Money Matters Media

Which Safe Asset Classes do you really need in your Portfolio?

Wed, 17 Sep 2025 07:11:01 GMT

When it comes to building wealth, most people focus on the exciting part — chasing returns with stocks or ETFs. But the foundation of any strong portfolio is the safe portion: the money you can count on no matter what happens in the markets. In this chapter of my investing guide, we’ll explore the most reliable asset classes for protecting your savings while keeping them liquid and accessible.

This is Part 3 of my investing guide. You can also read it as a standalone article.

In Part 1, I explained why most investors should use ETFs as the backbone of their portfolios.
In Part 2, we looked at Level 1 Asset Allocation (L1AA): how much of your portfolio should be in risky vs. safe investments.

If you haven’t read those chapters yet, I recommend checking them out. If we imagine our portfolio in two buckets, one for save investments and the other riskier ones, in this Chapter 3 I will talk about which Asset classes we should use to fill them up, besides globally, diversified ETFs on the world economy. In this part 1, we will cover safe investments, the backbone of your portfolio.

The Safe Portion of Your Portfolio

Safe assets should be secure and liquid. For many people, this means keeping money in a bank account.

Bank Accounts and Deposit Insurance

In the EU, the European Deposit Insurance Scheme protects deposits up to €100,000 per person, per bank. If your bank were to fail, other European banks and governments would (at least in theory) step in to safeguard your funds.

Choosing a trustworthy bank makes it unlikely you’ll ever face this scenario, but the risk is never zero — even for large, established institutions. Keep in mind:

Only balances up to €100,000[GJ1] per bank are covered.
If you hold more than that in a single bank, it’s wise to spread your money across multiple banks.
While the scheme has never been tested in a major crisis yet, the risk of failure seems very low for most private investors.

ChatGPT was very helpful in providing an overview of deposit insurance schemes worldwide. I reviewed many of the sources, and the information appears to be accurate. If you’re particularly interested in a specific country or region, let me know — I’d be happy to double-check and verify the details for you.

Country / jurisdiction	Coverage limit (amount)	Currency	Notes & source
United States	250,000	USD	FDIC: $250,000 per depositor, per insured bank, per ownership category. (FDIC)
United Kingdom	Current: 85,000 → Proposed: 110,000 (consultation)	GBP	FSCS current limit £85,000; PRA proposed raising to £110,000 (proposal/consultation). (fscs.org.uk)
European Union (harmonised)	100,000	EUR	DGSD / EBA: harmonised at €100,000 (or equivalent) per depositor per bank. (European Banking Authority)
Germany	100,000 (statutory) — additional private schemes may offer more	EUR	Statutory coverage generally €100,000; Germany also has additional schemes for extra protection (see BaFin/Bundesbank pages). (BaFin)
France	100,000	EUR	FGDR: €100,000 per depositor per bank. (garantiedesdepots.fr)
Canada	100,000	CAD	CDIC coverage limit $100,000 CAD per eligible deposit category (government consultation noted potential changes). (Government of Canada)
Australia	250,000	AUD	Financial Claims Scheme: up to A$250,000 per account holder per ADI when activated. (apra.gov.au)
Japan	10,000,000	JPY	Deposit Insurance Corporation / FSA: up to ¥10 million (principal + interest) per depositor. (Financial Services Agency)
China	500,000	CNY	Central bank / official materials: deposit insurance up to RMB 500,000 per account. (Caixin Global)
India	500,000	INR	DICGC: ₹5,00,000 (₹500,000) per depositor for principal + interest. (Reserve Bank of India)
Singapore	100,000	SGD	MAS raised coverage to S$100,000 (from S$75,000). (The Straits Times)
Hong Kong	800,000	HKD	Hong Kong Deposit Protection Scheme increased limit (first phase) to HK$800,000 per depositor per bank (enhancement measures). (Hong Kong Monetary Authority)
Switzerland	100,000	CHF	esisuisse / FINMA: CHF 100,000 per customer, per bank. (esi Suisse)
New Zealand	100,000	NZD	Depositor Compensation Scheme (DCS) covers up to NZ$100,000 per depositor (scheme details / scope apply). (Reserve Bank of New Zealand)
South Korea	Current: 50,000,000 → Planned: 100,000,000 (from Sep 1, 2025, proposal)	KRW	KDIC coverage historically KRW50m; FSC proposed raising to KRW100m (public consultations / regulatory steps). Check exact effective date in source. (kdic.or.kr)
Brazil	250,000	BRL	FGC (credit guarantee fund): insures certain bank instruments up to R$250,000 (applies to certificates, etc. — see FGC rules). (Reuters)
Mexico	400,000 (indexed)	UDIs (inflation-indexed units)	IPAB: coverage up to 400,000 UDIs (investment units; value in MXN/USD varies with UDI). (Gobierno de México)
Russia	1,400,000	RUB	Deposit Insurance Agency: statutory limit 1.4 million rubles (there have been proposals/legislation around raising certain product limits—see sources). (Wikipedia)
South Africa	100,000	ZAR	New deposit insurance scheme (Corporation for Deposit Insurance) — protects individual deposits up to ZAR100,000 (central bank announcement / Reuters coverage). (Reuters)
Turkey	400,000	TRY	TMSF / official: the insurance limit is expressed in TRY and adjusted periodically (TMSF site lists the limit; local rules and recent changes apply). (tmsf.org.tr)

Call Money Accounts (Tagesgeld)

If you’re holding larger sums for a while, consider a call money account (sometimes called a savings or demand deposit account).

