Glossary

A state that has the best possible credit rating (namely AAA) from at least one of the three major rating agencies. Governments incur debt by issuing bonds. The bonds are bought by private individuals, companies or banks. Anyone who buys a government bond is granting the state a loan. The major rating agencies are Standard & Poor’s, Moody’s and Fitch. The rating scales have about 25 levels from AAA (best possible) to D (worst possible) – see entry “Rating agency” on Wikipedia. Each rating corresponds to a quantitative probability of 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 out 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 Wikipedia (keyword “List of countries by credit rating”). The second-best rating is AA+, the third-best AA.

ABS stands for “asset-backed security”: special, collateralized corporate bonds issued by “single-purpose companies”. The collateral can be, for example, mortgages registered on residential real estate, credit card receivables or student loan receivables.

The discount rate is the interest rate at which a future payment must be “discounted” in order to arrive at its → present value. The risk of future payment is taken into account here. High-risk (uncertain) payments in the future must be converted into a 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 average residential value) and the average household income in the city, region or country.

An open-ended investment fund that invests its investors’ assets in stocks (stakes in listed companies). Depending on the fund strategy, these stocks can be shares in domestic or foreign companies as well as shares in large, medium-sized or smaller companies. On the stock exchange, “small” companies (also known as second-line stocks or “small caps”) nevertheless have turnovers that typically exceed 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 (equity) funds (or ETFs) that do not have an active fund manager. The purpose of an index fund is to track a broad equity segment at the lowest possible cost. Index funds achieve better returns than the majority of all actively managed equity funds.

The total return from an equity investment (→ dividend yield + price return).

Stock market jargon for “excess return”, “excess return”, “additional return”, “outperformance” of an investment or an investment strategy compared to a meaningful benchmark (comparative index). A lot of shenanigans are perpetrated in the financial sector with the quantification of alpha outside of scientific studies.

Companies and governments issue bonds to obtain debt capital. In principle, anyone can buy a bond. This gives the company or state in question a loan. The only significant difference between a bond and a loan is that a bond is designed from the outset to be “tradable”. This means that the buyer of the bond can resell it to a third party at will (and, importantly, without having to ask the bond issuer = debtor).

See annuity repayment. The annuity is the borrower’s periodic debt service payment consisting of interest and repayment. It can be monthly, quarterly, semi-annually or annually. The amount of an annuity does not change during the fixed-interest period.

A certain repayment mode for loans. With annuity repayment, the periodic debt servicing payment (sum of interest and repayment) remains unchanged over time, i.e. the borrower pays the same debt servicing (in this case annuity) in each period (e.g. month, quarter, half-year, year). This makes financial planning easier for the borrower. Annuity repayment (see installment repayment) dominates for real estate loans in the private customer business. One 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%). This EUR 500 remains unchanged during the period for which the interest rate is fixed, although the remaining debt decreases each month, as the monthly capital service rate includes a repayment component. If the remaining debt decreases, one would normally assume that the interest expense in monetary units also decreases (this is the case with installment repayment). With annuity repayment, the interest expense saved is added to the repayment in each debt service period (the lower the interest expense, the higher the repayment), so that the total amount always remains the same (in this example, EUR 500 per month and EUR 6,000 per year). 

English term for “asset”. Not only investment “goods” or “tangible assets” such as real estate, gold bars or securities can be assets, but also monetary claims such as credit claims, claims to private insurance 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 food, clothing, flight tickets or services. See also → Asset class.

The allocation of a portfolio of investments to 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 the 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 stocks, corporate bonds, government bonds, money market investments (cash-like investments), real estate, precious metals, commodities and collectibles. These main asset classes can be broken down into sub-asset classes in a variety of ways.

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

Generally synonymous with the terms counterparty risk, credit risk and issuer risk. The risk of negative value fluctuations 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 does not meet its interest and capital repayment obligations or does 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. One example: If a bank lends money at an 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 known as cash or liquidity reserve. Every conventional investment fund must invest part of its fund assets in cash in order to be able to buy back fund units from investors at any time.

Present value is a fundamental economic concept. It is the value “in today’s money” of a payment or cash flow that will only be received in the future. The value in today’s money is calculated by “discounting” the relevant payments in the future. One example. A payment of EUR 105 in one year at a discount rate of 5 percent today has a present value (BW) of EUR 100, because if you invest EUR 100 today with a 5 percent annual return for one year, you will then earn a total of EUR 105. Therefore, both values – EUR 100 now or EUR 105 in twelve months’ time – have the same present value at this discount rate. Present values can be used to compare payments that are due at different times. The formula for calculating a one-off 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, in this case 1). The formula for a series of future payments is similar, but slightly more complicated. The appropriate discount rate depends on how “certain” or probable the future payment is. If it is definitely safe (“risk-free”), then the interest rate for risk-free government bonds of the corresponding maturity is appropriate; if it is less safe, then a higher interest rate is needed, resulting in a smaller present value. Using a spreadsheet program such as Microsoft Excel, you can calculate present values quite easily. There are numerous financial calculators on the Internet that can be used to carry out simple and sophisticated cash value calculations, e.g. www.zinsen-berechnen.de and www.n-heydorn.de.

