COLOBUS gives you suggestions for buying and selling stocks. Before you start investing your money in stocks, you should make sure you have a basic understanding of the way financial markets work as well as of the associated risks. The following advice aims to help you develop this understanding.
When you invest your money in stocks and other financial instruments, your goal is to maintain or grow the value of your assets. However, you must be aware that investing in the capital markets can also lead to a loss of money. Traditional savings instruments such as savings accounts and treasury bonds offer a guaranteed but limited return for a fixed amount of invested capital. In contrast, when investing in stocks, you are explicitly willing to take on risk for a potentially higher return.
The real value of all earnings - whether they come from traditional saving or investments in the capital markets - is diminished by inflation (see below). The minimum goal for any investment plan should therefore be to compensate the effect of inflation with the return of the investment. For quite a while now, traditional interest-based offers have fallen short of this goal, which has caused an increasing number of private investors to move their money into the capital markets. When taking this step, you, as a private investor, must be willing to take on the associated risks.
Before you decide to invest money with COLOBUS, you should have a clear understanding of the following terms:
If you buy three different stocks for 88€, 123€ and 47€, the total value of your portfolio is 258€.
If you start with a portfolio of 9,438€ and after one year its value has risen to 10,551€ then the annual return is 10,551€ / 9,438€ - 1 = 11.79% p.a.
All profits are compounded, meaning any earnings from price appreciation and dividends are reinvested into stocks the next time the portfolio is rebalanced.
The safety of an investment reflects how likely it is that you lose some or even all of your money. Safety is usually inversely correlated with expected returns: A treasury bond is a very safe investment, but yields almost no returns. A leveraged option can be super lucrative, but bears a high risk of losing all invested money.
You buy 24 different stocks at a value of 500€ each. One of these stocks unexpectedly drops to 250€. Seven other stocks grow extraordinarily well - 38% on average. The loss is compensated by diversification.
You should be aware of the following risks:
Economic fluctuations: The price development in the financial markets typically takes place in cycles that can last several years. A bull market (rising prices) is eventually followed by a correction of inflated valuations in the form of a bear market (falling prices) or even a crash like in 2008. In between, there are so-called sideways markets in which the stock market neither gains nor loses significantly in value. The strategies recommended by COLOBUS have been tested also for such difficult phases. Nevertheless your portfolio will suffer from an economic downturn.
Inflation: The real value of your assets is devalued every year due to additional money produced by the central banks. If you invest your money at a nominal return of 1.5%, but inflation is currently at 2%, you actually lose money owing to the negative real interest rate.
Country risk: When you buy stocks in other countries, these assets have a risk of being influenced by the respective foreign government. Changes in laws and regulations or even direct control of a foreign company through the government can mean that you lose some or all of the money invested in the asset. At COLOBUS we recommend stocks in EU countries, which should generally not be affected by such developments. However, the country risk can and must not be regarded as negligible.
Currency risk: Some of the stocks recommended by COLOBUS are traded in foreign currencies. All transactions of these stocks are affected by fluctuating foreign exchange rates and possibly fees. You cannot expect to convert a nominal profit in a foreign currency into your home currency without deductions.
Liquidity risk: A liquid market exists when a sufficient number of parties wants to buy and sell a stock. In this case the selling price (ask) and the buying price (bid) are closely aligned and trading can take place without friction. However, in every market there are phases of insufficient liquidity. If you must trade a stock during such a phase, you may have to accept significant losses arising from the ask-bid-spread, i.e. the difference between the buying and selling price. This situation may also occur when you invest a large amount into a stock with a small market capitalization.
Fees: Before starting to trade European stocks you should develop a detailed understanding of the fee structure of your broker. Some trading platforms have hidden fees for trades of a certain size or in certain markets. COLOBUS itself has no hidden fees. You pay a fixed annual fee, independent of the sum you invest.
Taxes: Profits from investments in the capital markets are subject to taxation in your country of residence. Tax rates may change and significantly impact the effective return of your investment. Investments in foreign countries may be subject to double taxation.
Loans: You should only invest in stocks if you have the money available and can spare it for several years. Compensating or increasing your investment amount by taking out a personal loan is highly speculative. If the markets do not develop in your favor, this could lead to a situation of financial distress or even loan default. We strongly discourage any type of credit-backed personal investment.
In contrast to investment funds, with COLOBUS you manage your own portfolio at a broker of your choice. You should be aware of the following:
Delay: When you receive a buy or sell signal from COLOBUS, you should convert this into an actual order with your broker within the next days. The belated execution of a trade can incur losses or unnecessary deductions due to price changes. If for some reason you cannot execute an order you may notify us via the dashboard on the COLOBUS website. You will then quickly receive a new signal. If you know beforehand that you won’t be able to trade for a certain period of time, you can configure so-called “offline times”.
Strategy changes: Should you wish to change your chosen investment strategy, e.g. because you need money and therefore have to sell some stocks, this may incur losses in comparison to continuing with the original strategy. You can configure such changes in the dashboard of the COLOBUS website. Our system will then plan the best possible transition to the new strategy for you.
Updated: March 2017