimate of the default risk (credit risk) of the bond issuer.

Corresponding to the debt financing effect or leverage effect for short: A property can be partially or completely financed through a loan (instead of just from your own funds), and this is the rule for new purchases. The use of debt capital increases the return on equity (the return on equity as opposed to the return on the property), provided that the return on the capital investment financed in this way exceeds the interest on the loan and only then. However, “leveraging” also increases the risk level of an investment. Any real estate financing via credit is financing with leverage (with credit leverage). Example: Anyone who financed their property with 30% equity (own funds that were paid initially or later) and whose property loses 20% in value has suffered a loss on their equity of 67% (20% ÷ 30%) (without taking any net rental income into account). The financial risks of the credit leverage effect in real estate financing are traditionally downplayed by the real estate industry and die-hard “real estate fans,” while the opportunities of the effect (the “upside”) are exaggerated. In general you can say: For e.g. B. With a 20% equity share (i.e. 80% loan share), the risk (the loss effect) for the equity from loss of value of the property is five times higher than for the property itself. With an equity share of 25% it is four times as high and with an equity share of 50% it is still twice as high.

Abbreviated KBV. The ratio of the share price to the book equity (balance sheet equity) per share or the ratio of the → market capitalization of a company to its book equity.

Abbreviated P/E ratio. A financial key figure. The ratio between the current share price and the company's most current available book profit per share (Price Earnings Ratio). The P/E ratio measures the valuation level of a share or an entire stock market.

see → price-earnings ratio.

Capital management company, a company that creates and manages investment funds (colloquially: fund company). A previously common expression for KVG was capital investment company (KAG).

From the perspective of a private household, this refers to the risk of living longer than one's own assets last or the risk of setting one's standard of living too low for fear of becoming wealthless before death. From the perspective of a life insurance company, the risk is that, in individual cases, committed annuity payments will have to be paid for longer than the actuarially determined remaining life expectancy would suggest.

See also → Contingent liabilities.

English Short Selling. Party A sells a security A hopes that at this point the security will have fallen in value compared to the original time of sale (so A is speculating on falling prices). If this is the case, A makes a profit because the selling price is higher than the purchase price (taking the rental costs into account). If prices rise, A will lose money.

An annuity that pays until the death of the annuitant. In principle, an annuity is not limited to a date that can be determined in the present calendar. The statutory pension is typically a life annuity. With a life annuity, the annuity payer bears the longevity risk of the annuitant from his or her perspective.

See → Credit leverage effect. In financial jargon, leverage is a synonym for debt or indebtedness.

In German “credit to value”. The relationship between the outstanding loan amount (loan balance) and the purchase price or market value of a property. Not synonymous with the latently misleading German term “loan-to-value ratio”, in which the loan balance does not refer to the market value or purchase price of the property, but to the lower loan-to-value value set by a bank.

See → Microlocation.

Active investment strategy in which an attempt is made not to identify specific individual values ​​(as in → stock picking), but rather to identify specific market segments (asset classes) that represent particularly attractive or particularly unattractive return-risk combinations over time and, based on this, to generate an excess return over time through “in-out”.

Other names for MK are “market value” or “stock market capitalization”. The MK of a listed company is equal to the share price multiplied by the number of shares outstanding. The MK also represents the current market value of the company's equity (market value of → assets minus market value of debts). The MK can also be calculated collectively for a national or regional market or an index such as the DAX or the MSCI World, i.e. for a large number of stock companies instead of just one. Then it is the sum of the individual market capitalization of all companies listed in that country or region. The concept of MK can also be applied to bonds. There, the MK is the market value of a bond and not, as is often incorrectly assumed, the nominal amount (repayment amount or nominal amount).

The number of historical months or years that the investor had to wait after the onset of a loss in value (negative return) until the previous peak in value was reached again. In other words: The longest sub-period within a longer observation period for which the value of an asset is identical at the beginning and end (i.e. there is no increase in value). This period can be calculated based on real (inflation-adjusted) or nominal appreciation rates.

