Stock market professionals confirm: There is no such thing as the perfect time to enter the stock market. Anyone who thinks they are smarter than the market can miss the best stock market phases. However, perseverance and patience pay off.
The idea of investing a large chunk of your savings in securities and seeing them instantly fall in value is a nightmare. The bad news first: This can happen to anyone, because nobody can predict the development of the markets precisely. Now the good news: time is an investor’s best friend. Because in the long term, fluctuations in the financial markets can be comfortably sat out.
“Only liars can always be out in bad times and always in in good times.” Bernard Baruch (American financier, stock market speculator)
Time is the most important resource in the financial market and should not be wasted. Because investors who are looking for the perfect entry are very likely to miss the best phases of the market. This is illustrated by a calculation based on Thomson Reuters data. Accordingly, the annual return of the leading German index DAX between 1998 and 2017 is 5.6%. But only those who were invested on all 6,935 days in this period could benefit from the full return. Without the top ten days, the annual return already drops to 1.3%. Such a result does not even compensate for inflation. Without the best 40 days, investors are clearly in the red at -6.3% pa (see chart). As the example shows, there is little room for error. Whoever is wrong will be punished by the markets. If you always have a savings plan with you, you can take the best market phases with you.
Set up a savings plan now
Perseverance is rewarded
Discipline and perseverance, on the other hand, are rewarded. In retrospect, anyone who made the decision in 1998 to invest in stocks over the next 19 years did not get the perfect time to invest. Only two years later the Internet bubble burst and in 2007 the financial crisis broke out. But in both cases perseverance was eventually rewarded. The losses were more than made good. Be there and stay tuned is the motto. This is all the easier if the invested capital is not needed for a long period of time. The investment period should therefore not be less than three, preferably five years.
“Buy stocks, take sleeping pills, and stop looking at the papers. After many years you will see: you are rich.” (André Kostolany, stock exchange and finance expert)
The media pays too much attention to short-term market movements. Because news formats have to spread news, even if things are quiet on the stock exchanges. A deviation of half a percentage point up or down is reported more dramatically in the news than it should actually be.
The focus of the media is also only on an index or a few shares, mostly large companies. Their price movements are traced back to current events, which usually does not go far enough: if the prices rise, a bull market is declared. If prices fall, the next bear market is said to be just around the corner. If both happen alternately, a warning is given of increased volatility.
An analysis of bull and bear markets over the past 100 years makes it clear that it just doesn’t work that way. Since 1926, there have been a total of nine phases of rising prices (bull market) and eight phases of falling prices (bear markets) on Wall Street in the USA. The big difference: Bull markets last much longer than bear markets, according to an analysis by Boston-based ETF provider Newfound Research. The upside performance is correspondingly higher than the downside.
“I don’t remember seeing a market timer on the list of the richest people in the world. If corrections were truly predictable, someone would have made billions from them.” (Peter Lynch, former fund manager at Fidelity Investments)
Investors usually want to wait for a stock market crash in order to enter the markets at the lowest possible prices. But nobody knows exactly when that will be the case – whether in five months or five years. Compared to the four longest bull markets of the past 100 years, the current phase of rising prices is still relatively short. Those who are waiting for the crash may miss out on the appreciation in value over the coming years.
Back and forth makes the pockets empty
Another compelling argument against trying to take advantage of the ups and downs on the stock market by timely trading are the fees. Custody fees are charged for every buy and sell order for stocks and bonds. When buying and selling investment funds, there may also be ongoing fees and front-end loads. That’s why there is an old stock market adage: “Back and forth empties your pockets.” Because whoever trades a lot and is wrong at the same time pays twice. This only helps brokers and banks, but not investors.
“If you love constantly buying and selling, then I want to be your broker, not your partner.” (Investor legend Warren Buffett)
Savings plans on ETFs and index funds
A smart way to escape the timing dilemma is to enter into a savings plan. A previously defined amount is invested in a broadly diversified investment fund on a monthly or semi-annual basis. If prices then fall, the investor receives more fund shares for his savings rate. If prices rise, fewer shares are bought. In the long term, this results in an average cost effect (cost-average effect), because fluctuations in the market are smoothed out by regular investments.
If you want to save EUR 100 a month and receive a fund share for EUR 100, you will receive two shares for the same amount if the value of the fund falls by 50%. If the value of the fund share increases to EUR 150, the investor only receives 0.66 percent of a fund share for the defined savings rate. After five months, the investor owns 5.66 fund shares due to price fluctuations (see chart below).
Set up a savings plan now
Raisin Invest is also available as a savings plan. Investors can then determine their savings rate themselves and adjust it if necessary. Should the big crash actually occur, investors have the opportunity to increase the savings rate in order to then enter the market anti-cyclically and benefit disproportionately from the subsequent upswing.
The answer to the question of the right time to get started could therefore be “now”. Because if you don’t invest today, you won’t be part of the value development in the coming years.
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Risk warning: Every investment in the capital market is associated with opportunities and risks. The price of investments may rise or fall. The value of the mediated ETF and index funds is subject to market fluctuations and the following risks: 1. General risks of capital investments (such as economic risk, interest rate risk), 2. Securities-specific risks (such as share price risk, credit risk), 3. Special risks of investments in investment fund shares, 4 .Special risks of investments in ETFs and index funds, 5. Special risks in the processing of securities orders. Detailed information on the individual risks can be found here.