The present-value benefit that arises if a given tax payment can be deferred into the future (e.g. several years) instead of being paid immediately. The present-value benefit for tax purposes is a real economic advantage (i.e. a real saving) for the taxpayer. The tax present-value benefit is not identical to the pure liquidity benefit of a tax payment deferred into the future. The latter is not a real economic advantage in terms of present value.

A company that typically builds (“develops”) real estate commercially on undeveloped land and then markets (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 preliminary lump-sum tax for the taxation of dividends in accumulating investment funds (including ETFs) is not identical to the base interest rate regularly redefined by the Bundesbank in accordance with Section 247 (1) BGB, which is used as a reference interest rate in all possible civil law contracts (e.g. for calculating default interest in the event of legal disputes). The “base rate” in the preliminary lump-sum tax is a separate base rate that is republished annually for the approaching tax year (calendar year) by the Federal Ministry of Finance (not by the Bundesbank) in accordance with section 18(4) of the Investment Tax Act (InvStG). The base rate in the preliminary lump-sum tax is roughly based on the → current yield for ten-year German government bonds. Googling the keywords “Federal Ministry of Finance base rate for calculating the preliminary lump-sum tax” should lead to the page that gives the current base rate.

In simple terms, the percentage debt ratio 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 ratio based purely on the market value of the property

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

In the context of investments, a benchmark with which the return and risk of an actively managed portfolio (e.g. a fund or the securities account of a private investor) can be meaningfully compared. The benchmark is often a security 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 is to be distinguished from mid caps (stocks of medium-sized companies) and small caps, stocks of small companies.

see → Default risk.

Typically translated as “break-even point” or “cost recovery threshold”; generally the point at which – depending on a certain influencing variable – a product or project A is more favorable or more profitable than product or project B or another threshold (e.g. full cost recovery). Example: cost comparison between diesel cars and gasoline cars: A diesel is typically more expensive to buy. However, the additional expense is worthwhile from a certain annual mileage, because the running costs of a diesel and its depreciation over time are lower than those of a gasoline engine. A break-even calculation can be used to determine the minimum annual (average) mileage required to make the additional expenditure for the diesel worthwhile.

For loans, this is the interest rate from which a loan A is really as expensive as a loan B, if all relevant factors and cost components are taken into account, including those that may not be included in the effective interest rate.

GDP is an economic indicator for the “value added” of an economy in a certain period of time, typically one year. GDP is the sum of all salaries, corporate profits, income from interest and rents and net government revenue (government revenue minus expenditure), excluding double counting. GDP growth is usually given as a real (inflation-adjusted) figure.

The equity reported in a company’s balance sheet. It must be distinguished from market capitalization. It is the company’s equity as valued by the market.

A buy and hold investor acquires an investment, for example 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 acquire 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 benefit) and is much easier and more convenient than ongoing → active investing (trading). Virtually all homeowners are ultimately buy and hold investors without realizing it.

From an investor’s perspective, positive cash flows are payments received (inflows) and negative cash flows are payments made (outflows).

Controlled foreign corporations rules. This is the standard international term for rules of → add-back taxation, in which the income of a foreign company is added directly to the domestic shareholder of the company for tax purposes and is taxed directly by the shareholder in a timely manner.

In law, compliance with legal regulations or – interpreted in the sense of the tasks of a company “compliance department” – all measures to identify and prevent legal violations or, formulated even more generally, measures to ensure the lawful conduct of those involved. Compliance plays a particularly important role in the banking sector and one whose significance has increased dramatically over the last 20 years. Typical compliance regulations relate to (1) the fact that financial service providers should know their customers precisely 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 should be taken against terrorist financing and (4) that the ongoing taxation of income should also be ensured across borders through the automatic exchange of information and the exchange of information on request.

see → Credit default insurance.

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

Also known as “data snooping”, “data dredging”, “backtesting with overfitting” or “p-hacking”. The selective, unprofessional or unethical use of historical data with the aim of producing a particular result. Data mining can also happen unintentionally. Data mining is particularly likely if the longest available data series are not used or 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 sell-in-may strategy, for example, could be the result of data mining. (However, the term data mining is also used and interpreted quite differently, e.g. 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 extremely short periods of time on average. From this author’s point of view, this is a “senseless” investment approach for private investors.

The opposite of inflation. Deflation is a sharp, sustained fall in the general price level for goods and services. The last time this occurred in Europe was during the Great Depression of 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.

Allocation (diversification) of total assets to different assets (assets and asset classes) in order to reduce the overall risk of the → portfolio. Diversification means not putting all your eggs in one basket or not staking everything on one card.

Key figure in which the annual dividends (or the total dividend payments in a year) are divided by the average share price for the year (before payment of the dividend). Can be calculated for an individual stock as well as for an entire stock market. The dividend yield of the world 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 dividends.

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

General Data Protection Regulations.

The return on the equity invested as opposed to the return on the property (equity = the funds/equity paid in by the investor). An (optimistic) example: A property is financed with debt capital and equity in a ratio of 80 to 20 and cost EUR 100. 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. The total income is therefore 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 leverage effect). In simple terms, equity is the original down payment (equity investment) plus all loan repayments made in the meantime.