English Maximum Drawdown; the maximum accumulated loss during a given historical period. A clear risk indicator. After the maximum drawdown has been reached, it may take a number of years until the asset's previous maximum price or value is reached again. The MKV is a particularly conservative (“pessimistic”) risk indicator. For example, it is more conservative (pessimistic) than the “Value at Risk” more commonly used in the financial industry (see Wikipedia, “Value at Risk”). A specific MKV represents a worst-case perspective (maximum negative perspective) in that it assumes that the investor “entered” and “exited” with all of his assets at the worst possible time during the entire period (period under consideration). This will not be the case for most investors for obvious reasons. In addition, almost all of us gradually add money to or withdraw money from our portfolio over time. Both of these “blur” the entry and exit times (i.e. extend them) and thus lead to a more even distribution of the “downside” and “upside” (risk and opportunity), both in a positive and negative sense.

see → maximum cumulative loss.

When it comes to real estate, a distinction is made between micro and macro locations. The latter refers to the region and the city, while the micro-location refers to the district, the street, the very specific location within the street and the character of the immediate surroundings including connections to public transport, traffic noise levels, pollution levels or direction. Microlocation and macrolocation both greatly influence the price of the property.

Key figure from statistics. The median is the middle case or “the case (data point) in the middle.” The median can but does not have to be identical to the (arithmetic) average. In the number row 2; 3; 5; 10 and 100, the average is 60 and the median is 5 (see also Wikipedia, “Median”).

An actively managed investment fund that invests in stocks and bonds at the same time. The fund manager decides tactically about the mix ratio. Mixed funds are generally not recommended.

A statistical (stochastic) forecasting technique with which a probability distribution of portfolio development over e.g. B. is produced for 30 or more years. This can be used, for example, to calculate how likely it is that a portfolio will last for at least 30 years given a certain withdrawal rate and other given assumptions.

“ACWI IMI” stands for All-Country World Index Investable Market Index (MSCI is the name of the index provider). The ACWI IMI is the broadest index among the well-known stock indices. It covers around 99% of the → market capitalization of the world stock market (both developed and emerging markets). It represents over 8,800 stocks and is significantly broader than the better-known “world stock index” MSCI World Standard. In the DACH countries, ETFs are sold on the MSCI ACWI IMI and similarly broad global stock indices.

For real estate, the reciprocal of the gross rental yield. Example: A gross rental yield of 4% corresponds to a multiplier of 25 (namely 1 ÷ 4%).

In the sense of nominal increase in value or nominal return, i.e. increase in value or return including inflation, in contrast to “adjusted for inflation” or “real” (excluding inflation, after deduction of inflation. Example: nominal versus real return. See also → Inflation illusion.

A bond with no ongoing interest payments, i.e. no “coupon”. With an NKA, the interest is instead included in the repayment amount at maturity. NKAs have the advantage that (a) there is no risk of having to reinvest current interest payments at a worse interest rate and (b) incurring transaction costs when reinvesting. They may also have tax advantages in some tax systems.

A risk metric. The maximum sub-period within a total period for a given investment within which - calculated from the beginning of the sub-period to the end of the sub-period - the return (nominal or real, as the case may be) was exactly zero. You could also say: the maximum “dry spell”.

Expression from mathematics Game theory for a situation in which one person can only win what another person loses (see Wikipedia, keyword game theory). The total winnings of the “game” are limited. With regard to the distribution of excess and under-returns among individual investors, the securities market is a zero-sum game. In every trade, one party must necessarily win relative to the market average, one must lose, and the combined return of the two trading partners, ignoring costs, equals the market return.

The return on a property without taking into account its financing, i.e. without taking into account any borrowing costs (credit costs). The property return assumes, so to speak, 100 percent equity financing. Since the financing costs of real estate vary from case to case, the property yield allows a simpler, more objective comparison of returns between different properties. Outside of real estate financing, the terms asset return or return on total capital are used for what is called “property return” in the real estate industry. See also return on equity.