These accounts usually offer higher interest rates than regular checking accounts
Transfers to your main account are often quick sometimes even instant if both accounts are at the same bank
If you have your main account and a call money account at the same bank, they will both count towards the maximum insurance scheme amount

Be cautious of offers that seem too good to be true:

Some high rates are temporary promotions
Some banks offering unusually high rates may be located outside your jurisdiction (check if they’re covered by deposit insurance)
In extreme cases, high rates could signal a bank in financial distress — something you’ll want to avoid

Call money accounts typically won’t make you rich — especially with a modest portfolio, the extra interest might only amount to a few euros per year. But they’re still a simple way to earn a bit more on your safe money.

Bonds and Bond ETFs

Another option for the safe portion of your portfolio is high-quality bonds. To meet our safety and liquidity criteria, only consider:

Bonds with at least a BBB (or Baa3) rating
Bonds denominated in your home currency.
Short-term maturities

I take these recommendations from Kommer, 2025. For maturities, he gives example ETFs and fonds up to 3 years as examples. Since diversification is key, it makes sense to invest in an ETFs or money market funds, which spread risk across multiple bond issuers. If a bond within the ETF is downgraded, you don’t need to worry about adjusting your portfolio yourself.

And here is an overview of the bond ratings from Moody´s and Standard & Poor´s from Investopedia.

Moody’s	Standard & Poor’s	Grade	Risk
Aaa	AAA	Investment	Lowest Risk
Aa	AA	Investment	Low Risk
A	A	Investment	Low Risk
Baa	BBB	Investment	Medium Risk
Ba, B	BB, B	Junk	High Risk
Caa/Ca/C	CCC/CC/C	Junk	Highest Risk
C	D	Junk	In Default

Source: Investopedia table

What does “maturity” mean?
In the context of bonds, maturity refers to the date on which the bond issuer is obligated to repay the investor the principal (the amount originally invested). Until that date, the bond typically pays interest (the “coupon”). A short-term maturity simply means that the repayment is due relatively soon—often within one to three years. Shorter maturities generally reduce interest rate risk, because your money is tied up for less time and the bond’s price is less sensitive to changes in market interest rates.

Bond ETFs are also practical if you have large cash reserves. For example, if your safe portfolio allocation is €1 million, holding everything in insured bank accounts would mean opening 10 accounts (with €100,000 insured per account). With a bond ETF, you can manage that allocation in a single position.

Holding Cash at Home

Why not just keep cash at home? While it offers instant liquidity, it comes with risks:

Burglary and theft
Fire or natural disasters
Other unforseen events

For most investors, these risks outweigh the convenience. That said, keeping a small amount of emergency cash at home can be useful. During a financial crisis, banks and brokers may temporarily restrict withdrawals. A few days’ worth of expenses in cash can provide peace of mind.

But storing large amounts of cash at home is rarely wise.

Summary: Safe Asset Classes

For the safe part of your portfolio, you can consider:

Bank accounts – your default option, but keep balances under the insured threshold.
Call money accounts – to earn modest interest while maintaining safety and liquidity. Keep in mind that they add to the insured treshold.
Bond ETFs or money market funds – especially useful for large reserves.
Small amounts of cash at home – as an emergency backup.

For most private investors, call money accounts strike the best balance of safety and return. Bank accounts are fine, but don’t exceed the insured limit. Bonds or bond ETFs make sense for wealthier investors managing large sums.

Investing Course – Chapter 2 – Level 1 Asset Allocation

Tue, 15 Jul 2025 13:03:55 GMT

Welcome to the second chapter of our investing guide, where we’ll dive into the essentials of Asset Allocation Level 1 (L1AA). If you missed the first chapter, we concluded that most people should primarily focus on low-cost, globally diversified ETFs to build long-term returns. If you haven’t watched it yet, feel free to check it out.

For this guide, we’ll be using insights from the book Souverän Investieren—currently one of the most authoritative resources for passive investing in Germany from Gerd Kommer. Specifically, we’ll focus on Chapter 10.2, which is all about determining your Level 1 Asset Allocation. This second chapter was initially recorded as a Power Point presentation. You can find the video with quotations on my YouTube Channel.

But before we dive in, here are a few important notes:

Disclaimer: This is not professional financial advice. The information shared here is based on my own research and understanding, but things change over time. Always do your own research, especially before making major financial decisions.
Questions: This is a small channel with a tight-knit community. If you have any questions—even long ones—feel free to drop them in the comments. Chances are, I’ll have time to respond!

The Basics: Building Your Liquidity Reserve

Before you jump into investing, one of the first steps is building a liquidity reserve. Simply put, this is a cash buffer to protect you from unexpected expenses that might pop up. Think of it as your financial safety net.

What kind of unexpected expenses are we talking about? That could be:

Your phone breaks or gets lost
Your washing machine dies unexpectedly.
You lose your job (especially if you don’t have a strong social safety net).

The key point here is that unexpected costs happen to everyone, even if we try to plan for them. And without a liquidity reserve, you may have to borrow money, potentially using an overdraft account or selling off your investments to cover the cost. This leads to two key problems:

Overdrafts: Many banks have high overdraft fees. If you don’t have enough funds in your account, you may face these expensive penalties. It’s better to avoid them entirely.
Selling Investments: If you have to sell parts of your ETF portfolio to cover an emergency, you might be selling at a loss—especially if the market is down at the time. This reduces your potential long-term returns, and it could lead to tax inefficiencies depending on your situation.

But beyond the financial implications, having a liquidity reserve also provides something invaluable: mental stability. Knowing that you have the cash available to replace your phone or pay for emergency repairs means you won’t have to stress about where the money will come from.

