The COVID-19 pandemic and the asset allocation of private investors in Germany. An empirical study of the influence

Bachelor Thesis, 2021

163 Pages, Grade: 1,7


Table of content

List ofFigures

List of abbreviations

Index ofFormulae and Symbols

1 Introduction
1.1 Topical situation
1.2 Objectivesandapproach

2 Pandemic
2.1 Definition & historical events
2.2 COVID-19
2.3 World Health Organization

3 Private investors

4 Asset allocation
4.1 Definition
4.2 Tactical versus strategical asset allocation
4.2.1 Tactical asset allocation
4.2.2 Strategical asset allocation
4.3 Portfolio selection

5 Investment components
5.1 Investment guide
5.2 Investment instruments
5.2.1 Selection
5.2.2 Savings book
5.2.3 Call money & fixed deposits
5.2.4 Stocks
5.2.5 Funds
5.2.6 Gold
5.2.7 Real estate

6 Research
6.1 Research question
6.2 Research method
6.2.1 Kinds of research Quantitative research vs. qualitative research Selection for the study
6.2.2 Research instruments Questionnaire - fundamentals, advantages & disadvantages Observation - fundamentals, advantages & disadvantages Selection for the study
6.2.3 Questionnaire - structure & procedure

7 Evaluation
7.1 Evaluation method
7.2 Results evaluation
7.2.1 Participants & survey period
7.2.2 Experience & know-how
7.2.3 Investor profile
7.2.4 Previous influence of COVID
7.2.5 Future influence expectations
7.3 Interpretation

8 Critical review & discussion
8.1 Critical review
8.2 Discussion

9 Conclusion&outlook



List ofFigures

Figure 1: Distribution of infections according to WHO regions

Figure 2: Asset allocation process

Figure 3: Portfolio

Figure 4: (E-V) rule

Figure 5: Portfolio comparison

Figure 6: Calculation transactions costs

Figure 7: Funds Questionnaire

Figure 8: Investment guide

Figure 9: Ownership of assets

Figure 10: Savings - Interest rate development

Figure 11: Dax Chart - One Year

Figure 12: Gold price chart

Figure 13: Research method selection process

Figure 14: Participants by gender and age

Figure 15: Frequency of dealing with money matters

Figure 16: Knockout answers

Figure 17: Predefined goals

Figure 18: Time horizon consideration

Figure 19: Use of investment instruments

Figure 20: Reported influence on the investment instruments

Figure 21: Influence on stocks

Figure 22: Influence on funds

Figure 23: Influence on savings plans

Figure 24: Asset allocation assessment

Figure 25: Survey times by DAX price

Figure 26: Results overview

List of abbreviations

Abbildung in dieser Leseprobe nicht enthalten

Index ofFormulae and Symbols

Formula 1: Expected value

Formula 2: Variance of return

1 Introduction

In the following, the reader is introduced to the subject area of this bachelor thesis by getting an overview of the current situation. At the same time, the aim of the work, the procedure as well as the expectations are explained to the reader.

1.1 Topical situation

In today’s news there is one important topic surrounding people all over the world - the corona pandemic. It feels like there is barely other news presented by the media as COVID-19 affects economy and social life very much in many if not all countries on our planet. Even when there is something written about waves, it is mostly not about sports like surfing but infection waves - a small exaggeration to make it clear. People have to handle a lot of challenges in this regard. Starting with some having the fear of infecting themselves with the virus and so having health problems with the possible result of death, others are afraid of the effects on the economy that can be detected in many ways. That is not very surprising as the numbers of the worldwide production in the first quarter of 2020 decreased by about 15.5 percent, what could lead to a total decrease of 4.9 percent in 2020 as the DIW in Berlin estimates. To get an idea what this number means it should be mentioned that in 2018, there was an increase of around 4.2 and in 2019 3.5 percent with a total of eight positive quarters.1 Also, the current situation on the labor market, which is important for lots of people, does not reassure at all. When zooming in and only taking a look at Germany in this regard, it can be stated that the number of new gained employed persons decreases a lot comparing it to past quarters.2 This could lead to people not being able to pay their rent, credits and other bills what could have tremendous impact to other factor markets and social life of many people. Closed businesses, increased working from home and travel restrictions also caused a decrease of customer spending as the value of the first quarter of 2020 is around three percent lower than the previous quarter.3 On the other hand, investment markets like the stock market showed some huge movements as the DAX lost about 30% in a few weeks4, which leads to the assumption that COVID-19 had an impact on that. The German share index comprises the 30 largest stock corporations and is often used as a barometer or indicator of the situation on the capital market.5 Nobody is able to predict the long-term consequences of COVID-19 with certainty. This is why people including the author of this bachelor thesis are doing research and conduct studies to obtain more information and thus, build a basis for possible recommendations for action.

1.2 Objectives and approach

In the previous chapter different challenges and situations regarding the COVID-19 pandemic are mentioned. This bachelor thesis investigates, how private investors in Germany were influenced by the pandemic regarding their asset allocation. As the markets acted turbulent, it is expected that people have adapted to the situation and eventually have shifted between several investment instruments - also, that people were influenced in the form of changing focus regarding investor keywords like diversification, risk tolerance and others. Therefore, an empirical study with the help of a questionnaire is done. Expectations for the future development of the investors are also addressed. In view of the limited time and resources available for the preparation of this scientific work, it is pointed out that external studies are also included in the search for results and new findings. The sum of the results of all studies including the survey conducted in this thesis is then finally used to answer the research topic or the question.