Organization for Economic Co-operation and Development. International organization with 37 member states based in Paris, committed to democracy and a market economy. Most members belong to the countries with high per capita income and are considered developed countries. The OECD is the global driving force in international tax cooperation.

An open real estate fund is a normal investment fund that only invests in real estate. The investor in an open real estate fund can - in principle - buy and resell his shares in the fund at any time at the official share price listed in the newspaper. For the sake of simplicity, we will ignore the fact that this has not been the case in many open real estate funds in Germany and other countries in recent years due to the crisis and without planning. Since 2013, there have been minimum holding and notice periods for investment amounts that exceed 30,000 euros. In the case of closed real estate funds, however, there is an initially and ultimately defined group of investors who become “co-entrepreneurs” in the fund assets. This co-entrepreneur status comes with complex contractual and legal obligations that private investors generally do not understand correctly. There is no ongoing opportunity to buy and sell the fund shares. Closed real estate funds are strongly discouraged for risk reasons.

Here is the successful definition from Wikipedia: "Opportunity costs (also rarely referred to as alternative costs, waiver costs or shadow prices) are lost revenues (more generally: lost benefits) that arise from the fact that existing opportunities (opportunities) for using resources are not taken advantage of. Colloquially one can also speak of 'costs of regret' or 'costs of lost profits'. Opportunity costs are therefore not costs in the sense of business cost and performance accounting, but rather a economic concept for quantifying lost alternatives.”

Synonymous with → “Alpha”.

German: overestimation of oneself. Science has found that most private and real estate investors have an astonishing degree of overconfidence regarding their knowledge of the real estate and capital markets and, in particular, their ability to achieve above-average returns in the future or to avoid particular risks. They also tend to overestimate their historical returns (they usually don't collect really objective data on this, but they don't readily admit it). The overconfidence bias is statistically more pronounced in men than in women.

Latin for “per year”, “annually”.

Performance chasing (in German “rearview mirror investing”) is a “phase model” derived from science that describes the behavior of the typical private investor over time. You can describe it casually and slightly sarcastically as follows: First phase: The performance chaser enters relatively close to the peak in value of a security, fund or an entire asset class (e.g. technology stocks or Munich real estate) because and after a few very good years have taken place - in other words: he enters late and no longer takes advantage of a large part of the upswing. Phase 2: Some time later, the expensive → asset collapses because it is highly valued (“what goes up, must come down”). After 20% to 50% losses, the performance chaser leaves, frustrated and annoyed - with reduced assets due to the loss. Phase 3: Stay on the sidelines, “because things could get worse.” Wait a long time, maybe years, and lick your wounds until a few good years have passed again. Phase 4: Now jump back on the already fast-moving train without having made up for the old losses. The game begins again: “Repeat until broke.”

Every private household should maintain a certain amount of cash reserves (typically in the form of a bank balance within the state deposit insurance limit) in order to be able to finance unplanned unavoidable expenses or emergencies and to increase one's own peace of mind. An order of magnitude for the PL is four times to twelve times the average monthly cost of living.

Small loans that are legally granted by a private person to another private person or to a small business. P2P loans are arranged and distributed through a dedicated P2P company (platform) (typically over the Internet). The P2P platform charges an ongoing fee for this intermediary role. P2P is old wine in new bottles and is exactly what banks have been doing for hundreds of years, just repackaged.

In the narrower sense, the sum of all assets (→ assets) of an investor or household, regardless of how many real estate properties, securities deposits (possibly at different banks) and life insurance these assets are distributed over. In a broader sense, an investor portfolio also includes their human capital (salaries not yet received until retirement) and their entitlements to statutory pension insurance. For → investment funds, a portfolio is the sum of securities that the fund holds at a given time. Sometimes - somewhat imprecisely - an individual securities portfolio is referred to as a portfolio.