Now, how much should your liquidity reserve be? According to the book, the general recommendation is to have enough to cover four to ten months of your living expenses. The amount really depends on your situation:

If you live in a country with a strong social safety net, like Germany, and have family or friends you can rely on, you might lean toward the lower end of that spectrum.
If you live in a place like the U.S., where social welfare is less comprehensive, and you don’t have family support, you might want to have a higher reserve.

Ultimately, the goal is to have enough liquidity to handle emergencies without disrupting your investment strategy. But also, don’t overdo it. Keeping too much money in a liquid reserve means you miss out on long-term investment returns. The idea is to find the right balance—enough liquidity for peace of mind, but not so much that you’re sacrificing future returns for security.

When to Adjust Your Liquidity Reserve

Your liquidity reserve isn’t something set in stone. It can and should be adjusted based on your needs and life changes. If you find yourself dipping into it more often than expected, it may be time to increase the amount. Alternatively, if you’ve built up a strong financial cushion and find you’re not tapping into it, you may choose to reduce the reserve and invest the difference.

Remember, the liquidity reserve is meant to cover emergencies only. You don’t want to use it for normal expenses or lifestyle choices. For example, if you buy an expensive item or make an impulse purchase, it’s better to pay for it from your regular income rather than touching your emergency fund.

Level 1 Asset Allocation: The Key Decision

Once you’ve built up your liquidity reserve, the next step is deciding how to allocate the rest of your money. This brings us to Level 1 Asset Allocation (L1AA).

At this stage, you need to decide how much of your portfolio will go into low-risk assets (like bonds or cash) versus higher-risk assets (like stocks or ETFs). Here’s the reasoning:

Risk and Return: The more risk you take on (by investing in stocks), the higher your potential return. But risk comes with volatility. Stocks, for example, can have high short-term fluctuations, but they generally outperform bonds over the long term.
The Balance: The trick is finding the balance between risk and return that suits your personal financial situation and psychological comfort. The more risk you’re willing to take, the more potential long-term gains you’ll see—but it’s important to be prepared for periods of volatility.

Why Not Go All-In?

You might be tempted to put everything into high-risk investments like stocks or ETFs because of the higher returns they promise. However, there’s a caveat. For example, U.S. stocks had a period between 1968 and 1983 where they had no real (inflation-adjusted) growth for over 14 years.

But this doesn’t mean that if you invest in stocks today, you’ll have to wait 14 years for returns to kick in. In real life, most investors don’t put all their money into stocks at once and then sell everything at the same time again. They invest and divest gradually. This reduces the likelihood of experiencing such long stretches without returns.

Historically, a 100% stock portfolio with zero returns for up to 12 years was not that uncommon. Therefore, the key takeaway is that you need to be mentally prepared for the possibility of low or zero returns over a decade.

Deciding Level 1 Asset Allocation

When deciding on your Level 1 Asset Allocation, consider how much volatility you’re willing to tolerate and how much risk is appropriate for your financial goals. The more risk you take on, the higher the potential long-term returns, but the journey might include significant bumps along the way.

So, before making decisions about how to allocate your investments, remember:

Start by building your liquidity reserve to cover unexpected expenses.
Once your emergency fund is in place, focus on allocating the rest of your funds between low-risk and high-risk assets according to your risk tolerance and financial goals.
Don’t invest money you might need in the short term, and be prepared for ups and downs in the market.

The Benefits of a Lower-Risk Portfolio

Not everyone is equipped to withstand the stress of severe market drops. For some, the psychological impact of a 50% or 60% decline in the value of their portfolio could be detrimental to their mental health and overall well-being. This is where adding a low-risk portion to the portfolio becomes beneficial.

Including safer assets—such as government bonds, money market instruments, or other low-volatility investments—can help lower the overall risk of your portfolio. It’s similar to choosing the alcohol percentage in a cocktail. While a 100% alcoholic drink might make for an exciting night, it also increases the chances of negative outcomes. Similarly, a portfolio composed entirely of high-risk assets may offer great returns, but it also brings a greater risk of loss that might cause undue stress.

This concept is particularly important in today’s world of instant portfolio tracking. With the proliferation of mobile apps, investors now have immediate access to their portfolio’s performance. If your portfolio takes a steep dive, seeing those negative numbers can trigger feelings of anxiety and panic, making it harder to stay the course. Therefore, adding a buffer of low-risk investments can mitigate the emotional toll.

Psychological Stress and Portfolio Performance

An essential consideration when deciding on your portfolio composition is how you react to financial stress. The risk of market crashes or substantial losses is inherent in any investment strategy, but how you handle these situations is equally important. Many seasoned investors can endure downturns without much concern because they trust the long-term growth potential of their investments. But for others, the experience of seeing red numbers in their portfolio can be overwhelming.

If the thought of a market correction—where your portfolio might lose 50% or more of its value—keeps you up at night, it’s a sign that your risk tolerance may not align with an aggressive, 100% risky portfolio. In such cases, it’s wiser to include more conservative investments in your portfolio to maintain a balance that feels comfortable for you psychologically. After all, the ultimate goal of investing is not just optimizing returns, but also preserving your peace of mind.

Adapting Your Portfolio as You Learn

If you’re just beginning your investing journey, it’s natural to feel apprehensive about large market fluctuations. If you’re unsure about your ability to handle volatility, start by allocating a higher percentage of your portfolio to safer assets. Over time, as you gain more experience and confidence in your strategy, you can adjust your portfolio to include a larger share of risky assets. The flexibility to adapt as you learn more about yourself as an investor is key to achieving long-term success.