Therefore, it is started with a theoretical part describing the important components of the term paper's topic to allow the best possible understanding including some background information. At first, the reader gets an overview about pandemics in general including the historical background followed by information about COVID-19. Additionally, the reader receives information about the World Health Organization and its role in the current pandemic. The market participants addressed are then briefly explained - these are private investors. There is a lot of theory on the subject of asset allocation. It is included indispensable standard information as well as details relevant to this work. This should give the reader an idea of what is meant by the term mentioned. Now various investment components are taken up. These include an investment guide and asset classes that are particularly relevant for German investors.

In the sixth chapter, the research question is fixed as well as the method is shown. The latter is determined in a deductive process, which is made transparent to the reader. The selected research instrument is then described and explained by showing information about the target group, the structure and last but not least the procedure of the questionnaire. Chapter seven is about the description of the evaluation method as well as the practical evaluation of the results. In this context, the last sub chapter contains the interpretation. In the penultimate chapter, the study is critically reviewed, and external findings are included in the results. Finally, the research results are summarized, which answer the research question, as well as an outlook on the future development of the subject area is given.

2 Pandemic

In this chapter the reader gets information about pandemics as this is essential knowledge to follow the term paper's content and research result. Starting with a definition in general, the main focus will be a description of the COVID-19 pandemic with the gained knowledge there is until today regarding this young pandemic. Additionally, there are given historical background information and a short mentioning of the World Health Organization.

2.1 Definition & historical events

“A pandemic is the worldwide spread of a new disease.”6 This is how the World Health Organization shortly defines the term pandemic. In contrast to that, they describe an epidemic with being limited to a specific community or region.7 According to the previous definitions, a pandemic can be understood as a large epidemic regarding the dispersion range. To get a better understanding of what a pandemic is, descriptions of past events of this nature are included. This also allows a later categorization of the current situation.

In an article by Hakes et al. (2020) the authors summarize several pandemics and epidemics. Starting in the 14th century, the plague, which was also called the Black Death, caused about 350 to 475 million deaths - in these times that was a huge part of the total world population. Another event in this regard was the Spanish Flu in 1918 that was responsible for many deaths. This pandemic was caused by the H1N1 influenza A virus and showed similar characteristics as the current pandemic, what is clarified in chapter 2.2. The symptoms among others were fever and pneumonias.8 Not only health but also economic consequences are reported at the time. For example, merchants complained of slumped sales of up to 70 percent across various retail sectors.9 A well-known epidemic that humans could not defeat until today is known as HIV/AIDS. Its origin is led back to the year 1920 and is connected to chimpanzees. People infect each other with sexual contact among others. If the infection is advanced, the defence system is attacked and then often overloaded with classical infection diseases, what could cause the death of the respective person. The medicine sector has made it to reduce the mortality rate over the years. The forerunner of the current pandemic is SARS-COV - first watched around 18 years ago and lasted approximately two years. Symptoms as well as the medical preparation regarding tests and vaccines was very similar to the COVID-19 pandemic.10

In the next chapter the reader gets information regarding the current pandemic. It is mentioned that historical events delivered some insights that could be useful for COVID-19. According to Hakes et al., every epidemic or pandemic event made the humans learn lessons like improving the hygienic standards and needing flexible systemic responses as well as sufficient medical resources to be prepared.11

2.2 COVID-19

In previous chapters there are things mentioned that this new pandemic has impact on or is responsible for. Now the reader gets information about COVID-19 to get a clearer view what this new pandemic is like. Wuhan, which is a city located in China, today is more known by people over the world than it was in 2019 as on December the 31st there were reported several cases of pneumonia - with no indication what the trigger for that could be. About a week later these cases were connected to a new virus called 2019-nCoVbut was renamed to C0VIDVirus afterwards - this should not have been the final description. In the following weeks uncertainty ruled the daily life as it was unclear where to categorize the happenings. About three months after the first cases were reported, the World Health Organization classified the outbreak as a pandemic - that was on March 11th, 2020. The decision was motivated by over 100.000 reported infections from several countries with a death rate of about 4 percent.12 Jankowski (2020) describes the COVID- 19 as follows: „The current COVID-19 pandemic, characterised by acute inflammatory damage to the human respiratory tract (mild to severe and life-threatening), is caused by a so-called viral particle of matter called SARS-CoV-2, which is transmitted from one individual to another by droplets of saliva or respiratory mucus projected into the air physiologically by breathing, speaking or sneezing or coughing. These virus-laden droplets are deposited on the objects that we touch and can also be transmitted by the hands to the mucous membranes of the face.“13

When a person is infected and symptoms appear, it usually happens five to six days after infection. Typical symptoms are cough, cold and fever. Taste disorders also occur.14

Ippolito et al. (2020) associate the COVID-19 pandemic with desperation and hope by judging the world's largest economies. They mention several impacts of the pandemic as there was a freeze of economic activities and the feeling of people having less free movement. They accuse the respective responsible health care institutions not having watched and learned how the pandemic was handled in Asia. Even the most advanced ones struggled to get control over the situation.15

Now some facts about the extent to which the pandemic is making itself felt around the world are presented before later focuses on measures and effects in Germany are focused - this shall help to understand the respective motivations of German private investors. As of December 15, 2020, a total of more than 71 million people worldwide were infected with the novel virus, according to the World Health Organization. In this context, more than 1.6 million people have died, which corresponds to a mortality rate of about 2.2 percent. The infections are distributed as follows on the different areas of the earth:16

Figure 1: Distribution of infections according to WHO regions

Abbildung in dieser Leseprobe nicht enthalten

Source: Ownfigure, compare WHO, COVID-19 dashboard, Accessedon 15/12/2020.