A fund that invests in unlisted companies - hence “private” equity. In most countries (including Germany), private equity funds are not approved for general distribution to private investors - and that's a good thing.

see → price-to-book value ratio.

A put option gives its owner (“long position”) the right, but not the obligation, to sell a specific security to the seller (“short position”) of the put option at a specified price during a specific period of time (“American put option”) or at a specific time (“European put option”). As a rule, with options, securities do not change hands, but rather a compensation payment is made in the amount of the difference in the value of the security in question at the time of execution.

A specific repayment method for loans (“installment loan”). With installment or linear repayment, a constant amount of money is repaid per period (e.g. per month or per half-year). With installment repayment, the sum of repayment and interest payment is high at the beginning and then decreases over time. Reason: The interest payment decreases in parallel with the decreasing remaining loan amount over time, while the periodic repayment always remains the same. Installment repayment differs from annuity repayment or bullet repayment (repayment in a single sum at the end of the loan term). An installment loan is sometimes misleadingly called a “repayment loan”.

German grade, grading. Rating agencies assign ratings for the creditworthiness of companies or states or their bonds. The rating expresses the creditworthiness (→ creditworthiness) of the company or state (or its bonds) and thus the estimated risk of an investment in these bonds. See also the keyword “Rating” on the German Wikipedia.

As part of a “passive” forecast-free buy-and-hold investment strategy with “static asset allocation” as we recommend, rule-based rebalancing is necessary. Rebalancing is the periodic “returning” the division of a portfolio to its originally consciously chosen structure. There are a number of different methods for implementing rebalancing in practice.

The well-documented, widespread and dangerous error in thinking is to assume that data from the immediate past (in investing, return data over the last two to five years) is more representative of the future than data that came before it.

A natural person, a legal entity (e.g. foundation, GmbH or stock corporation) or a new legal structure formed by these two types of persons (such as a partnership) that can independently bear rights, obligations and property relationships. When it comes to legal entities, a distinction can be made as to whether they can be owned by someone (e.g. corporations or partnerships) or not (natural persons and foundations).

English regression to the mean, reversion to the mean. From periods of around five years upwards, the phenomenon of regression to the mean (RZM) can be observed in real estate returns and, to a lesser extent, in stock returns. RZM causes the annual returns on real estate or diversified stock portfolios to hover around the arithmetic mean of the returns of the → asset class over the very long term. To the extent that there is regression to the mean, excess or under-returns relative to the long-term market average are only temporary.

Real estate investment trusts. A special legal form of real estate companies that are subject to the respective national REIT law. If they do this, they receive a number of tax advantages, but in return they have to comply with several restrictions and conditions that the majority of all real estate companies in Europe and especially in Germany apparently find too unattractive. In the USA, however, most real estate companies are REITs.

In a portfolio (deposit) from which significant withdrawals are made over time (outflows take place), the order of the annual returns plays a major role in the final value of the asset after 10, 20 or 50 years.

An open-ended investment fund that invests the assets of its investors in bonds (“bonds”), i.e. in government bonds or corporate bonds. If you invest in bond funds, you should choose a bond fund (bond fund) based on ETFs, as these have significantly lower additional costs and are very likely to produce a better return in the long term.

Also “risk-adjusted return”. Investment metrics that relate returns to the risk taken. The best known of these key figures is the Sharpe ratio (see the keyword “Sharpe quotient” on the German Wikipedia).

In the case of endowment life insurance and private pension insurance, the insurance company informs the policyholder (VN) of the surrender value annually. The surrender value is the payout that the policyholder would receive if he were to cancel the insurance at the time the surrender value was calculated. You could also say that the surrender value is the → cash value of the insurance claim.

The risk (probability) of falling below a specified threshold return during a given investment period.

Small public companies in contrast to large (large caps or standard stocks) and medium-sized (mid caps). Contrary to what many investors believe, how “small” a small cap is is not firmly defined. Despite this, small caps on the stock market are still comparatively large companies relative to the vast majority of unlisted companies - often with annual sales of over one billion euros or dollars.