On the other hand, if you start out with a more aggressive portfolio—say 100% invested in risky assets—and find that you struggle to deal with the emotional stress during downturns, you can always reallocate. It’s perfectly fine to reassess and adjust your approach to ensure it aligns with both your financial goals and your mental well-being.

Managing Risk and Understanding Portfolio Composition

In building a diversified investment portfolio, the mix of risky and safe assets plays a crucial role in determining the portfolio’s long-term success. While the theoretical framework around risk and return is well established, actual market conditions can shift over time, making it important for investors to adjust their approach based on up-to-date information. This section discusses the importance of adapting to changing market conditions, the potential for factor investing, and the necessary considerations when creating a balanced portfolio.

Factor Investing: A Potential Strategy with Higher Risk and Return

One investment approach discussed by Kommer is factor investing—an investment strategy that targets stocks based on factors like value, momentum, quality, size, and low volatility. Factor investing can offer higher long-term returns but typically comes with higher volatility and lower diversification compared to more traditional, market-neutral investing strategies.

While Kommer advocates for factor investing, it’s not without its drawbacks. The added complexity and volatility may not suit every investor’s risk tolerance, especially those looking for a more stable, diversified portfolio. For this reason, it’s important to understand the implications of factor investing, which will be explored further in Chapter 3. I personally are not that convinced right now of the usefulness of Factor Investing.

ESG Investing: Trade offs?

Another consideration for modern portfolios is Environmental, Social, and Governance (ESG) investing. It is likely that ESG-focused ETFs would yield returns similar to those of traditional stock market investments—albeit potentially with slightly lower returns due to the added screening criteria for ESG factors. If you are considering adding ESG elements to your portfolio, be mindful of the possible trade-off between ethical investing and the risk/return profile that suits your overall financial goals.

Understanding Maximum Drawdown and Risk Tolerance

To help visualize different portfolio allocations, Kommer presents a table of maximum draw downs for various levels of risky and safe asset allocations. The draw down represents the peak in portfolio value, which is particularly important for those who are risk-averse. It’s essential to choose an asset allocation that aligns with your personal risk tolerance. If you feel uncomfortable with the idea of losing more than 30% or 40% of your portfolio’s value during a downturn, you might want to reduce your exposure to risky assets. Conversely, if you have a longer investment horizon and a higher tolerance for risk, you may opt for a more aggressive, higher-risk portfolio. If you are going for a safer portfolio composition, you could use this table from Komemr as guidance. But keep in mind, the calculations are from August 2024 and might not be that accurate anymore if the interest level changed a lot in the meantime.

For 100% equities portfolio, Kommer states a maximum nominal draw down of -53%, expected real return before costs and taxes 5,5% p.a. for market neutral portfolio and 7% p.a. for a factor investing portfolio. For a portfolio consisting 50/50 of risky and safe investment, these numbers change to -26% for the draw down, 3,5% p.a. for the market neutral portfolio and 4,25% for the factor investing portfolio. For a portfolio consisting 100% of safe assets, the maximum draw down would go down to a mere 2%, 1.5% return for the market neutral portfolio and factor investing portfolio this time. I would like to share the entire table with you, but it is not my own intellectual property and calculation, that is why I can only share this extract with you.

Outlook

Thank you for reading this chapter. In the next chapter, we are going to look at other assets classes besides stocks we might want to put into our risky part of our portfolio.

Investing Course for Intermediates with Checklist | Part 1 | Introduction

Mon, 14 Jul 2025 12:43:00 GMT

Image by Markus Winkler from Pixabay

This article was originally published on YouTube

Introduction

In this investing crash course, I want to briefly go over everything you need to know, to finally start investing. Also, I want to provide you with a checklist at the end you can reference, each time when in doubt in the future. Science based investing for private investors is no witchcraft anymore. The genie is out of the bottle, you can find everything you need to know about investing on the internet for free, a plethora of guides, books and videos at your fingertips. But with all the information out there, it can be hard to keep an overview of every little thing you are supposed to remember and pay attention to.

If only there was a maintained checklist online that did just that. It’s actually hard being useful in the online finance education space, as the important basics are already so well-known and covered by at least a bazillion people. But I do think a comprehensive up to date science-based checklist condensing all this information would have merit, so that’s why I am going through the trouble of creating this guide.

Scientific basis for most of the guide will be Burton G. Malkiel´s “A Random Walk Down Wall Street (Completely Revised and Updated)” 15, Edition from 2024 and Gerd Kommer´s “Souverän investieren mit Indexfonds und ETFs — Ein Investmentbuch für fortgeschrittene Privatanleger” 7. Edition from 2025 which translates in English to “Investing confidently with index funds and ETFs — An investment book for advanced private investors”. If I mention the book in the future, I will do it under its abbreviated German title “Souverän Investieren” (Investing confidently). The reason I will mostly draw from these two books is, that, “A Random Walk Down Wall Street” is considered by many the go to book for investing for English speakers, while “Souverän Investieren” is the pendant for German speakers.

I will probably mostly cite Kommer, as I feel like his book applies a little more scientific rigor compared to Malkiel. In addition, Kommer, as far as I am aware only publishes his books in German, while also including a lot of statistics, information and arguments you would not find in “A Random Walk Down Wallstreet”. In this way, I might be able to treat you to some information nuggets you would not be able to find otherwise. Please let me know if there is a specific topic you are interested in, we can cover these in one of the future chapters. So without further ado, let’s get the party started.