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

Cash investments (current accounts, savings accounts, term deposits, etc.) are de facto a loan that the investor/saver grants to his bank. As with any other loan, such “loans” are fundamentally associated with the risk that the borrower (i.e. the bank) will not be able to repay the loan (the cash deposit). The deposit guarantee instruments reduce this risk, but they do not eliminate it completely. Important here: Securities investments, including investment funds, are not affected by this risk, because in the event of the bank’s bankruptcy, these investments – unlike the aforementioned forms of cash investment – do not fall into the bank’s bankruptcy estate. For securities and fund investments, the bank is normally only a custodian, but not the investor’s “borrower” in the above sense. In Germany, deposit guarantees are regulated by the Deposit Guarantee and Investor Compensation Act. Protected are 100% of deposits 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 made 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 entitlement to them. Anyone who carefully reads the “small print” in the respective deposit protection regulations of the individual bank types (private bank, savings bank or cooperative bank) will find such provisions there. For this reason, cash investments at banks (including savings banks) should only ever be made up to a maximum amount of EUR 100,000 per person and bank. If you want to make more cash investments at 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 the German state deposit guarantee. Most EU member states have similar, but not necessarily identical, deposit guarantees. The entry “Deposit insurance” on Wikipedia is worth reading on this topic.

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

The amount of money (or general assets) relative to the asset value at the beginning of the year that a person withdraws net from a portfolio (or general assets) per year in the form of distributions and/or sales of units (any deposits are considered net of distributions and sales of units). Example: Peter’s total assets amounted to EUR 2.0 million on January 1 (EUR 1.5 million in stocks and EUR 0.5 million in rented property). He withdraws/receives EUR 37,500 in stock dividends for consumption purposes in the year in question, sells stocks worth EUR 50,000 and receives EUR 15,000 in net rental income from the property. The withdrawal rate is therefore (37.5 + 50.0 + 15.0) ÷ 2,000 = 5.13% (taxes and costs have been ignored here for the sake of simplicity).

The excess return produced by the general stock market over the “risk-free investment” (super-safe short-term government bonds).

In simple terms, economists use the “expected” increase in value or the expected return of an → asset class to mean the probable 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 given time interval are above this value, while the other half are below this value. The expected return is often determined on the basis of very long-term historical figures (30 years and more), adjusted for certain correction factors. The expected return tends to rise after sharp price falls (losses in value) and fall after sharp price rises (increases in value).

“Exchange traded fund”. In legal terms, 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”, i.e. the bankruptcy of the fund management company or the custodian bank of the fund does not mean a loss for the special assets because these and the assets of the fund management company or custodian bank of the fund are strictly separated. One of the important differences between a conventional (traditional) investment fund and an ETF from an investor’s perspective is that ETFs are designed from the outset to be bought and sold via a stock exchange, whereas conventional funds are usually purchased directly from the asset management company and sold back to it. Almost all ETFs are passive investment funds, i.e. index funds. ETFs have lower ancillary purchase costs and ongoing costs compared to active investment funds.

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 any individual bank, but is a neutral and transparent average rate for loans between many European banks. It is published daily in the media for terms of 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 an individual bank.

Sometimes also called tail risk. This refers to risks which, by definition, cannot be calculated or are not reasonably foreseeable or lie far outside the probability distribution. One example is the likelihood of buying a house that later turns out to be heavily infested with dry rot. The data for calculating this specific risk is probably not available in a meaningful form. This is typical for event risk. One of the main characteristics of event risk is that it is often overlooked and underestimated and its damage is difficult to quantify.

“possible debts”. A guarantee is a contingent liability. The guarantor does not normally become the debtor, but only if the actual debtor is unable to settle his debt himself and the guarantor is called upon under the guarantee. There are also contingent liabilities that do not result from guarantees, e.g. → deferred taxes.

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

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, the “risk-free” investment (money market investments).

Also known as Smart-Beta investing. The overweighting of certain scientifically identified “factors” or factor premiums in a securities portfolio in order to achieve an excess return or a more attractive risk-return combination. Factor investing is explained in detail in Souverän Investieren mit Index Fonds und 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 obliges US taxpayers and companies with their usual place of residence or registered office outside the USA to report certain data to the 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 constellations. The legal implementation of FATCA outside the USA means that third countries participate in the enforcement of US tax law. That is “unusual” per se. US income tax law – and this is almost unique in the world – is linked to citizenship and residency. However, the international standard for this is “residence only”. This means that US tax law contradicts European and actually global tax law principles in one fundamental aspect.

“Fiat”: Latin for “let there be”. A monetary system in which the central bank (the state) 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. (However, an increase in the money supply does not necessarily mean an increase in consumer goods inflation) Virtually all currency systems in existence today are FIAT money systems. Their basic counterparts are precious metal-backed currency systems (the classic gold standard) or the sovereign money system (see Wikipedia “Sovereign money system. With the classic gold standard, the volume of precious metal belonging to the central bank (or the state) determines the value of a currency unit. This means that the central bank cannot influence the money supply “arbitrarily”, but must first acquire gold if it wants to increase the money supply. Scholars argue about whether the lack of influence on the money supply by the central bank in a gold standard is an advantage or a disadvantage.