Due to the human-to-human transmission of the virus as already described, the political entities of the respective countries have taken measures. The aim is to contain the spread of the virus, which is done by restricting social contacts, among other things - large-scale lockdowns are the result in many countries.17

Now a look at developments in Germany is taken. At the beginning of March, measures of a pandemic plan with recommendations were described. At that time, citizens were asked to avoid their social contacts.18 Then on March 22, a fixed set of rules that restricted people in their movement was published. The validity was scheduled until April 19.19 The period of validity was later extended. In parallel, testing of individuals for the coronavirus was intensified. In addition, various stimulus packages were adopted to support institutions and individuals that were particularly affected - such as the healthcare sector. In June, the digital advance was used to introduce a Corona warnings application to counter the virus with precautionary measures. During the summer months, the restrictions were loosened and partially lifted, before they came into force in September due to rising numbers of infected persons.20 At the end of October, more stringent measures were adopted. These include the closure of facilities such as theaters, cinemas and gyms. Additionally, only a maximum of 10 people from two households are allowed to meet. This is only part of the restrictions to make an idea about the impact on people imaginable.21 As of December 2020, initial vaccination centers are being planned to proactively protect people from Corona.22

2.3 World Health Organization

“Better health for everyone, everywhere”23 - this slogan is used by the World Health Organization to give the reader an idea of their motivation for work. The institution that operates worldwide having around 190 member states, aims to fight diseases of all kind like Influenza, Cancer or the new Corona disease.24 As the media started to report regarding COVID-19, the WHO was mentioned more and more often as it has a role in this situation. That is why a short overview about the WHO is given in this chapter. To reach a better health standard for people all over the world, the organization practices a lot of different to dos - from optimizing access to medical that are indispensable for life to improving people’ influence on health policies of their countries.25 Therefore, the WHO collaborates among others with the countries, the UN system, foundations and academia.26 That allows programmes like deafness preventions, vaccine safety and drug information to only name a few ones.27 Also, for COVID-19 the World Health Organization publishes a lot of information like a list of possible symptoms, prevention information and updates of the current information with total number of confirmed cases and more.28 That makes the WHO a central point of contact during the current pandemic. It also has to be mentioned there are doubts regarding the actions of the World Health Organization as the USA canceled their membership in July 2020. This additionally drew attention to the organization.29

3 Private investors

There are different groups of investors participating in the investment market like governments, companies of different sectors like banks and last but not least private investors. It is concentrated on the last-mentioned group regarding the bachelor thesis’ topic and given a short description with mentioning a few characteristics in the following. In contrast to institutional investors that invest third party’s money in the market, private investors use their own assets aiming for capital growth. Private investors, who are nature persons, have different intended uses regarding their assets. While some invest money to make sure having enough liquidity when retiring, others use it to make an acquisition in the nearer future. People also take part in the investment world for unselfish uses like giving and inheriting value to the next generation. As there is a great gap regarding the available amount to invest within the group of private investors, the group cannot be characterized as a homogeneous one.30 In a report published by DIW regarding the year 2017 is shown that in Germany, the richest ten percent of people own around 56 percent of the total net assets. In contrast to that, the poorest 50 percent together only hold about 1.3 percent.31 For the sake of completeness, it has to be mentioned that the available amount to invest is not the same as the total net assets - but these numbers give an idea ofhow big the discrepancy is.

4 Asset allocation

In this chapter it is explained what to understand with using the term asset allocation by starting with a general definition. After that, a closer look at tactical and strategical asset allocation is taken. This chapter finishes with showing information about the portfolio theory ofMarkowitz.

4.1 Definition

The term asset allocation has to be demarcated from the keyword asset management as it is a part of it with the meaning of building and reaching portfolios with a diversified aspect regarding the portfolio components - it is about a diversification regarding different asset classes, geographical orientation and other criteria with the target to ensure an attractive risk/reward-ratio for the investors in consideration of the time available to be invested and the amount of the invested capital.32 Asset classes can be described with containing assets with similar or same characteristics regarding risk and revenue. The profit of assets within an asset class normally correlates among each other and so performs very similar or equally. With having different low or non-correlating assets classes combined within a portfolio, a diversification effect appears.33 Ferri (2010) writes about several key concepts in context with asset allocation. To control the risk of a portfolio, he advises to regularly review the contained assets to be able to react with reallocations regarding assets. Thereby the author mentions that correlations between several portfolio components that were determined, can change over time. He puts diversification in context with asset allocation with the result of allocating into different segments of markets and so achieve a more balanced risk level.34 Sharpe (1992) mentions that asset allocation has high impact on the profit of a typical investors' portfolio. By his definition, he connects asset allocation with a diversification of predefined asset classes.35 Forbes (2020) defines asset allocation with trying to harmonize it with two keywords also mentioned in chapter 5.1. In detail, it is about time horizon and the risk tolerance36 about what the reader gets more information in the next chapter by presenting an investment guide. Within the asset allocation process, there are different components involved including an investment policy, the strategic asset allocation and the tactical asset allocation as the following figure by Lumholdt (2018) shows:

Figure 2: Asset allocation process

Abbildung in dieser Leseprobe nicht enthalten

Source: Lumholdt, H., M., Strategic & tactical asset allocation, 2018, p. 6.

All of these components are described in the following chapters - the description of investment policy is covered in chapter 5.1.

4.2 Tactical versus strategical asset allocation

Asset allocation appears in various forms as there is a tactical as well as a strategical point of view in this regard. In the following chapter, the reader gets an overview about these two dimensions.

