Timing is everything:
how to choose the right time to enter the stock exchange?
Shall I wait for the economy to start running smoothly first? Or wait to pay off my mortgage first? Or wait until the US has a new president? As an investor, you want to invest your money at the 'right' time. But when exactly is the 'right' time? Based on reconnaissance.
1. When you are 25 or 75: does it matter?
Yes, the earlier you can start investing, the better. If you are 25, you have much longer to invest. Are you 75? Then your investment horizon is much shorter. This is important, because the longer your investment horizon is, the longer you can let the stock market work with your money. And this way the higher your potential return can be. Do you invest 5,000 euros over a period of 40 years? Then your potential return will be much higher than if you only invest 5,000 euros for 5 years.
Investing is always accompanied by interim peaks and troughs. A longer investment horizon gives your investments time to sweat out a possible dip. If you invest, there is always a risk of a temporary downturn. The word 'temporary' is crucial. Because if you look at the long term, shares and bonds behave relatively predictably. Although peaks and troughs alternate in the short term, there is a clear upward trend in the long term. Even taking into account all the stock market crises – from the crash in 1929 to the credit crisis of 2008 – shares have yielded an average annual return of around 6% and bonds of around 2% over the past 100 years. A long investment horizon is therefore useful for much more than just absorbing peaks and troughs on the stock market. It is also useful for your return.
Is there an additional advantage to starting when you are 25 rather than when you are 75? If your investor profile and risk tolerance allow it, you can invest much more dynamically at a younger age. Although dynamic investments (e.g. shares) can fluctuate considerably in the short term, they offer much greater prospects of a higher return in the long term than defensive investments (e.g. German government paper).
Would it be better not to invest at all when you are 75? Very possibly. When you are 75 years old, it is of course better to keep a larger money box, for example for unexpected health expenses or if the stock market takes a dive. But if your investor profile allows it, you can still invest. This could be the case, for example, with (more) defensive investments, which fluctuate less violently in the short term. In general, it is better not to invest very dynamically when you are getting older. You have to take into account that a complete stock market recovery can take several years, whereas that is usually not a problem if you are younger.
2. Trading stresses, Brexit, growth slowdown: would it not be better to wait until all these problems have been solved?
There are always uncertainties. Elections lead to shifts in power. Technological innovations have redesigned the economy. Social events accelerate or slow down growth...There will always be unforeseen circumstances and changes.
In practice, investors are often guided by the current economic and political context. But events that prevent you from investing today may in a few years' time be a footnote in history. For example, the tensions with North Korea which have now subsided a lot. Or the coup in Turkey. Or the Greek debt crisis. These events haunted many investors, but a lot of these issues have already been resolved.
Just by waiting, opportunities can be lost. The longer you wait for a 'quiet moment', the shorter your investment horizon will become.
3. Am I not too soon or too late to start? Or is it just right to start investing today?
A savings account is almost useless at the moment. The situation was very different in the past. A few years ago, the interest rate even peaked above 5%. The interest on interest, also called the eighth wonder of the world by Albert Einstein, allowed you to build up a decent amount of capital.
Unfortunately, these golden years are now part of the history books. And because of the European Central Bank's ongoing low interest rate policy, the chances of a recovery are very slim for the foreseeable future. Moreover, while interest rates are currently historically low, inflation is rising. This is currently around 2%. In other words: savings don't currently yield much. You also lose purchasing power by saving.
Whether you are a novice investor or a seasoned investor: if fear of the right moment to start keeps you from doing so, periodic investing is an interesting solution. You can invest an amount in a collection of five investment funds every month (or quarter or year). This way you avoid the risk of a 'bad' timing, because you spread your investments over time. After all, it is best not to invest all your assets at once. Periodic investing does not even need to involve large amounts. At Keytrade Bank this is possible from as little as 25 euros per year in a periodic investment plan.
It is important, however, that you maintain your predetermined regularity. Especially when the stock market is not going well, because this is often when opportunities arise. By investing periodically, you also balance out the risk of basing your decisions on stock market sentiment: buying when everyone buys and selling when everyone sells. In the long term, it is better to maintain your chosen investment strategy and horizon rather than constantly embarking and disembarking. Time is therefore more important than timing.
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4. And if I were to invest in the short term?
People sometimes start investing with the idea of getting rich very quickly. In order to succeed, they must first of all be very lucky. They have to buy at the lowest prices and sell at the highest. These investors may be lucky, but in the long run reality will overtake them.
Despite all the glass balls and supercomputers: today, nobody can predict the stock market in the short term. For investment products such as shares (at least 10 years) and equity funds (at least 7 years), it is therefore best to invest in the medium or long term. If you still want to invest in the short term, qualitative bonds in euros are an option. Although the expected return is rather limited.
Want to invest in 1-2-3 periodically, without worrying about the right time to start? With KEYPLAN you invest at your own pace, starting at 25 euros per year.
This article does not contain any investment advice or recommendation, nor a financial analysis. Nothing in this article may be construed as information with a contractual value of any sort whatsoever. This article is intended for information only and does not constitute in any way a commercialization of financial products. Keytrade Bank cannot be held liable for any decision made based on the information contained in this article, nor for its use by third parties. Every investment entails risks such as a possible loss of capital. Before investing in financial instruments, please inform yourself properly and read carefully the document "Overview of the principal characteristics and risks of financial instruments" that you can find in the Document centre.