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

In the broadest sense, measures taken by the state to gradually reduce its debt at the expense of its citizens. The most common form of financial repression is the influencing (increasing) of the inflation rate by the state (the central bank). As inflation rises, the government’s tax revenues increase, while the amount of government debt to be repaid 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 debt.

Acronym for Fear of Missing Out. FOMO stands for the unpleasant human emotion that feeds on situation-specific envy, impatience, ignorance and credulity to chase after “opportunities” that a year or five years later the person usually shakes his or her head at or even bitterly regrets chasing after if it caused real damage and was not just harmlessly stupid.

The percentage of an investment (asset investment) that is not financed with equity (100% – equity in % = debt capital in %). Debt capital for a property or small business is typically a bank loan. In the case of a large company or a state, 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 security indices are (typically) adjusted every six months, then for certain popular small-cap or other narrow indices, hedge funds may be able to influence the prices of the securities concerned through their targeted trading activity to the detriment of index fund investors and reduce their return.

The functional currency of a household (or company) is its “home currency”. In more precise economic terms, it is the currency in which the household is most likely to spend most of its money 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.

The risk that a counterparty to whom one has or could have a current or future payment claim will/can not fulfill this payment claim. Counterparty risk is closely related to → default risk or credit risk.

see → Present value.

Bid-offer spread. The spread between the buying price and selling price of a security, currency or other instrument from an investor’s perspective. The “market price” (mid-price) lies roughly halfway between these two prices. Ultimately, the bid-ask spread (known as GBS in German) represents the dealer margin. The more liquid a security (the higher its average trading volume per time unit), the tighter, i.e. “more favorable” the bid-ask spread (GBS) tends to be. The bid-ask spread (GBS) changes over time and often even within a day. In a market crisis, the bid-ask spread (GBS) become more widespread and therefore more expensive. The bid-ask spread (GBS) may also differ on different stock exchanges at a given time.

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

From an investor’s perspective, money market investments are short-term, liquid, “risk-free” capital investments in their → functional currency, such as term or fixed-term deposits, savings deposits, accounts with interest on credit balances, money market fund units or investments in bonds, provided the time to maturity 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-bearing securities are allocated to the bond market.

see → Money market investment.

The interest rate or return on → money market investments.

A specific way of calculating the return on an investment. The geometric average return is to be distinguished from the (generally less meaningful) arithmetic average return, from the → internal rate of return and from the cumulative return. In his book “Souverän Investieren mit Index Fonds und ETFs”, Kommer goes into detail about these different types of return calculation.

“Typical German” fund construction 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 general partner (full partner). In the concept proposed here, a foundation and, if applicable, family members act as limited partners with limited liability as managing limited partners.

Income tax in Germany, as in most countries, is “progressive”. This means that the tax rate starts at a low level for low incomes and then gradually increases as income levels rise. The initial tax rate in 2021 was 14% (for income that exceeded the income tax-free amount of EUR 9,744 per year). The top tax rate in 2021 was 47.5% for income from EUR 274,613 (with solidarity surcharge, without church tax). As the tax rate in a progressive tax rate system only applies to the portion of income that exceeds a certain threshold, the result is an average tax rate for total income. This is fundamentally different from the marginal tax rate on the “last” euro, so to speak. The marginal tax rate is the highest tax rate level applicable in a specific case. At low incomes, the average tax rate is significantly lower than the marginal tax rate; at high incomes, the two gradually converge, although the average tax rate never quite reaches the marginal tax rate for arithmetical reasons. For most tax calculations, the higher marginal tax rate must be used for methodological reasons, not the average tax rate. Example (basic income tax table 2021): For an annual taxable income of EUR 25,000, the average tax rate is 14.5% and the marginal tax rate is 28.3% (including solidarity surcharge, excluding church tax); for an annual taxable income of EUR 50,000, the average tax rate is 24% and the marginal tax rate is 38.7% (including solidarity surcharge, excluding church tax).

The regular mandatory payments made by the owner of an apartment to the homeowners’ association to finance the future (or existing) maintenance of the common property.

see → Leverage effect.

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

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

see → functional currency.

From the perspective of the tax authorities in country A, the add-back taxation comprises the taxation of “passive” income of a foreign subsidiary in country B at the domestic shareholder in country A (the domestic shareholder is assumed to have unlimited tax liability in country A). The purpose of add-back taxation is to prevent unlimited taxpayers in Germany (country A) from transferring certain assets (e.g. bonds and stocks) from Germany to a company they control that is domiciled in a low-tax country (country B) and then no longer being subject to tax on this income in Germany. “Passive income” includes dividends and interest, for example. The “addition” breaks through the usual shielding effect of the foreign company in B from taxation in A, as the foreign income (which remains abroad) is also subject to domestic taxation (this does not mean distributions from B to A – these would generally always be taxable in A).

The predominantly irrational tendency of private investors to favor (overweight) investments (e.g. stocks) from their own region or country over comparable investments from a more distant region or another country. It has been shown many times that the home bias worsens the achievable risk-return profile 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, assuming no inheritances or lottery winnings. When you have finally retired, your human capital is zero by definition. Journalists often use the term human capital in a different way to refer to the collective level of education or knowledge of a national population. Trade unions often use the term pejoratively and unscientifically. Both concepts of human capital differ from the academic-economic conception represented here.

