German wealth growth remains minimal, according to Bundesbank's assertions.
**Cautious German Savers Opt for Low-Risk Investments, Missing Out on Potential Returns**
A recent analysis of the German financial landscape reveals a trend among savers preferring cash and sight deposits over stocks, primarily due to risk aversion and a desire for easy access to their funds.
According to data from the Federal Bank, more than a third (37%) of the gross financial wealth is held in cash and sight deposits, a preference that has significant implications for returns. The less wealthy half of the population holds almost all of their financial wealth in these low-risk assets, while the wealthiest ten percent invest more heavily in stocks and funds.
This cautious approach to investment results in negative real returns for many savers, as their funds often yield less than inflation. In fact, historical evidence shows that stock investments generally provide superior long-term returns. For instance, during the period since the pandemic, a surveyed group held about half of their savings in cash or similar deposits, leading to a real loss of about 9% in value due to inflation eroding purchasing power. In contrast, a global stock portfolio would have yielded a real return of 39%.
The fear of losing money with stock investments is a significant factor influencing this preference. Savers often feel safer keeping their funds in cash or cash-like deposits, despite the lower returns. This behavior is particularly evident among households with lower budgets, who prefer these investments out of caution.
The total financial wealth of German citizens is currently 9,053 billion euros, with approximately four million households holding about half of this wealth. At the lower end of the scale, there are about 20 million households that account for only eight percent of the financial wealth.
The wealthiest ten percent of German citizens benefit from price gains in stocks, with almost 20% of the financial wealth being in stocks. Meanwhile, about 28% of the financial wealth is in claims from insurance and pensions, and almost 13% is in investment fund shares.
However, it's important to note that real estate is not considered by the Federal Bank as a component of households' wealth. The financial wealth increased by 9 billion euros compared to the previous quarter, with net financial wealth, after deducting debts, standing at 6,913 billion euros.
Inflation has normalized in the range of two percent, and fixed-term deposits have become less attractive due to interest rate cuts by the European Central Bank. As a result, many people have shifted fixed-term deposits to short-term liquid deposits like overnight deposits.
In conclusion, German savers’ preference for liquid, low-risk cash holdings limits their potential to achieve positive real returns, particularly over extended periods where stock markets tend to outperform deposits. This trend highlights the importance of understanding the trade-off between risk and return when making investment decisions.
| Preference | Reason | Effect on Returns | |------------------------|-------------------------------|-----------------------------------------------| | Cash and sight deposits | Risk aversion, easy access | Negative real returns (loss due to inflation) | | Stocks | Fear of volatility and losses | Higher potential returns over long term |
Personal-finance advisors might advocate for a balanced approach to investing, as the cautious preference for low-risk investments like cash and sight deposits among German savers restricts potential returns in the business realm. In fact, historical evidence indicates that investments in stocks, a category frequently overlooked due to fear, can yield superior long-term returns, sometimes even surpassing the rate of inflation – a stark contrast to the negative real returns observed on low-risk assets. For instance, an analysis of the savings habits during the pandemic period revealed that about 9% of the value was eroded due to inflation, a finding that would likely encourage a shift towards personal-finance strategies that prioritize high-risk, high-reward equities.