4.2.1 Tactical asset allocation

“Tactical asset allocation is intended to take advantage of opportunities in the financial markets when certain markets appear to be out of line. Tactical asset allocation is designed to facilitate a fund’s long-term goals by seeking added value.”37 This definition suggests a different time orientation between tactical and strategical asset allocation. Anson (2004) confirms that by stating that the time frame is the main difference between these two characteristics. Related to a funds’ asset allocation for example, the management board takes care about the strategical orientation, while the investor staff tries to outperform the market by identifying market opportunities with specific asset classes. That could be a targeted change from one asset class to another with the result of a shift from an underweighted to an overweighted asset class. If the market situation changes, the investor staff reacts flexible and may change the allocation the other way round.38 Regarding the success and profitability of tactical asset allocation, Stockton & Shtekhman (2010) write that in average it does not enable a higher outcome than a strategy without tactical asset allocation.39 According to Tokat et al. (2007), several asset classes and their sub assets can be considered on a regional or even global scope - but in contrast to a security selection strategy, the available assets are limited as usually there are only up to 20 different assets considered within a TAA strategy. Another challenging characteristic that tactical asset allocation entails, is the fact that important trading signals are difficult to anticipate. An advantage of this strategy is possible low transaction costs, when major assets classes are shifted - therefore, it is obligatory to trade liquid assets and avoid nonliquid sub assets.40

4.2.2 Strategical asset allocation

“Strategic asset allocation is the translation of an organization’s investment policy. It dictates how a fund’s assets should be divided across major asset classes.”41 Even if Anson focuses on institutional investors by stating what strategical asset allocation stands for, his definition gives an idea of what SAA is. To reach a suitable asset mix, there are ranges and percentage targets predefined.42 This could mean to choose several assets classes within the investment universe and setting some key numbers like a minimum of 20 percent holdings in bonds and having not less than 15 percent cash within the portfolio at the same time. To give the reader a better idea of how such a strategical asset allocation portfolio could look like, the following figure is shown:

Figure 3: Portfolio

Abbildung in dieser Leseprobe nicht enthalten

Source: Ownfigure.

This sample portfolio is a snapshot within the investment period as the weightings of the included assets can change - it is only to show how a portfolio could look like considering the predefined framework conditions.

In contrast to the tactical asset allocation model, the SAA plans with a longer investment period that can be ten years long, for example. At the same time, the predefined aims are tried to be reached under the assumption of not turbulent but normal market circumstances.43 In an investigation of Brinson et al. (1986) it was detected that the strategical asset allocation has an impact of over 90 percent on the portfolio's returns.44

Regarding this investigation what the current pandemic's influence on the asset allocation of private investors in Germany is, the tactical asset allocation as well as the strategical one is considered. On the one hand, the pandemic occurred quite unpredictable and so could have impacted the TAA, but on the other hand, the investors could have been motivated overthink their SAA strategy.

4.3 Portfolio selection

As mentioned previously, the asset allocation aims to create a suitable portfolio for the respective investor. The modem portfolio theory of Harry Markowitz (1952), for that he received the economic Nobel Prize in 1990,45 is an approach to achieve an efficient portfolio, what is explained in the following text. Markowitz separates the process of portfolio selection in two different sequentially phases. The first one is about preparation doing research based on the investor's experience and setting expectations about possible future returns of specific assets. The second one, on that the scientist focuses in his article, is based on the results of stage one and ends in the selection of a portfolio.46 In this thesis the basics of his theory will be taken in scope to give the reader an idea, what Markowitz wants to show with his results - this excludes a full consideration of the portfolio theory as it would go beyond the scope of this bachelor thesis.

With mathematical and statistical considerations, Markowitz tries to find a collection of efficient portfolios. In the following figure his idea of the expected returns - variance of returns (E-V) rule is shown with the help of a two-dimensional matrix:

Figure 4: (E-V) rule

Abbildung in dieser Leseprobe nicht enthalten

Source: Markowitz, H., Portfolio selection, 1952, p. 82.

To understand the (E-V) rule an explanation of different variables based on the paper named Portfolio Selection as well as an example slightly modified is used. Markowitz calls Y a random variable that could have a several values like yl, y2, y3 etcetera. He assumes that the probability of 7 being yl is defined with^p7. The other possible values bring along their respective probabilities likep2,p3 etcetera. E that is the attribute variable of the x-axis on the matrix above, stands for the expected value or mean value of Y.

E, in this example and with consideration of only having three possible values for 7, is calculated as follows:

Formula 1: Expected value

Abbildung in dieser Leseprobe nicht enthalten

Source: Compare Markowitz, H., Portfolio selection, 1952, p. 80.

As the (E-V) rule is about two dimensions, the attribute of the y-axis needs to be clarified. It shows V, what stands for the variance of returns of a specific portfolio.47 Variance in this regard has the meaning of the total risk of difference between the actual return and the expected one. This key number is more often used to evaluate the risk of a portfolio than the standard deviation. Both key numbers are arithmetically in connection as the variance is the squared value of the deviation.48 The variance of returns is a key number that shows the level of dispersion and is, according to our example, calculated as follows:

Formula 2: Variance of return

Abbildung in dieser Leseprobe nicht enthalten

Source: Compare Markowitz, H., Portfolio selection, 1952, p. 80.