Open-ended “passive” investment funds or ETFs that follow the investment strategy of index investing, i.e. replicate a specific security index (e.g. the DAX, S&P 500 or MSCI World) as closely as possible in their composition. An active investment strategy with the aim of outperforming the market return is not pursued. The fund invests the fund assets in the securities underlying the index in the same proportion as the index. The ancillary purchase costs and running costs of index funds are far lower than those of actively managed funds.

Also known as “money illusion”. A better term would be “real value illusion”. The inability of a normal person to distinguish between an apparent increase in wealth or purchasing power, which is merely the result of inflation, and a genuine (“real”, inflation-adjusted) increase. Example: If my assets 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) assets (their purchasing power) shrank by 1%.

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

In somewhat abbreviated terms, an information-efficient market (often referred to imprecisely as just an “efficient” market) is a market in which it is not possible, taking costs and risk into account, to “systematically” (permanently and repeatedly) achieve an “excess return” over the corresponding average market return, except by chance. This means that the current market price of the security or property in question is very likely to already include all publicly available information. Based on such information (including rumors or guesses), systematic excess returns over market returns are not possible.

Mathematical term for 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 is equal to zero. In other words, the present value of the total 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 normally only be calculated using a spreadsheet program such as Microsoft Excel.

In what is known as an open-ended investment fund (and this is what 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. The fund investor pays an ongoing management fee for this service, which is taken from the fund assets and reduces the return. Private investors should only invest in “passive” index funds, as these offer higher returns over the very long term than the average “actively” managed investment fund (see also → ETF, → equity fund, → fixed income fund, → index fund). It is impossible to reliably identify the comparatively few “good” investment funds in the future in advance, although the financial sector always claims the opposite.

The first ten grades on the rating scale of the well-known rating agencies for bonds form the investment grade range up to “BBB-“. The remaining (worse) approx. 15 grades form the much riskier sub-investment grade area (“junk bonds”).

In a market economy in which prices are essentially free to form and market players can act reasonably freely, market participants direct (“allocate”) the economy’s resources to their most economically sensible use through their buying and selling decisions. This steering function of the markets relates to consumer and capital goods.

Sum of interest and repayment that the debtor has to pay per period (e.g. per month or per year) in the case of a loan or bond. Also known as “debt service”. See also → Annuity.

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

Takes place in the case of a loan when the interest is not paid by the debtor on an ongoing basis, but is instead added to the loan amount, i.e. increases it.

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

Corporate bonds, which are typically issued by large insurance companies. The payment profile (yield profile) of catastrophe bonds is primarily based on how frequently and intensively defined natural disasters (e.g. tropical cyclones) occur in a certain area and over a certain period of time relative to a long-term average. An attractive feature of cat bonds is that their payment profile has a → correlation of close to zero 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 is liable for the business of the limited partnership with all his private assets and (2) the limited partner is a person who is only liable with a certain monetary contribution. In the case of a →  GmbH & Co. KG, a GmbH is the general partner that is liable with its entire assets (which often only consist of a minimum investment of EUR 25,000).

A statistical key figure 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. The correlation is measured in the form of the correlation coefficient, which lies 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 more suitable they are for diversification in a portfolio. Just like returns, correlations also fluctuate over time, albeit less violently.

credit default swaps (CDS). An investor who buys a bond can also acquire protection for a certain term in the form of a CDS. This is paid if the bond issuer fails to pay its debt servicing (interest, repayment) in accordance with the contract. The cost of this insurance reflects the market’s estimate of the bond issuer’s default risk (credit risk).

Meaning debt financing effect or leverage effect for short: A property can be partially or fully financed by 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 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. All real estate financing via credit is financing with leverage. Example: Anyone who has financed their property with 30% equity (own funds paid initially or later) and whose property loses 20% in value has suffered a loss on their equity of 67% (20% ÷ 30%) (without taking into account any net rental income). The financial risks of the leverage effect in real estate financing are traditionally played down by the real estate sector and die-hard “real estate fans”, while the opportunities of the effect (the “upside”) are exaggerated. In general you can say: For example, with a 20% equity share (i.e. 80% loan share), the risk (the loss effect) for the equity from losses in the value of the property is five times as high as for the property itself. Four times as high with 25% equity and still twice as high with 50% equity.

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

Abbreviated to P/E ratio A financial key figure. The ratio between the current share price and the company’s most recent available earnings per share (so-called price earnings ratio). The P/E ratio is used to measure the valuation level of a stock or an entire stock market.

see → Price-earnings ratio.

Capital investment company, a company that launches and manages investment funds (casually: asset management company). A CIC is also known as a capital management company or fund management company.

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

See also → Contingent liabilities.

Party A sells a security X, which it has previously borrowed (for a limited period of time) from party B, to party C. At the end of the loan period (often only one day or a few days), party A must buy security X on the market in order to return it to B. A hopes that by this time the security will have fallen in value compared to the original time of sale (A is therefore speculating on falling prices). If this is the case, A makes a profit because the selling price is higher than the purchase price (taking into account the borrowing costs). If prices rise, A will lose money.

