The prices have repeatedly fallen significantly in the past few weeks, but just as suddenly bargain hunters have bought them back up again. The indices? “Suddenly in a ping-pong zone,” as one stockbroker said. Such situations quickly feel like a tightrope walk, and in the end the concerns of many investors boil down to just four words: get in, stay involved or take profits? The SZ did the math and shows why all three answers fit together.
Can you enter at record levels with a clear conscience?
For many investors, record levels are a mixed blessing: those who are already invested are happy about good profits. However, anyone who is still on the sidelines will have to deal with the fear of heights. When faced with record highs, many people wonder whether gravity hits stock indices immediately after a record – and the prices plummet. “This assumption is as wrong as it can be,” says Karl Matthäus Schmidt from Quirin Private Bank.
SZ calculations for the industrialized countries index MSCI World since 1970 show: Even if gravity is considered a law of nature in physics, it cannot be transferred to the stock market. If the world stock market barometer reached a record, it was higher in around two thirds of all cases after one year, and even in around 90 percent of cases after ten years ( see grafic).
The highlight: Whether savers entered the MSCI World at record highs or at any time, on average, there was no systematic difference to their returns. It cannot be determined that the world stock markets would be riskier than usual at record levels.
HERE 1GRAPHIC “This is how often investors ended up in the black”
Should investors only enter in the comfort zone just below the record?
The five percent hurdle is not only being discussed in the Bundestag, but also on the stock market: When the major stock indices recently headed for a loss of around five percent compared to their highs, many investors became nervous. Conversely, this shows that the zone up to a maximum of five percent below record levels seems to be a comfort zone for many people.
On the one hand, the stock markets are close enough to the record to have a good feeling. On the other hand, the prices have not fallen too far to indicate glaring problems. Some interested parties are pleased that, for example, the industrialized countries index MSCI World, calculated in euros, has currently settled in this “band of good feeling”.
However, SZ calculations show that such feelings are not supported by facts. If investors entered the supposed comfort zone and remained loyal to the MSCI World for ten, 20 or 30 years, they achieved somewhat weaker returns on average since 1970 than the average for all periods ( see table). For example, anyone who invested over 30 years could, on average, achieve a return of around eight percent per year. For starting points at which the index was a maximum of five percent below its record, the average return was only 7.2 percent per year.
In concrete terms, this means that anyone who invested 10,000 euros once could have turned it into just over 100,000 euros on average before costs and taxes after 30 years. Anyone who invested in the feel-good zone would have had to settle for just over 80,000 euros on average.
Should investors then not invest just below the record?
Everyone has to judge that for themselves. Investors did not have to worry excessively, at least on average and in the long term. Those who invested in the supposed comfort zone only saw a loss on the price board after one year in 30 percent of all cases. After ten years there was only a minus in 17 percent of the cases, after 20 years they were all in the plus.
However, if investors hit a bad period, things could go wrong: “Of course there are setbacks, sometimes extremely severe ones, as the last few years have shown impressively,” says Quirin private bank boss Schmidt. In the worst period, index savers were still 35 percent underwater with their investments even after ten years. However, investors hardly have a good alternative: those who wait for the next crash so that they can get in at a supposedly cheap price often wait for years and see the prices continue to rise.
Should investors give her Money Wouldn’t it still be better to invest in stages?
If you want to prevent a possible crash from hitting the full amount immediately after investing, you can think about staggering your investments. For example, if investors invest 10,000 euros not in one fell swoop, but in equal installments over a longer period of time, a near-term crash would ultimately only affect part of the money.
The problem: Often the stock market simply continues to rise more or less steadily. With the piecemeal method, investors do not take full advantage of the price upswing right from the start because part of the money initially remains on the sidelines. Invoices from the asset manager HQ Trust clearly illustrate this for the period since 1970 ( see grafic): Anyone who extended their entry over three years left a return of almost one percentage point and, in case of doubt, several tens of thousands of euros. “The longer the period over which you spread your investment, the worse the return is on average,” say the Bad Homburg capital market researchers.
For many investors, it may still make sense to invest their money in staggered amounts or to set up a monthly savings plan. If you invest blindly every month, you don’t have to emotionally worry about low or high prices – and you simply outwit your fears of making the wrong entry point. Even if the cool math says otherwise.
Is it impossible to tell when stock markets are hot?
Yes, there are indications. Contrary to what many investors think, the absolute price level in points says nothing about it. Rather, those interested must put the price level in relation to fundamental factors, for example compare it with the corporate profits of the listed companies.
The price-earnings ratio (P/E ratio), for example, tells you how many years a company would have to accumulate the expected corporate profit for the current year in order to outweigh the total value of all of the company’s shares tradable on the stock exchange. It is precisely this indicator that some experts attribute to almost prophetic abilities. Evaluations repeatedly show that high price-earnings ratios at the start of an investment phase can later lead to poor returns.
The SZ checked this for the MSCI World: If the P/E ratio was over 19 at the start of the investment, investors were partly in the red after ten years ( see grafic). This is not a natural law on the capital market, but it is the result of around 30 years of stock market history.
Is a high rating always a warning sign?
A high price-to-earnings ratio could or did not have to result in poor returns. Even if the valuation of a stock market index is comparatively high, the shares can still rise much further. Statistically, poor returns after high valuations are by no means a foregone conclusion, and the P/E ratio is also not suitable as an indication of possible downward turning points.
At 18.9, the price-earnings ratio of the MSCI World stock market barometer is currently only slightly above the long-term average of 18. However, the indicator could currently be at a magical threshold: after all, the world index was only at a P/E level above 19 In the past, after ten years of investment, it was still in the red. However, anyone who stayed invested for another ten years always ended up with a profit, even with initially high valuations, at least in the past.
HERE 3GRAPHIC “Stock market valuation interesting”
So how should newcomers proceed?
That depends on your own psyche. Anyone who coolly trusts mathematics can invest their investment money in one fell swoop. On average of all historical cases, this was the most profitable option because the sum could work faster on the stock market.
The fact is, however, that for many investors things are too hot when prices are at record highs, but too shaky when prices are falling. They can outsmart themselves by putting their money into the market staggered over a year or two, even if that yields slightly worse results on average.
The fact that many people have to deal with fear when it comes to stocks can be more of an indication of an inappropriate share quota: those who followed a globally diversified stock index with their entire investment money accumulated a loss of almost 60 percent on paper in the worst crash. whatever can happen. Anyone who instead only followed a world stock index with half of their investment money only had to cope with a 30 percent loss in the meantime.
And what do investors who are already invested do?
Anyone who already follows a world index on the stock market can control the risk weighting of their own portfolio. “Otherwise, over time there is a risk that the asset classes that are doing well will become excessively dominant in the portfolio,” says capital market strategist Pascal Kielkopf from HQ Trust. If investors are aiming for an equity quota of 50 percent, the recent price rush may have made the stock market component of their entire investment too important. If the equity quota is 60 percent or more after a price rush, some of the equity investments can be sold – and the portfolio can be brought into harmony with the psyche.