If you calculate E and V for many different portfolios and mark the respective point of intersection, you need to know how to interpret the position of the portfolios with the matrix. Therefore, the meaning of the two axes is important to be clarified. The further right you move on the X-axis, the higher the expected return of the portfolio is - the higher you move upwards on the Y-axis, the higher the variance of returns of a portfolio is. With the assumption that an investor wants to maximize the expected return of a portfolio and aims to avoid or minimize the variance of returns, he chooses or shall choose a portfolio on the thickly drawn part of the circle (see figure 3). These represent the efficient portfolios as on the thinly drawn part of the circle for given E there are no F-values that are lower and for given V there are no E-values higher. Markowitz highlights in this regard that the (E-V) rule shows the importance of diversification within a portfolio to reduce the variance by same or higher expected returns. For the sake of completeness, he adds that it is also possible that a non-diversified portfolio entails a higher return with at the same time lower variance than other diversified portfolios. All in all, he mentions that the expected returns - variance of return rule ends up with diversified portfolios most of the time and urges caution to have the right understanding of diversification. In this regard, he describes that a portfolio including many securities is not naturally diversified.49 “It is necessary to avoid investing in securities with high covariances among themselves. We should diversify across industries because firms in different industries, especially industries with different economic characteristics, have lower covariances than firms within an industry.”50 Covariance shortly described means that two variables performing similarly or equally with having a positive covariance - negative covariance leads to opposite development of two variables.51 Different asset classes or their single investment instruments may differ by their impact to the diversification of a portfolio. Jayeola et al. (2017) combine a risk reduction strength to individual investment instruments in their article. Accordingly, an example with investments from the commodity and precious metals sector shows that gold has a higher power to reduce the risk in a corresponding portfolio compared to platinum. Thus, the more gold is directed relative to platinum in a portfolio, the lower the overall risk of the portfolio, which the authors summarize in tabular form.52

Figure 5: Portfolio comparison

Abbildung in dieser Leseprobe nicht enthalten

Source: Jayeola et al., Diversification of assets, 2017, p. 586.

It should be noted that in the example additionally silver and oil play a role and bring certain influence. Nevertheless, gold is assigned a risk-reducing strength of 56 percent in this example, whereas platinum has 0 percent of this strength.53

5 Investment components

To get an idea of the investment basics that are used in this bachelor thesis, the reader gets an overview about several investment components. In detail, it is about an investment guide that describes the procedure which an investor could follow while investing. Secondly, the investment instruments are explained that are considered relevant for this investigation.

5.1 Investment guide

In principle an investor is able to decide himself whether he wants to take care for asset allocation regarding his portfolio or to award an order with a professional asset manager. Rasmussen (2003) underlines the need of an investment policy statement when an asset manager works together with an investor.54 In this statement he explains different key elements that should be agreed by both parties. In this bachelor thesis these elements independently whether there is an asset manager engaged or not is used to create an investment guide consisting of key questions. This shall give the reader an overview regarding important investment process criteria.

First, it is important to set realistic objectives that shall be achieved within the investment process. These goals need to be orientated on the current situation of the investor. If, for example, an investor decides to invest 1.000 EUR as his financial situation does not allow a higher amount, it would not be suitable to set a goal of buying a house worth 500.000 Euros within the next year. In assumption that the investor has no further money to invest, it would need very high-risk tolerance to transform the initial amount to a half million. A clear definition of objectives does not only increase the probability of achievement but also helps to measure the progress during the investment phase and avoids misunderstandings with an asset manager.55

Logically following this, a long-term asset allocation has to be specified with the condition to have as high return as possible with a risk level that the investor can agree with. Of course, regarding this step further criteria have to be considered as the asset allocation process is comprehensive like described in chapter 4. It is critically mentioned that Rasmussen does not consider tactical asset allocation within the investment policy statement. To be flexible in turbulent market phases or special happenings, the investor should define a plan to intervene if necessary or approve changes regarding the investment strategy in advance ifhaving a contract with an asset manager.

As shortly mentioned above, the investor has to specify the amount of money he wants to invest into the market. This important criterium can have impact to the performance of the portfolio as a low net value portfolio potentially does not allow a diversification with a high number of assets without decreasing performance. The reason for that is the component transactions costs.56 This shall be clarified by an example. Assuming that a portfolio with a positive performance of three percent has an optimal diversification by containing 100 different assets and there is a transaction fee of five Euros per transaction, the following calculation can be done:

Figure 6: Calculation transaction costs

Abbildung in dieser Leseprobe nicht enthalten

Source: Ownfigure, owncalculation.

The result shows that the cost parameter can significantly influence the performance as the lower volume portfolios development turned negative from an initial positive three percent. The higher volume one was not impacted that much as there are only 0.5 percentage points missing. From a critical point of view the author points out that Rasmussen does not consider the difference between fix and variable transaction costs as variable costs behave different from fix cost used in the example.

Risk tolerance is the next element the investor has to think about his investment project.57 “Risk tolerance plays an important role in each household's optimal portfolio decision.”58 “Financial risk tolerance, defined as the maximum amount of uncertainty that someone is willing to accept when making a financial decision, reaches into almost every part of economic and social life.”59 How much financial risk a person is willing to take is subjective as it depends on different parameters as Hanna and Sung (1996) mention. According to this, there is less readiness to take risks for people having a specific age - the authors defined that age at 55 years. On the other hand, there are characteristics that are connected with the opposite - being more educated, having higher income or being selfemployed as well as being a single male.60 As risk tolerance is that subjective but at the same time indispensable to get fully information about, asset manager and other investment companies use questionnaires to rate their customer's risk level. Vanguard that claims itself one of the largest investment companies in the world,61 uses an investor questionnaire to get information about the investor’s preferences. Within the eleven questions there are some asking regarding the risk appetite so that the company is able to classify the customer.62 To give the reader an idea of how the questions sound like, an example is given:

Figure 7: Funds Questionnaire

Abbildung in dieser Leseprobe nicht enthalten

Source: Vanguard, Funds Questionnaire, Accessed on 15/09/2020.