In the case of raw materials, the market in which the “fulfillment of the trading transaction” (delivery of the goods and payment) takes place immediately” (e.g. within two working days). The “normal” market, so to speak. Its counterpart is the → futures market. The distinction between spot market and futures market also exists for stocks, bonds and foreign currencies.

See → Bonds. To be distinguished from corporate bonds.

see → Volatility.

Literally “selecting (individual) stocks.” Stock picking is the umbrella term for many active investment strategies that use a specific method to select stocks with the assumed potential to generate excess returns in the future.

A type of sell order in which the sell order is subject to a condition. The condition is simplified as follows: “Sell only if the price of this security (or fund) falls below the amount X euros in the period up to such-and-such a date.” Stop-loss orders are relatively expensive, very labor-intensive overall, do not work 100% reliably (are not always executed) and do not solve the crucial problem of what to do with the resulting liquidity after the “exit”.

see → Event Risk.

Accordingly, when a company is sold (if the shares are private assets), 60% of the capital gain is taxable at the personal income tax rate (Section 17 (1) EStG). At the highest marginal tax rate, this would be 47.5% × 60% = 28.5% (including SolZ, excluding church tax).

Also called present preference.

In Germany the TER is called “running costs” or “total cost ratio”. It is the ongoing cost burden for investment funds. The TER is more meaningful (and higher) than the management fee. The TER also does not include all costs that arise in an investment fund, e.g. B. not the transaction costs that result from the → bid-ask spread of the securities bought and sold.

English for trading, here in the sense of buying and selling securities.

The historical return-risk balance of a portfolio or an investor. To put it bluntly, his success (or failure) in the past.

A key figure that shows the fluctuation, i.e. h. measures the → volatility (standard deviation) of the → tracking difference.

For an ETF, the difference between the return of the benchmark index (the index being tracked) and the return of the ETF over a specified period of time (typically one year). The smaller this difference is, the better. Thanks to income from securities lending and possible withholding tax advantages of the ETF relative to the reference index, in rare cases the tracking difference can even be negative (in which case the ETF has a higher return than the reference index). The tracking difference is just as good and often a better cost indicator as the → TER.

English outperformance. Return that is above the applicable value for a → asset class. More generally formulated: A return that beats a correctly selected benchmark when taking costs, taxes and risk into account. Comparing the returns of two investments A and B without taking costs, taxes and risk into account is usually pointless and misleading, although it is common practice in financial and real estate marketing materials as well as in the media.

Real estate loan in which the loan amount is gradually paid out in installments until the borrower's death. The borrower's heirs must then decide whether they want to take over the property with the debts on it (alternatively, they can also refuse the inheritance). Reverse mortgages are an unusual form of credit that is primarily chosen by old people who want to “monetize” their illiquid property, but at the same time do not want to move out or sell it.

In relation to the state pension insurance system, the practice that current pension contributions (pension system income) are not invested in the capital market, but are immediately paid out again as current pension payments. With a falling birth rate and increasing life expectancy, the pay-as-you-go system cannot function without unpopular adjustments (increases in contributions, reductions in pensions, raising the retirement age) and can only be saved from insolvency through possible cross-subsidies from general tax resources.

English Yields to Maturity. The return on a bond from the time it is viewed or purchased (e.g. “now” until maturity, provided the capital service (interest, repayment) is always provided on time). The current yield is the “effective” (“real”) yield to maturity. It differs in particular from the coupon yield (which is the periodic interest payment per annum relative to the face value when the bond is issued).

The person refinancing can be a private household or an entrepreneur. Debt restructuring is the redemption (replacement) of one or more loans with one or more others. The purpose of a debt restructuring is usually to produce an advantage for the borrower, e.g. B. Extension of repayment, more favorable interest rates or partial debt relief. Debt restructuring often occurs due to pressure from a lender when the debtor is in economic difficulties. However, some debt restructurings also arise from the borrower's own initiative if he believes that he can improve his financial situation through debt restructuring (see also Wikipedia, keyword “debt restructuring”).