ETF investing is where it’s at

If you have not been living under a rock for the last 10 years, you should already know that a passive investing strategy with ETFs is the way to go nowadays. This fact is repeated online so often now, that it can be easy to forget why that is actually the case. The most important core message of books like “A Random Walk Down Wall Street” or “Souverän Investieren” boil down to the recommendation to implement a passive, long-term investing strategy with low-cost diversified ETFs. Most important exception to this advice would be, that it can also make sense to invest into buying or building your own home, if you plan to live in it long-term and other factors and considerations are met. This guide will assume, that you are not thinking of buying a house anytime soon or at all. If it makes more sense to buy or rent is an interesting scientific discussion to be had for sure, and if there are people interested in it, I can certainly cover this topic in a future chapter.

“A Random Walk Down Wallstreet” is already on its 15. Edition, while “Souverän Investieren” now on its 7. Edition. Both written by well-known finance experts in the field, that made it their life’s mission to teach this very topic. Trying their best to improve their carefully crafted texts even further with each edition. I simply cannot hope to rival them in teaching passive investing fundamentals with the same scientific rigor, wit and depth. I can however strongly recommend everyone that wants to gain a deeper understanding of the scientific ins and outs of passive investing to read or listen to either one of these works. They will not be able to teach you everything you need to know about investing, but the foundation they will lay, will be so solid, that most private investors will have trouble coming up with a convincing reason why they would need to read another finance book during their life time, except of course, simple interest and pleasure in finance literature.

While the bounded books, eBooks and audiobook versions could be pricier than what you are used to in spending for a single book, the dividends a solid grasp of investing fundamentals will pay these over and over again. Furthermore, both books will probably also be available for free during an audible trial or the usual price of the monthly audible fee in your country. And of course, while I definitely recommend supporting these works by directly buying them, if you are not able to do so with your financial situation right now, you could also always try your luck on the high seas. I know many will be hesitant to actually follow through with consuming on of these books. Considers this, the audiobook for “A Random Walk Down Wallstreet” is 13 hours and 14 minutes long, around 12 hours if you skip the epilogue and end credits. As the narration speed leans on the slower side, I think most people should be able to still comfortably listen to it at 1,2x speed, reducing it further to around 10 hours.

You could just listen to 1 hour of the audiobook every day, and still have 4 days in the second week to skim this guide and doing some additional research, for any tax specifics in your country et cetera. And after these 2 weeks, you will have a science based, investing strategy ready to be implement and know more about investing than probably 98 percent of people will ever know. I still totally expect nearly everyone not to be bothered by doing the reading, but hey, at least I tried. And for everyone that ended up reading and needs a small recap, and of course also everyone that could not be arsed, the following paragraph will be my best effort attempt at summarizing the core reasoning of these books, why passive investing with ETFs is the way to go for most private investors.

The stock market used to be fun

The stock market was not always as efficient as it is today, you could even say the stock market was fun once upon a time. When Buffet started investing in 1942 and some decades after that, he used to be able to go through dozens of balance sheets of companies and from time to time, he would be able to notice something interesting. For example, that a company would be on sale, but for less than the value of selling of piece by piece. In a case like this, Buffet could swoop in, buy the company and make a good profit with decent margin of safety. Good investments did not always mean selling off the company though, it could also mean that he found stocks for purchase that we most likely undervalued by the market. As Buffets assets grew more and more, like a rolling snowball, he was able to do something even more interesting, that is not usually part of a fund managers job.

At some point, he was not just able to just buy some stock, he would be able to buy a shareholder majority or outright buy entire companies. This enabled him to change company direction and strategy, if he spotted an opportunity to increase profits through that, he could also find and utilize synergies between his companies. In this sense, Buffet was not only a fund manager and investor, but also entrepreneur. These were the times when “The Intelligent Investor” was published Benjamin Graham, teaching value investing basics. He wrote and published this book, because back in the days, the stuff worked. Buffet and colleagues were able to use these principles to make a shit ton of money and get above average stock market returns. The stock market was a worthwhile fulltime occupation, the next big investment hidden in the printed balance sheets of companies big and small, if only you knew how to spot them reliably.

And the practice of value investing was only one of many flavors you could utilize to make money of the prevalent market inefficiencies. It was like the Wild West and Gold Rush all over again. And if you did not have the inclination or just not the interest in becoming a fulltime investor yourself, it could have made sense to hire a financial advisor. Of course they would offer their services for a decent fee, but who cared if they outperformed the market and earned their fees and more? Of course, under the presumption you had the luck to end up with a financial advisor or hedge fund manager who knew what they were doing.

You might wonder now though, if it was so easy to make a fortune by investing in the stock market, why would not just everybody do it, everyone would be rich. It’s not so much that literally everyone started to invest in the stock market, but the finance sector evolved, getting more efficient every year, new technologies emerged, making the flow of financial information faster and faster. After all, if you leave breadcrumbs on the table, expect them to be eaten up, especially when you are dealing with hungry wolfs, like the finance bros from Wall of Wallstreet. And even investing coryphées like Buffet started to notice. Already in 1967, Buffet considered changing careers, as he found it hard to find good value investments during the bull market. It is interesting to notice, if you read his biography, that going forward into the next decades, he does complain about the fact that it got harder and harder to beat the market, to find good investments and market inefficiencies to profit from. He acknowledges the fact, that investing is not the same anymore, as it used to be during his youth.