With this question the investor is confronted with a specific situation, where stocks lost nearly a third of their value in just a few months. As a result, the respondent shall give information what he acted or would act like in this kind of situation. Such a questionnaire could also help an investor to get an idea of his level of risk tolerance even if having no contract with an asset manager or investment company.

Of course, the investor needs to consider the time horizon regarding his investment as well. Rasmussen (2003) mentions a connection between time and risk tolerance as a higher risk level could make the investor lose a higher part of his portfolio - but at the same time, a higher investment period gives him more time to regain the losses. Also, it has to be considered how much of the portfolio can be quickly liquidated as this depends on the investors' liquidity needs. That can be controlled by an asset manager or the investor himself choosing the suitable assets for the portfolio. Last but not least, there is the element of tax. It has impact on a portfolio performance as it decreases a possible profit regarding taxable assets. By defining the investment strategy, it has to be considered whether focusing on non-taxable assets to reduce this profit inhibitor.63 The following shows a self-created investment guide draft consisting of key questions based on the described elements above to illustrate important factors of an investment strategy:

Figure 8: Investment guide

Abbildung in dieser Leseprobe nicht enthalten

Source: Ownfigure.

5.2 Investment instruments

In this chapter the reader gets information regarding several asset classes that are relevant for German investors according to external studies. Therefore, specific assets that are described with basic information as well as possible arguments being an interesting investment instrument or not are selected. This shall help to follow the German investors' decisions regarding their asset allocation. It is highlighted that the information regarding the investment instruments is not complete as all details would go beyond the scope and are also not relevant for the goal of this bachelor thesis. Also, not all possible asset classes are considered as that would go beyond the scope, too. It is tried to consider the most relevant ones. The reader is given arguments for a selection of the respective assets as well as for the excluded ones. That shall help to follow the authors’ thoughts and to get a better idea of the investigation.

5.2.1 Selection

The universe of investment instruments is large. If a look is taken at the Bloomberg homepage, there are keywords like commodities, stocks, bonds, currencies, futures and funds.64 That does not yet cover classic forms of investment like typical German banks offer to their customers. By explaining the website visitor that this is the safest way to achieve asset growth, the HypoVereinsbank sells their customers different saving products like a building loan contract or a savings account.65 If you inform yourself about save and invest possibilities on the website of Commerzbank, there are additionally mentioned call money and fixed deposit.66 CoinmarketCap shows a comparative new form of investment like the cryptocurrency Bitcoin, which was launched about twelve years ago.67

As explained in the following chapter, the research topic refers to private investors in Germany. That requires a selection of the most relevant investment classes for this group of investors to focus on essential and allow a successful investigation. Therefore, assets with the help of surveys and studies done with German investors are chosen. The Bundesverband deutscher Banken (2019) in association with Kantar TNS shows that people in Germany starting with the age of 18 prefer the traditional investment in kind of savings book. Having increased a lot compared to the previous year, funds, stocks and call money are following. Real estate kept their level while bonds, precious metal except of gold and cryptocurrencies were low allocated to the portfolios. The people stated with majority that they are not willing to take high risks regarding their investments even by increasing the possible outcomes.68 The BaFin (2020) shows in a study done in association with OmniQuest that this group of interviewed people does not like to take much risk to have a chance ofhigher gains in value as only 4 % would increase their risk level.69

This is followed by a statistical overview of held assets by the survey group that is showed in the following:

Figure 9: Ownership os asset

Abbildung in dieser Leseprobe nicht enthalten

Source: Ownfigure, compare Röstel, D., Hoi, M., Consumersurvey, 2020, p. 7.

From this you can recognize that again the savings book is at the very top followed by call money. Over 50 percent of the participants justify this by saying these assets offer them high flexibility as they are liquid.70 Then there are several assets that are hold with about a quarter portion like funds consisting of stocks and bonds or a mixed version of that, building loan contracts, life and pension insurances and fixed deposits. Other securities like stocks, index funds and certificates are underweighted in the interviewed persons’ portfolios.71 One investment instrument that seems not to be that relevant for private German investors according to the previous studies, is gold. Nevertheless, this asset is included into the selection as gold was hyped in the media during the pandemic reaching an all-time high about 2.000 USD.72

On the other hand, there are assets that are not considered because of different reasons.

Although the building loan contract is clearly considered as an investment instrument by German investors based on the previous mentioned studies, it is excluded regarding this investigation. That is because the contracts are long-term orientated and so not that flexible. The Schwäbisch Hall, which is a well-known provider for this product in Germany, shows in an example calculation that these contracts are planned to run at least five years.73 If, for example, the research shows that people bought gold because of COVID- 19, they either way could not take money flexible out of their building loan contracts.

Because the studies do not show high relevance, cryptocurrencies, certificates, bonds and precious metals except of gold are not considered. Also, commodities like oil, gas and agricultural ones that, for example Onvista shows on their website74, do not find consideration for the same reason. Regarding past market turbulences, Berkowitz & Delisle (2018) share their thoughts about having volatility as an asset included in a portfolio. They mention the attractiveness of volatility as it strongly negatively correlates with equities.75 Nevertheless, it is not considered as the focus is on the instruments of the previous studies - that is also why hedge funds investments as well as private equity ones are not part of the investigation, although they a part of the financial universe. Hedge funds76 as well as private equity77 are both listed by Bloomberg.

