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Who speculates loses -
who invests for the long term wins

8 March | Tips

It’s no secret – those who invest in stocks over a sufficiently long period of time not only achieve positive, but better returns than with bonds, precious metals or time deposits.

Despite this proven fact, many investors get nervous as soon as the stock market drops. The consequences are sudden doubts about the chosen strategy, panic selling or attempts to time the market. However, those who exit prematurely deprive their assets of the opportunity to profit from the long-term strength of the stock markets.

In this article you will learn,

  • how successfully stocks perform in the long term,
  • why many investors still sell early, and
  • what you can do to avoid making the same mistakes.

It's a marathon, not a sprint

Anyone investing in shares to speculate on short-term gains can expect a high fluctuation bandwidth. Over the last 70 years, equities have achieved an impressive +47% return in the best 12-month period, while the weakest 12-month period saw a loss of -39% (see chart below – this shows the maximum ranges in each limited period).

This volatility decreases significantly over a longer investment period. Those who held on to their equity investments for at least 5 years only fluctuated between -3% and +28%.

And anyone who has invested in equities for 20 years at any time in the last 70 years has always left the trading floor as a winner with an annual positive performance of at least +6% to a maximum of +17%. This corresponds to an average annual performance of +11.5%. An initial investment of €100,000 would have resulted in an impressive €880,000 over a 20-year period.

Aktien Schwankungen
Ranges of short- and long-term returns of shares over rolling periods of 1/5/10/20 years. Data provider is the U.S. stock index S&P 500 with figures from the last 70 years. Source: own presentation based on JP Morgan

The Estably return triangle paints a similarly positive picture for equities. It shows the quarterly performance of our Modern Value 100 portfolio in all entry and exit scenarios since 2016.

At first glance, it is clearly visible that shades of green predominate – the stronger the green, the higher the returns. Only occasionally, and usually only for short investment periods, do you find red fields with negative performance.

Don’t be put off by the large number of figures in this chart. To play through different scenarios, simply select an entry point on the vertical Y-axis and a sell point on the horizontal X-axis. The box that combines your two entries contains the annual return that you would have achieved with shares over the period (click on the image to enlarge it).

Estably Renditedreieck 2024
(Click on the image to enlarge)
Estably return triangle with performance data (before costs and taxes) of the Modern Value 100 portfolio. Performance data prior to 2020 based on back calculations of the model portfolios. Status: March 2024

Uncertainties due to setbacks

While most investors keep a cool head during the day-to-day fluctuations on the stock markets, the first doubts start to surface during prolonged setbacks. These are supported by media reports and gloomy forecasts from so-called crash prophets.

What you need to know: setbacks during the year (even in the double-digit range) are completely normal and are no cause for concern. Over the last 44 years, the S&P 500 Index has fallen by an average of -14.2% during the year. In 33 of the 44 years, however, the stock market year ended on a positive note.

The following chart illustrates how often a stock market year still ends positively despite lows during the year. The red dots represent the low points in the respective year, while the bars indicate the return at the end of the year.

Example: in the course of 1980, the markets fell by -17% in the meantime, but at the end of the year the performance was positive at +26%.

Unterjährige Verluste und Performance am Jahresende, SP500, JPM Guide to Markets

Source: J.P. Morgan Asset Management. Status of the data: 31 March 2024.

There are a wide variety of reasons for stock market setbacks, some more justified than others. But all setbacks have one thing in common: they are linked to investors’ worries.

Depending on the strength of the setbacks, these worries change until at some point investors only fear about further price drops and the original reason has moved far into the background. Setbacks of this kind tend to be short-lived, as they are not associated with an economic crisis (e.g. financial crisis in 2008) or the bursting of a bubble (e.g. dot-com bubble in the early 2000s).

Why do investors find it difficult to stay invested over the long term?

«The stock market is a device for transferring money from the impatient to the patient.»

Many investors lack the patience and confidence to stay invested in the long term during bumpy times. Those who want to remain calm during these phases should consider a few important factors even before investing:

 

1. invest the “right” amount

If market fluctuations turn you into a nervous wreck who checks stock market prices several times a day, you should ask yourself whether you have invested too much in shares. After all, those who take on more risk than they can bear are more susceptible to sleepless nights and knee-jerk reactions.

During the application process for Estably, we ask you about your financial situation and your investment horizon. We do not offer an investment period of fewer than 5 years, as this becomes too speculative. If you invest assets that you can do without for the next five, or better ten years, you will remain calm even during weaker stock market phases.

 

2. internalize the investment strategy

If you understand an investment strategy and trust it 100%, you hardly run the risk of selling your portfolio in bad phases by acting rashly. Regardless of whether you invest broadly in the markets using ETFs or we pick out individual stocks for you with our value investing strategy – the more convinced you are of your chosen strategy, the easier it will be for you to stick to it even during a bear market.

On our website and in our information brochure we try to explain the cornerstones of our value-investing strategy in an understandable way. For more detailed information, please do not hesitate to contact us by phone or e-mail.

Besides: Do you know how we can tell that our clients have internalized our value-investing strategy? When stock market prices fall, a value investor thinks about increasing, not selling, his portfolio. Because in most cases, high-quality companies are then available at bargain prices!

3. your mind plays tricks on you

Especially in the case of major setbacks, there is a great danger of questioning the chosen investment strategy and selling the securities. While these thoughts never arise in positive stock market years, they are more present in more difficult times. This is where our psyche plays tricks on us. Behavioral researchers estimate that financial losses hurt twice as much as gains bring pleasure. According to the “loss aversion theory”, it is more important for an investor not to suffer a loss than to make a profit.

In addition, there is the so-called “anchor effect”. Through past performance or benchmark figures, you unconsciously set expectations for short-term future returns. However, we have already shown you how these can fluctuate. What counts, in the end, are the average values distributed over many years!

How you can succeed investing long-term

We want the best for your assets. With our long-term value investing strategy, this means sticking with it long enough to reap the rewards of this investment philosophy. To avoid the temptation of unnecessarily reducing your assets through rash behavior, you can take the following measures:
  • In line with your risk, only invest the assets that you can do without for at least five, preferably ten years.
  • Internalize our investment strategy and contact us if you have any questions about our strategy.
  • Share prices on the stock market fluctuate strongly, but outperform other asset classes in the long term (see Credit Suisse Global Investment Returns Yearbook 2021).
  • Don’t let looking at your portfolio too often drive you crazy.
  • Don’t waste time with “ifs, ands and buts” – nobody has a crystal ball to predict the future. Trust in the long-term development of your company investments.
  • Don’t try to find suitable entry and exit points through supposedly “smart” trading. The vast majority of investors have the same ideas as you, i.e. you would be swimming with the crowd at the wrong time.
  • A chart tells you nothing about the right entry or exit time.

Are you ready to invest long-term?

Estably is the first Liechtenstein-based digital asset management firm to offer world-class asset management through a blend of technology and human investment expertise. Thanks to the portfolio managers’ many years of experience in the field of value investing, the aim is to achieve above-average returns – starting at an investment sum of € 20,000. The aim is to make professional asset management, which was previously possible exclusively for major investors, accessible to everyone – in a convenient, transparent and profitable way.

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