The Efficient Market Hypothesis

Interestingly enough, just 2 years before Buffet admitted having problems finding opportunities to outperform the market, Eugene Fama introduced the efficient-market hypothesis in his paper “The Behavior of Stock-Market Prices”, that was part of his PhD. (Britannica Money, 2025; Fama, 1965) The paper does not directly use the term efficient-market hypothesis, but rather describes the concept as, “…a situation where successive price changes are independent is consistent with the existence of an ´efficient` market for securities, that is, a market where, given the available information, actual prices at every point in time represent very good estimates of intrinsic value”. (Fama, 1965, p. 90)

In 1970 he formalized this idea in his paper “Efficient Capital Markets: A Review of Theory and Empirical Work” as, “A market in which prices always ´fully reflect` available information is called efficient”. (Fama, 1970, p. 383) He tests the hypothesis for different forms: “First, weak form tests, in which the information set is just historical prices, are discussed. Then semi-strong form tests, in which the concern is whether prices efficiently adjust to other information that is obviously publicly available (e.g., announcements of annual earnings, stock splits, etc.) are considered. Finally, strong form tests concerned with whether given investors or groups have monopolistic access to any information relevant for price formation are reviewed.” (Fama, 1970, p. 383) He concluded that, “with but a few exceptions, the efficient markets model stands up well.” (Fama, 1970, p. 383)

Shocking underperformance of active funds

The first to implement this theory of efficient-market hypothesis into a large-scale financial product was John Bogle. He founded The Vanguard Group in 1974 and only a year later introduced the first index mutual fund, which was coined “Bogle´s Folly” and unamerican, because it merely tried to track the market return, a passive investing approach. While Vanguards investment funds did take a long time to find willing investors, they did not turn out to be the folly their critics made them out to be.

While the public needed sometime to wrap their head around this unexpected result, the passive investing approach implemented by Vanguard simply worked. Let’s have a look at some convincing data from “Souverän Investieren”. In his second chapter, he summarizes the data from S&P Dow Jones Indices »SPIVA Europe Scorecard Year End 2022« in a table for actively managed investment fonds in Europe. After 10 years, 96% of funds investing in developing countries and 98% of funds investing into developed countries underperformed their benchmark. (Kommer, 2025, p. 27) Furthermore, the data does not include associated costs, which would most likely increase the percentages of underperformance even more. Additionally, most people interested in investing will have an investment horizon longer than 20 years, where we would also expect an even higher percentage of underperformance.

To summarize this, in the long term, nearly 100% of actively managed funds seem to underperform their correctly chosen benchmark. To make matters for actively managed funds even worse, the underperformance on average is not neglectable, but after 10 years more than 2% per annum for developing countries and for developed countries nearly 4%. (Kommer, 2025, p. 28)

Performance Consistency

In response you might say, of course from all the available active managed funds, the bad performing fund manager will drag down the average. But that is no concern for you, you´ve done your research, the manager you selected knows what he´s doing, and will surely do much better than average. If we assume, that there are good and bad performing managers, we could expect to see the same managers in the top 25% over and over again. Consider this analogy to football leagues and world cups. We cannot expect the same team place first every year, not even the best of the best. And there will be some variation to the results and some weird years in between, where placement is way different than expected. But in general, while Bayern might not win the Bundesliga every year, they consistently place high on the list.

That is because the team has a certain performance consistency. The established players, managers, training culture, financing give them a clear advantage to place better than the teams at the bottom. Large part of their performance can be attributed to what they bring to the table, not sheer luck. Of course, if they win the championship this or next year can depend on lucky goals or penalties, but that’s why we are flexible with the benchmark and only set it to the upper 25%. While I choose the example with Bayern München just for fun, it actually holds true. For the last 20 years, they have not performed worse than 4. place in the first Bundesliga out of 18 teams. (FC Bayern München — Historische Ligaplatzierungen, 2025)

(FC Bayern München — Historische Ligaplatzierungen, 2025)

But which horrors await us, when we look at the statistics for active fund managers. Kommer looks at the percentage of fund managers, that stay in the upper 25% after only 5 years, and find 0% for developing countries, and a mere 0,4% for developed countries. With a clear downtrend in the percentages, one would assume that the percentage for developed countries would also drop to 0%, if only the chosen time frame was a little longer.

It’s as if their performance was not because of their skill, like in football, but mostly sheer luck. And Kommer comes to this sentiment in his book as well later on. To recap the numbers we just went over, around 100% of active funds underperform in the long run, the underperformance will probably be substantial, and we can also not really get lucky while choosing, because the performance of the manager in and off itself is based on luck.

Lottery but worse

It’s like playing lottery, only investing into actively managed funds is even stupider, as in the long run, none of the investor’s seem to win . Except of course the fund managers, and associated institutions, as they will collect their fees no matter their performance. Of course they would also prefer to perform well, as that would also increase their collected fees and bring in new customers. And surely most fund managers are very capable and hard working. But at the end of the day, at least this is what our current understanding of the stock market heavily suggests, a single person or team does not hold a candle to the predictive power of the entire stock market system. This also explains in part the bad underperformance. Fund managers, like every other profession need to be paid. They are getting paid by the fees they charge on their funds. But here is the big catch, compared to almost every other job there is, their work seems to not create any value at all.

You could even argue their work is more harmful to their customers than useful. But compared to low-cost ETFs, the high fees cut into their performance every year. In the first year, the additional fees might be “only” 1 or 2 percent, but after 30 years, that can accumulate to a much bigger percentage. Even our value investing prodigy Warren Buffet, recommends now that most people invest into an ETF, instead of stock picking. (CNBC, 2020)

Exceptions apply seldomly

Of course, let’s say you are a politician in America, have access to insider information on which legislation is about to pass in the next few days and how that will likely affect the stock market, that’s a different story. Then normally, you still would not be allowed to use that information to your own advantage, as that would be insider trading. But for example, in America, even after the disastrous financial crisis in 2008, consequences for this political insider trading are so low, that still some politicians seem to be doing it. I also do not want to argue, that it is virtually impossible to outperform the market based on skill, but that the sentiment holds true for the normal average investors. If you are reading this article and happen to be the president of America or have a PhD in finance and are leading a banking team using the latest super computers and algorithms with information not available to the general public, or similar, then in fact, different rules might apply to you.