Based on the previous information, a collection of investment instruments that are relevant for this investigation is specified - in the following chapters the reader gets information including basic data and arguments whether investing could be attractive or not. It is noted that there isjust given an overview about the instruments and not a complete description as this would go beyond the scope of this bachelor thesis.

5.2.2 Savings book

Based on the information given in the previous chapter, the savings book is a relevant asset that people use to have in their portfolios. To follow the investors thoughts, necessary details including pro and con arguments are considered. According to the Sparkasse, the history of savings book dates back around 200 years, which makes it a traditional investment alternative. It is about little books an investor receives from his bank, in that all relevant data like deposits and payouts are printed in. As this product is connected to interest payments calculated to the amount of money invested, the owner also finds these details within the little book, what is a certificate by law. As the world gets more and more digital, the savings book product is meanwhile also available as saving card or a pure online account.78 After having clarified the basics, the question arises what could motivate or deter people to use saving books as an investment product. On the one hand, the investor has a flexibility by being able to pay out 2000 Euros each month, but on the other hand, has to wait three months getting access to amounts higher than 2000 Euros. An advantage is the use of this product without having any initial or running costs.79 However the interest rate development nearly annuls the characteristic of having regular interest payouts.

Figure 10: Savings - Interest rate development

Abbildung in dieser Leseprobe nicht enthalten

Source: Own figure, compare deutsche Bundesbank, Savings interest rate, 2020, Downloads - Savings deposits with agreed notice of 3 months, Accessed on 22/12/2020.

In 2019, the rate was nearly zero percent, what does not even compensate the inflation rate, which was 1,4 percent in the same year.80 Shortly described, inflation means the increase of the price level with the consequence of money loosing buying power.81 In a simple calculation created for this thesis that would mean that the invested money would lose value as it does not have the same purchase power at the end of the investment period. So, an initial amount of for example 10.000 Euro would be worth 10.000 Euro*l,001 = 10.010 Euro, if it is invested one year on the savings account with the interest rate of 2019. If you then correct it regarding inflation, what decreases the amount by 1,40 percent, you will get a buying power of around 9.871,79 EUR. Many investors seem to accept this fact for having a comparatively save investment instrument as the money is protected by protection system in case of an insolvency of the bank.82

5.2.3 Call money & fixed deposits

Call money is very similar to the savings book what the following description shows. If an investor chooses to invest his money into a call money product, he is allowed to flexible withdraw his money as it is due daily. Sometimes there are individual contracts that define a duration upto30 days. A person paying money into a call money account benefits of regular interest payouts at the same time being secured by a protection system that avoids losing the money in case of an insolvent contractual partner. In this regard, Lindmayer & Dietz (2019) mention that eventually not every provider of this product takes part in the protection system as investors especially have to pay attention on high interest offers.83 Similar to the savings book, the interest rates are on a low level as a comparison of different call money offers on the Focus Money Online website shows. By specifying criteria like an amount to invest of 10.000 EUR, an investment period of three months and a high focus on the interest rate and security protection, there are several results with a maximum of 0,5 percent per year interest rate. For the sake of completeness, it is mentioned that normally the investment period is irrelevant investing in call money as it is due daily. But the result shows that most of the offers are only for new customers and are limited for three months for example.84 Investors that are aiming at high profits maybe stay away of this asset because of that low interest rate.

Fixes deposits are represented in this chapter as they share many characteristics with call money products. The special thing about fixed deposits compared with call money is that the investors fix a specific period what makes the money not due daily.85 An investor so raises his chance to receive a higher interest rate as seen on that shows an interest rate of0.6 percent for investing 10.000 EUR for a period of one year.86

5.2.4 Stocks

Stocks are an asset class known by many investors that enables the owner having a part of a company. The media often make stocks a topic as the investment instrument is able to raise and fall in value by high percentage rates.87 An investor could be motivated to buy stocks, that are classified as equity connected with limited liability88 because they entail different features described in the following. These include the voting right that is used to vote for a management for example, which is responsible for the success of the company as well as the satisfying of the investors’ needs. A main feature that at the same time is an important characteristic of stocks, is the right to claim dividends. If a stock company is profitable, the profit can be reinvested to for example invest in further projects or be paid out to investors.89 Investors can rate the stocks in dependency of their dividend policies. The Daimler AG for example, distributed 0,90 Euros to their share owners in 2019, what is a return on investment of about 1,82 percent considering the share price of that time. In the previous year, the ROI was about seven percent. This could definitely be a factor whether to invest or not.90 Lindmayer & Dietz (2019) do also mention that the dividends are important for an investor to get an idea of the stocks' value. With reference to chapter four, there are three principles described specified on stocks by Lindmayer & Dietz. They advise to select a collection of different shares to spread the risk as well as to invest in companies, the investors understand. Regarding shares they recommend to be long-term orientated as news can affect the prices short-term, what can be partly ignored by using this strategy.91 Within the stock market, where the stocks are traded, high price fluctuations can be watched as for example, the price decrease connected to the COVID- 19 pandemic was high followed by high recovery as seen in the following figure:

Figure 11: Dax Chart - One Year

Abbildung in dieser Leseprobe nicht enthalten

Source: Bloomberg, Bloomberg DAX, Accessed on 31/10/2020

During February and March 2020, the price of the DAX that contains 30 of the biggest German companies in terms of total market capitalization and revenue,92 fell from above 13.000 points to nearly 8.000 points. After that, a huge recovery was seen, what connects possible high price movements to a stock investment. On the one hand, it could be a knockout criterion as people do not want to accept that price fluctuation for their portfolios, but on the other hand, investors could be motivated as they think any high movements are good to earn money.