A pension that is paid until the death of the pension recipient. In principle, a life annuity is therefore not limited to a date that can be determined in the present. The statutory pension is typically a life annuity. In the case of a life annuity, the annuity payer bears the longevity risk of the annuitant from his point of view.

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

Ratio 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 “Beleihungsauslauf”, where the loan balance does not refer to the market value or purchase price of the property, but to the lower loan value set by a bank.

See → Micro-location.

Active investment strategy that attempts to identify certain market segments (asset classes) that represent particularly attractive or particularly unattractive risk-return profiles over time, rather than specific individual stocks (as in → stock picking), and to generate an excess return based on this by “getting in and out” over time.

The market capitalization of a listed company corresponds to the share price multiplied by the number of shares in circulation. MK also represents the current market value of the company’s equity (market value of → assets minus market value of liabilities). The market capitalization 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 corporations 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 market capitalization can also be applied to bonds. There, the market capitalization is the market value of a bond and not, as is often wrongly assumed, the nominal amount (repayment amount or par value).

The number of historical months or years that the investor had to wait after the onset of a decline in value (negative return) until the previous peak in value was reached again. In other words: The longest partial 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 on the basis of real (inflation-adjusted) or nominal appreciation rates.

The maximum accumulated loss during a specific historical period. A descriptive risk metric. Once the maximum drawdown has been reached, it may take a number of years before the asset’s previous maximum price or value is reached again. The MDD is a particularly conservative (“pessimistic”) risk metric. For example, it is more conservative (more pessimistic) than “value at risk”, which is more commonly used in the financial sector (see Wikipedia, “Value at risk”). A certain MDD represents a worst-case perspective (maximum negative perspective) in that it assumes that the investor “entered” and “exited” with all his assets at the most unfavorable time during the entire period (period under review). This will not be the case for most investors for obvious reasons. In addition, almost all of us are gradually adding or withdrawing money from our portfolio over time. Both “blur” the entry and exit points (i.e. extend them) and thus lead to a more even distribution of the “downside” and “upside” (risk and opportunity) in both a positive and negative sense.

In the case of a property, a distinction is made between micro-location and macro-location. The latter refers to the region and the city, whereas the micro-location refers to the district, the street, the very specific location within the street and the character of the immediate surroundings, including access to public transport, traffic noise levels, emission levels or compass direction. Micro-location and macro-location both have a strong influence on the price of the property.

Key figure from the statistics. The median is the middle case or “the case (data point) in the middle”. The median may or may not be identical to the (arithmetic) average. In the number series 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 on the mixing ratio. Multi-asset funds are generally not advisable.

A statistical (stochastic) forecasting technique used to generate a probability distribution of portfolio performance over, for example, 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 at a given 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 countries 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 German-speaking countries, ETFs are distributed on the MSCI ACWI IMI and similarly broad global stock indices.

For real estate, the inverse 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, as opposed to “inflation-adjusted” or “real” (excluding inflation, after deducting inflation. Example: Nominal versus real return. See also → Inflation illusion.

A bond without ongoing interest payments, i.e. without a “coupon”. In the case of an ZCB, the interest is instead included in the repayment amount at maturity. ZCBs have the advantage that (a) there is no risk of having to reinvest current interest payments at a lower interest rate and (b) there are no transaction costs when reinvesting. They may also be tax-privileged in some tax systems.

A risk metric. The maximum sub-period within an overall period for a given investment during 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 mathematical game theory for a situation in which one person can only win what another loses (see Wikipedia, keyword game theory). The total profit of the “game” is limited. In terms of the distribution of excess and shortfall returns among individual investors, the securities market is a zero-sum game. In any trade, one party must necessarily win relative to the market average, one must necessarily lose, and the summed 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). To a certain extent, the property return assumes 100% equity financing. Since the financing costs of real estate vary from case to case, the property return allows a simpler, more objective comparison of returns between different properties. Outside of real estate financing, the terms asset return or total return on 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 and headquarters in Paris, committed to democracy and a market economy. Most members belong to countries with a high per capita income and are considered developed countries. The OECD is the global driving force behind international tax cooperation.

An open-ended real estate fund is a normal investment fund that invests exclusively in real estate. Investors in an open-ended real estate fund can – in principle – buy and resell their units in the fund at any time at the official price of a unit as published in the newspaper. For the sake of simplicity, we will ignore the fact that this has not been the case for many open-ended real estate funds in Germany and other countries in recent years, due to the crisis and unplanned events. Since 2013, there have been minimum holding and notice periods for investment amounts exceeding EUR 30,000. In the case of closed-end real estate funds, on the other hand, there is an initial and final group of investors who become “co-owners” of the fund assets. This co-entrepreneur status is accompanied by complex contractual and legal obligations that private investors generally do not fully understand. There is no ongoing purchase and sale option for the fund units. Closed-end real estate funds are strongly discouraged for reasons of risk.

Here is the successful definition from Wikipedia: “Opportunity costs (rarely also referred to as alternative costs, foregone costs or shadow price) are foregone revenues (more generally: foregone benefits) that arise because existing possibilities (opportunities) for the use of resources are not utilized. 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 an economic concept for quantifying foregone alternatives.”