Still, I already hear the active trading proponents objecting from the back, that the data used by Kommer is only for European funds. The thing is, the outperformance of the passive investing approach has been cemented by a multitude of research findings, with data from all over the world, over the last decades, repeatedly, in theoretical and empirical works. I won’t bore you by listing or going through each of them all. I would also be lying if I said I know, read or understood all of them. What I can say with confidence though, is that if you look at what they teach at the universities, what the trustworthy and knowledgeable researchers, authors, YouTubers, Redditors, bloggers etc. all have to say about the topic, it all points to the same conclusion. I think I could also just say, it’s the scientific consensus at the moment. Of course, there are also a lot of influencers preaching the total opposite of what I am writing here. But I also said trustworthy and knowledgeable. Chances are, and I´m sorry to say that influencers advocating for active trading strategies are most of the time neither, while sometimes missing only one of the mentioned qualities.

What about DIY?

Next objection, you might come up with. The data is only about professional active funds and managers, surely you could do better as a private investor. While we also have data and tables on that, I won’t even bother to quote. Just think about it for a second, active fund managers are most of the time smart people, doing this fulltime. Surely, you can do better than them, much better actually. You just need to be really lucky. Go 100% into Amazon, Apple, Tesla or what have you, and you might outperform the average stock market and active manager by a factor of 10 or more. Easy, not even breaking a sweat. Thing is, if that happens, you are just a lucky, but not suddenly a stock market genius showing investing skills that no active fund manager was able to display in the last 2 decades. If you think you can do better than professional fund managers by merit of skill, you are kidding yourself.

Diversification is king

Which would beck yet another question, why do active funds and passive funds alike hold back their best performing assets, by investing in so many different stocks at the same time? Investing into many different titles is called diversification. Without going too much into portfolio theory, we want to maximize diversification as much as possible, if more diversification does not come at prohibitive cost. If we invest into stocks, we earn their higher long term average returns compared to safer investments, for example triple A bonds, by shouldering the additional risk and volatility of the stocks. Each individual stock has a certain volatility associated with it. If we combine different stocks with the same average return but not 100% correlated volatility, the resulting portfolio will have lower volatility while having the same average returns.

If we combine all stocks and weigh them by market capitalization, we minimize volatility as much as we can, while also investing into stocks. We basically shoot for the average asset class return. If we invest in an asset, we only get rewarded by carrying the risk inherent to that market or asset class. Because if you have a portfolio with higher volatility than the market average, you can eliminate that additional risk by more diversification. The market does not need or will reward you, for carrying unnecessary risk. As investors, we don’t like unnecessary risk or volatility, therefore we want to maximize diversification, until more diversification becomes cost prohibitive.

Why stocks in the first place?

If you are getting frustrated by all this stock market portfolio theory, you might wonder how we ended up focusing so much on stocks and their specific asset risk in the first place anyway. The major asset classes we have a lot of historical data on are stocks, real estate, bonds, money market (saving books/accounts), gold and commodities (spot market). (Kommer, 2025, p. 17) Other more exotic asset classes like art, old cars etc. are to be considered more in the realm of speculation than serious investing. Of course, if you are an expert in the field, perhaps you can spot great investment opportunities than no one else can. But probably you are just speculating. The available data and scientific work for these more obscure asset classes does not compare to the big established asset classes and makes educated scientific predictions about their expected long term returns harder.

Chances are, you will always find a buyer with reasonable transaction costs for stocks, bonds etc., but who knows if anybody will still care in 40 years about the limited Pokémon booster packs and Lego builds you have hidden in your attic. Similar goes for crypto currencies and other new asset classes, with the additional problem that we simply do not have enough historical data for reliable scientific evaluations. With crypto currencies, that might change in the future, as we get more data and scientific papers on the topic. For now, you could perhaps consider adding a small percentage of crypto currencies to your portfolio in the name of diversification, but it cannot be recommended to be your main investing vehicle. And even then, I would be surprised if this recommendation would change drastically in the next few decades.

So then, for the historical long-term returns without inflation, 124 years from 1900–2023, Kommer found the following returns per annum: 5,1% for stocks, 2,4% for real estate, 1,8% for bonds, 0,5% for gold and 0,3% for commodities. (Kommer, 2025, p. 27) There are a lot of scientific debates to be had how and why the returns of the asset classes are as they are. But for an investing crash course, it should be enough to note down, in the long-term, stocks are the most volatile asset class, but they also have the highest expected return. Who knows, maybe that could change in the future, but to my knowledge, there is no convincing argument why we should believe that to happen with a high likelihood.

ETFs — The better index funds

So, what about ETFs? For now, I just mentioned that Vanguard setup an investment fund. While index funds can only be traded once per day, that is not the case with ETFs. (ETF Vs. Index Fund: What’s the Difference? | Fidelity, 2024) ETF stands for “Exchange Traded Fund” and can be bought and sold around the day, just like stocks. They are similar to index funds in that they are investment vehicles that are normally used to hold different stocks or assets combined under one investment. You could think of ETFs as a more modern version of the index fund. It is just a fund you can trade at the exchange. Nowadays, ETFs are often used interchangeably with the passive investing approach, as they are the most useful investment vehicle for that purpose right now. Investment funds are associated more with managers and active trading. But pay attention, index funds and ETFs are just investment vehicles. Either finance product could use an active or passive investment approach.