“Experts” who – mostly for many years – have been making radically pessimistic predictions about the economy, public finances and capital markets. Most doom forecasters are not scientists, but “amateur economists.” The part of these forecasts that is sufficiently precise in time has largely not come true in the past 20 years and can therefore be classified as incorrect. Another part is so imprecise in timing that it fundamentally cannot be wrong, such as the forecast “there will be a severe storm”. At the same time, such time-undefined forecasts are ultimately useless in terms of decision-making. From an investor's perspective, the main problem with these forecasts is that following them has high → opportunity costs.

The term expresses the final sum to which an original investment of one monetary unit would have grown at the end of an observation period if the average return during the observation period were taken as a basis. The final asset value can be calculated including or excluding inflation.

Valuation deductions in German inheritance tax law, which significantly reduce the actual burden of inheritance tax on heirs (typically by 85% or even 100%) in the inheritance tax valuation (assessment basis) of small and medium-sized companies in particular, provided that the company successors (the heirs) maintain the jobs and do not make any major withdrawals. A less controversial, more moderate exemption also applies to properties rented out for residential purposes.

The conversion of a sum of money or, more generally, an asset (including real estate) into a periodic (e.g. monthly) annuity payment. This annuity payment can be made for a limited period of time (for example 20 years) or “perpetually”, that is, until the death of the investor or the last spouse to die. Insurance companies offer such private pension insurance. With a perpetual annuity, the annuity provider bears the “longevity risk” of the annuitant. See also life annuity.

The most widely used measure of risk in financial economics. The word is derived from the Latin verb “volare” (to fly) and refers to the fluctuations in the value of an investment over time. Volatility is typically measured using the standard deviation statistical measure. The higher the standard deviation of the value fluctuations in the period under review, the riskier the investment is. For direct investments in real estate (including open or closed real estate funds), the calculation of volatility is usually misleading because the underlying value and return measurements are smoothed by appraisers and/or do not occur frequently enough.

If a real estate loan is repaid early within its fixed interest rate period (before this has expired), the bank can and may demand an early repayment penalty (“penalty payment”) if the market interest rates (for the remaining term until the end of the fixed interest rate period of the loan) are noticeably lower than the interest rate agreed in the loan agreement.

As part of the implementation of EU regulations (Directive EU 2015/849), registers must be introduced across Europe which show which legal entities (companies, companies, trusts, foundations, etc.) can be assigned to which beneficial owners (natural persons). The directive was, among other things, also implemented in the European Economic Area and thus also in Liechtenstein.

Abbreviation for securities identification number.

Electronic trading on the Frankfurt/M stock exchange – by far the largest stock exchange in Germany.

Securities issued by banks (i.e. legally bank bonds, i.e. bonds). In contrast to a normal bank bond, the investor does not receive any interest, but rather participates in the success or failure of a stock exchange transaction (e.g. the price increases of a basket of shares). These investment products are not recommended as they involve high hidden costs and the credit risk of the issuing bank.

Borrowers are generally subject to interest rate risk, i.e. the risk that their interest burden will increase due to an increase in interest rates on the next interest rate adjustment date. This is particularly true for variable interest loans. With fixed-interest loans, there is a risk of an interest rate increase when the fixed interest rate expires.

Compound interest: The interest or, more generally, the return that a security generates in a unit of time (interval) and which itself produces interest (return) in the following interval. The compound interest effect leads to a higher increase in the investment value per period in monetary units, the longer the observation period is.

A heavily indebted company that can supposedly only survive because and as long as interest rates are as low as they have been in Germany and other countries since around 2015. Zombie companies are said to hinder or slow down technical progress, healthy structural change and economic growth. The zombie company theory is not without controversy because both the data and the economic logic underlying this hypothesis are “worthy of discussion”.