Equivalent to → “Alpha”.

Academics have found an astonishing degree of overconfidence among most private investors and real estate investors regarding their knowledge of the real estate and capital markets and, in particular, their ability to achieve above-average returns or avoid particular risks in the future. As a rule, they also overestimate their historical return successes (they usually do not determine truly objective data on this, but do not readily admit this). The overconfidence bias is statistically more pronounced in men than in women.

Latin for “per year”, “annually”.

Performance chasing 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 like this: First phase: The performance chaser gets in 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, they get in late and miss out on a large part of the upswing. Phase 2: Some time later, the expensive → asset topples because it is highly valued (“what goes up, must come down”). After 20% to 50% losses, the performance chaser exits frustrated and unnerved – with reduced assets due to losses. Phase 3: Holding out on the sidelines, “because it could get even worse”. A long time, perhaps years, waiting and licking wounds until a few good years have passed again. Phase 4: Now it’s time to jump back on the already fast-moving bandwagon without having made up for the old losses. The game starts all over again: “Repeat until broke”.

Every private household should keep a certain cash reserve (typically in the form of a bank deposit within the state deposit protection limit) to be able to finance unplanned unavoidable expenses or emergencies and increase their own peace of mind. An order of magnitude for the PL is four 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 via a special P2P company (platform) (typically via the Internet). The P2P platform charges an ongoing fee for this intermediary role. P2P is old wine in new bottles and exactly what banks have been doing for hundreds of years, just “repackaged”.

In a narrower sense, the sum of all assets (→ assets) of an investor or household, regardless of how many real estate properties, securities portfolios (possibly with different banks) and endowment policies these assets are distributed across. In a broader sense, an investor’s portfolio also includes his human capital (salaries not yet drawn until retirement) and his entitlements to statutory pension insurance. In the case of → investment funds, a portfolio is the sum of the securities held by the fund at a given time. Sometimes – somewhat imprecisely – a single securities account is also referred to as a portfolio.

A fund that invests in unlisted companies – hence “private” equity, i.e. unlisted equity. Private equity funds are not licensed for general sale to private investors in most countries (including Germany) – and that is a good thing.

see → Price-to-book ratio.

A put option gives its holder (“long position”) the right, but not the obligation, to sell a certain security to the seller (“short position”) of the put option during a certain period (“American put option”) or on a certain date (“European put option”) at a fixed price. As a rule, securities do not change hands in the case of options, but a compensation payment is made in the amount of the difference in value of the security concerned at the time of execution.

A specific repayment mode for loans (“installment loan”). With installment or straight-line 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 residual loan amount over time, while the periodic repayment of principal 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). Occasionally an installment loan is also misleadingly called a “repayment loan”.

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

Rule-based rebalancing is necessary as part of a “passive” forecast-free buy and hold investment strategy with “static asset allocation” as we recommend. Rebalancing is the periodic “bringing back” of the allocation of a portfolio to its originally deliberately chosen structure. There are a number of different methods for the practical implementation of rebalancing.

The well-documented, widespread and dangerous mistake of assuming that data from the immediate past (in investing, return data from the last two to five years) is more representative of the future than data that preceded it.

A natural person, a legal entity (e.g. foundation, limited liability company or public limited company) or a new legal construct formed by these two types of persons (such as a partnership), which can be the independent holder of rights, obligations and ownership relationships. In the case of legal entities, a distinction can also be made as to whether they can be owned by someone (e.g. corporations or partnerships) or not (natural persons and foundations).

Also known as reversion to the mean. From periods of around five years upwards, the phenomenon of regression to the mean can be observed in real estate returns and, to a lesser extent, in stock returns. Regression to the mean causes the annual returns of real estate or diversified equity portfolios to oscillate around the arithmetic mean of the returns of the → asset class over the very long term. Where regression to the mean exists, excess or shortfall returns relative to the long-term market average are only of a temporary nature.

Real Estate Investment Trusts. A special legal form of real estate company that is subject to the respective national REIT law. If the companies do this, they receive a number of tax advantages, but in return they must comply with several restrictions and conditions that the majority of real estate companies in Europe, and especially in Germany, apparently find too unattractive. In the USA, on the other hand, most real estate companies are REITs.

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

An open-ended investment fund that invests its investors’ assets in bonds (“fixed-income securities”), i.e. government bonds or corporate bonds. Anyone investing in fixed income funds should choose a bond fund (bond fund) on an ETF basis, as these have significantly lower ancillary costs and are very likely to produce a better return in the long term.

Investment ratios that put returns in relation to the risk taken. The best known of these ratios is the Sharpe Quotient (see keyword “Sharpe Quotient” on Wikipedia).

In the case of capital-forming life insurance policies and private pension insurance policies, the insurance company informs the policyholder (VN) of the surrender value each year. The surrender value is the payout that the policyholder would receive if he were to terminate the insurance at the time the surrender value is calculated. You could also say that the surrender value is the → present value of the insurance claim.

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

Small stock corporations as opposed to large (large caps or standard stocks) and medium-sized (mid caps). Contrary to what many investors believe, there is no fixed definition of how “small” a small cap is. Nevertheless, small caps on the stock exchange 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 commodities, the market in which the “fulfillment of the commercial 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 the spot market and the futures market also exists for stocks, bonds and foreign exchange.