TL;DR

To recap, we want to implement a passive investing approach, by utilizing an ETF. In the next chapter, we going to talk about choosing an asset allocation for our portfolio and later on the specifics on how to choose an ETF and broker.

Implement passive investing approach by using ETFs

Outro

Thank you very much for taking the time and reading my article. If you have any questions regarding the article or investing in general, feel free to ask. I will try to answer your questions if I can or cover topics in the future you are interested in. Also happy to receive criticism, hints for typos and suggestions how to improve the article for future iterations. You can also follow me on LinkedIn.

References

Britannica Money. (2025, June 5). https://www.britannica.com/money/what-is-the-efficient-market-hypothesis

CNBC. (2020). Warren Buffett: For most people, the best thing is to do is owning the S&P 500 index fund. https://www.cnbc.com/video/2020/05/04/warren-buffett-investing-advice.html

ETF vs. index fund: What’s the difference? | Fidelity. (2024). https://www.fidelity.com/learning-center/smart-money/etf-vs-index-fund

Fama, E. F. (1965). The Behavior of Stock-Market Prices. The Journal of Business, 38(1), 34–105. http://www.jstor.org/stable/2350752

Fama, E. F. (1970). Efficient Capital Markets: A Review of Theory and Empirical Work. The Journal of Finance, 25(2), 383. https://doi.org/10.2307/2325486

FC Bayern München — Historische Ligaplatzierungen. (2025, June 11). https://www.transfermarkt.de/fc-bayern-munchen/platzierungen/verein/27

Kommer, G. (2025). Souverän investieren mit Indexfonds und ETFs: Ein Investmentbuch für fortgeschrittene Privatanleger (7., aktualisierte Auflage). Campus Verlag.

The Best Book on Passive Investing with ETFs in 2025

Sun, 22 Dec 2024 15:02:34 GMT

Most people already know they should start investing. Many have heard from friends or read online that a passive investing approach using ETFs is the way to go. However, after that initial insight, many get lost. It’s easy to fall down the rabbit hole of YouTube and Reddit, consuming endless content in an effort to make an informed decision. While there’s a lot of good educational material out there, there’s also plenty of misinformation. Even the “good” resources sometimes provide conflicting information. In the end, many give up entirely on starting their investment journey, overwhelmed by the sheer volume of information and unsure of where to begin.

Why Beginners Need the Right Resource

As with many complex topics, a well-written book can make all the difference for beginners. For passive investing with ETFs, the ideal book should provide a solid understanding of the science and reasoning behind this approach. This foundation helps readers navigate conflicting information in the future, distinguishing between sensationalism and factual, science-based advice. Additionally, the best book on passive investing should offer practical guidance on ETF selection and portfolio composition. While novice investors may still need to research broker options and learn to navigate specific platforms, they shouldn’t need much more than that.

Choosing the best beginner book on this topic for yourself, family, friends, or colleagues who want to finally start investing could be the decision with the biggest financial return of one’s life. That’s why I created this short article—to help people find the right resource.

The Search for the Best Book

In my search for the best book, I scoured the internet for recommendations. The title that seemed the most promising was A Random Walk Down Wall Street by Burton Malkiel. Other frequently mentioned books included The Simple Path to Wealth by JL Collins and The Little Book of Common Sense Investing by John Bogle. While Bogle’s book is excellent, A Random Walk Down Wall Street dives deeper into history, factor investing, and modern portfolio theory. On the other hand, JL Collins’s book advocates investing solely in U.S. stocks, which conflicts with the principle of maximizing diversification through international exposure.

Key Features of A Random Walk Down Wall Street

For these reasons, I have chosen A Random Walk Down Wall Street as the best book on passive investing in 2024. The most recent 13th edition was released on January 2 and is also available on Audible for audiobook enthusiasts. This new edition covers current topics like cryptocurrencies, NFTs, and meme stocks, as well as offering insights on factor investing and ESG portfolios. First published in 1973, the fact that the book is now in its 13th edition speaks to its lasting success and relevance. Its popularity is also an advantage—if you encounter a challenging concept or chapter, you can likely find help from others on platforms like Reddit.

Understanding the “Random Walk” Theory

The “random walk” theory, which inspired the book’s title, posits that stock prices are unpredictable because they respond to news and information as it becomes available. Since future events and news are inherently unpredictable, it’s nearly impossible to consistently forecast stock price movements. Think of it like flipping a coin: even if it lands on heads five times in a row, you can’t reliably predict the next outcome. Similarly, past stock price patterns don’t guarantee future performance. This theory underpins the book’s main message: instead of trying to outsmart the market by picking individual stocks or timing trades, it’s better to invest in the entire market using low-cost index funds or ETFs. Over time, this strategy has proven to be a simple and effective way to grow your portfolio without the stress of trying to beat the market.

A Note on Readability

While I appreciated the history lessons in A Random Walk Down Wall Street, I found the earlier chapters a bit lengthy—even as someone interested in the topic. If you feel the same way, I encourage you not to give up. Simply skip ahead to the more practical sections if the historical overview starts to feel overwhelming.

Final Thoughts

With that minor caveat, I wholeheartedly recommend A Random Walk Down Wall Street. It’s an excellent choice for beginners and should be accessible to most adult readers. Whether you’re choosing this book for yourself or recommending it to someone else, it’s a resource that could pave the way for a lifetime of smarter investing.