5.2.5 Funds

This chapter is about the asset class funds. The following information is separated in two parts as one will give the reader basics details and investment argument regarding Mutual Funds. The second part is about Exchange Traded Funds, what gained more and more attention within the last years what the following information confirm. Mutual Funds

Mutual funds are issued by investment companies that also manage the respective funds. The asset class combines the money of several investors with having a manager or a managing team controlling the funds' setup. Hereby each fund has its guidelines that the funds’ manager has to consider while trying to enable a positive performance to satisfy the investors.93 Mutual funds can contain different asset classes like stocks, bonds and others.94 If for example, an investor thinks about his asset allocation and portfolio management, he could get in contact with mutual funds as this product often entails an asset diversification, a risk management and predefined goals as also written about in chapter 5.1. To substantiate and get a better idea of that, the author presents an example. The equity fund DWS Deutschland LC, issued by the DWS, pursues the strategy of investing in a mix of the biggest German companies and specific smaller ones. Investors are transparently shown all necessary details on the website including the costs. These are split in buying costs of five percent and running costs per year of about 1,4 percent, what at least need to be earned that the investor is able to make profits with this investment. That fact could be a con argument for many investors. The investment company additionally shows possible risks that are connected to this fund, what an investor needs to match with his individual preferences and risk level. To get an overview about the relevant facts, a key investor information document is provided.95 Exchange Traded Funds

Exchange Traded Funds gained a lot of attention in the last years as the total assets managed in ETFs increased by more than 800 percent since 2006.96 “Exchange traded funds (ETFs) offer diversified, low-cost and tax-efficient access to the world’s investment markets. ETFs are designed to track the performance of specified indexes, less fees.”97 That is how Ishares that belongs to Blackrock and having the most assets under management regarding ETFs,98 99 describes the funds variant exchange traded funds. Mettau and Madhavan (2018) mention that an ETF orientates itself with a chosen index in regard to its performance.

Since the first Exchange Traded Funds was published about 27 years ago, a development could be seen by increasing sectors, market significance and assets in total." But how does this investment instrument work? In contrast to Mutual Funds and similar to stocks, Exchange Traded Funds can be traded by investors on the specific exchanges during their opening times. The underlying, on which the ETF is based, is tracked by issuing and redeeming shares within the fund.100 There are several characteristics that could be a pro argument on the one hand, and a con argument on the other hand. Most ETFs include several securities that help to diversify the portfolio and decrease its risk level.101 The supporters agree with the flexible trade handling regarding ETFs as trading is possible on the exchanges directly with a collection of different order options. Also, the price performance can be reproduced well as investors compare it to the based index. Disadvantages of this asset are that on the one hand, technical issues can cause differences in the tracking performance on the one hand - on the other hand, Exchange traded funds, especially little traded ones, can entail a high spread between the buying and selling price. That difference would be the immediate loss when an investor buys the instrument in the one moment and sells it right away.102

5.2.6 Gold

„Gold is a precious metal. It has emotional, cultural and financial value and different people across the globe buy gold for different reasons, often influenced by a range of national sociocultural factors, local market conditions and wider macroeconomic drivers.“103 In July 2020, the Wall Street Journal reported that gold outperformed its previous price all-time high reached in the year 2011.104 But what is gold as an investment instrument and what are the advantages respectively the disadvantages? The history of gold goes far back in the past - already around 2.600 years ago coins made of gold were used to pay for goods and services.105 Nowadays gold is used for different purposes. Although around 50 percent of the gold demand is attributable to jewelry industry,106 gold is used as an investment alternative as people are able to speculate with shares, funds and derivatives among others on the gold price.107 Also, the physical purchase of gold is an option for people that want to have the possibility to touch their investment, what could get more rarely in times of changing to a more digitalized world. On the website of a German precious metal retailer, for example coins and bars can be shopped like clothes and other things people buy on the internet.108

The price development of gold could be a first motivator to invest in the precious metal on the one hand, but on the other hand, entails price loss risks. To get an overview what happened to the gold price in the past including the COVID-19 pandemic period, the following price chart is useful:

Figure 12: Gold price chart

Abbildung in dieser Leseprobe nicht enthalten

Source: Onvista, Gold chart, Accessed on 21/10/2020.


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Excerpt out of 163 pages


The COVID-19 pandemic and the asset allocation of private investors in Germany. An empirical study of the influence
University of Applied Sciences Essen  (FOM Hochschule)
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"Mit knapp über 100 zitierten und weiteren verarbeiteten Quellen an wissenschaftlicher Literatur ist die Literaturbasis in ihrer Quantität überdurchschnittlich umfangreich und qualitativ durchaus hochwertig." "Die Ausführungen sind umfassend, sorgfältig aufbereitet und sind auch aufgrund der dargebrachten Form (Nutzung von übersichtlichen, zusammenfassenden Abbildungen und Tabellen) äußerst lesenswert. Ebenso reflektiert der Autor die Ergebnisse zielführend kritisch. Alles in allem ist das Kapitel lesenswert und ein ansprechender wissenschaftlicher Beitrag zur ausgewählten Thematik." - Dozent
COVID-19, Asset allocation, pandemic, portfolio selection, Corona, questionnaire
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Markus Weißmann (Author), 2021, The COVID-19 pandemic and the asset allocation of private investors in Germany. An empirical study of the influence, Munich, GRIN Verlag,


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