See → Bonds. To be distinguished from corporate bonds.

see → Volatility.

Literally “(select 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 an excess return in the future.

A type of sell order in which the sell order is subject to a condition. The condition is simplified as follows: “Only sell if the price of this security (or fund) falls below the amount of X euros in the period up to the so-and-so 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, in the event of a company sale (if the shares are held as 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 solidarity surcharge, excluding church tax).

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 incurred in an investment fund, e.g. not the transaction costs resulting from the → bid-ask spread of the securities bought and sold.

Here, in the context of buying and selling securities.

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

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

In the case of an ETF, the difference between the return of the reference index (the index being tracked) and the return of the ETF over a certain period (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, the tracking difference can even be negative in rare cases (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 than the → TER.

outperformance. Return that is above the value applicable for an → asset class. In more general terms: A return that has beaten a correctly selected benchmark when costs, taxes and risk are taken into account. Comparing the returns of two investments A and B without taking costs, taxes and risk into account is usually meaningless and misleading, although it is commonplace in the marketing material of the financial and real estate sector, as well as in the media.

Real estate loan where the loan amount is paid out gradually 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 renounce the inheritance). Reverse mortgages are an unusual form of loan that is primarily chosen by elderly people who want to “monetize” their illiquid property but at the same time do not want to move out or sell.

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

Also known as yield to maturity The return on a bond from the time it is viewed or purchased (e.g. “now” until maturity, provided that the capital service (interest, repayment) is always made on time). The current yield is the “effective” (“real”) return to maturity. It differs in particular from the coupon return (this is the periodic interest payment per annum relative to the nominal value when the bond was issued).

The person doing the debt restructuring can be a private household or an entrepreneur. Debt restructuring is the repayment (replacement) of one or more loans with one or more others. The purpose of debt restructuring is usually to produce an advantage for the borrower, e.g. repayment deferral, more favorable interest conditions or partial debt relief. In many cases, debt restructuring is carried out under pressure from a lender when the debtor is in financial difficulties. However, some debt restructurings are also the result of the borrower’s own initiative if they believe they can improve their financial situation by restructuring their debt (see also Wikipedia, keyword “debt restructuring”).

“Experts” who have been making radically pessimistic predictions about the economy, public finances and capital markets for many years. Most doomsday forecasters are not scientists, but “amateur economists”. The part of these forecasts that is sufficiently precise in terms of time has largely not materialized over the past 20 years and must therefore be classified as incorrect. Another part is so imprecise in terms of time that it cannot be fundamentally wrong, such as the forecast “there will be a severe storm”. At the same time, such undefined forecasts are ultimately useless in terms of decision-making logic. From an investor’s perspective, the main problem with these forecasts is that following them causes 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 discounts in German inheritance tax law that significantly reduce the de facto 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) retain the jobs and do not make any major withdrawals. A less controversial, more moderate tax relief also applies to properties rented out for residential purposes.

The conversion of a sum of money or an asset in general (including real estate) into a periodic (e.g. monthly) annuity payment. This annuity payment can be made for a limited period (for example, 20 years) or “forever”, i.e. until the death of the investor or the last spouse to die. Insurance companies offer such private pension insurance policies. In the case of a perpetual annuity, the pension provider bears the “longevity risk” of the pension recipient. See also life annuity.

The most widely used risk measure in financial economics. The word is derived from the Latin verb “volare” (to fly) and refers to the value fluctuations of an investment over time. Volatility is typically measured using the statistical indicator standard deviation. The higher the standard deviation of the value fluctuations in the period under review, the riskier the investment. In the case of direct investments in real estate (including open or closed-end 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 take place frequently enough.

If a real estate loan is repaid early within its fixed interest period (before it 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 period of the loan) are noticeably lower than the interest rate agreed in the loan agreement.

As part of the implementation of an EU regulation (Directive EU 2015/849), registers must be introduced throughout Europe to show which legal entities (companies, partnerships, trusts, foundations, etc.) can be assigned to which beneficial owners (natural persons). The directive has also been implemented in the European Economic Area and therefore also in Liechtenstein.

Abbreviation for securities identification number.

Electronic trading on the Frankfurt Stock Exchange – by far the largest stock exchange in Germany.

Securities issued by banks (i.e. legally bank debt securities, i.e. bonds). In contrast to a normal bank bond, however, the investor does not receive interest, but participates in the success or failure of a stock market transaction (for example, the price increases of a basket of shares). These investment products are not advisable 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 expense will increase as a result of an increase in interest rates on the next interest rate adjustment date. This applies in particular to variable-rate loans. With fixed-interest loans, there is a risk of an interest rate increase when the fixed interest rate expires.

The interest rate or, more generally, the return that a security generates in one time unit (interval) and which itself produces interest (return) in the subsequent interval. The compound interest effect leads to a higher increase in the investment value per period in monetary units, the longer the period under review.

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 technological progress, healthy structural change and growth in the economy. The zombie company theory is not uncontroversial because both the data basis and the economic logic underlying this hypothesis are “debatable”.