THUR, JUNE 21 2018-theG&BJournal-The answer is clearly yes, and you can find the clue in the market statistics: past performance says next to nothing about the future performance.
In the investment world, there are tricky questions. Points that you should really think about before investing your money for several years. For example: Can I assess the risk correctly? Or: are the fees transparent? Or: How can I effectively diversify my assets?
However, one question is not one of them: should I still get in, if the stock exchanges have gone up? Nevertheless, investors are very concerned about this, even after the correction in the first quarter of this year. The Dow Jones has gained around 20 percent in the past twelve months (as of June 6, 2018), and the MSCI World global stock index rose by eleven percent – both in USD and without dividend payments. The DAX only managed to gain one percent over the same period. Nevertheless, many private investors are still thinking of the records that the indices have reached since the beginning of 2017. So, they still feel the stock market is exaggerating, and conclude it would be reasonable to wait for a crash or at least a year of declining prices before investing money in stocks.
That is understandable, especially after the painful experiences with the dotcom crash and the financial crisis. It is still a mistake – from a statistical point of view. Because the past price development says almost nothing about which direction the stock market will take in the future. This can be seen from Dow Jones data dating back 132 years.
Marginal differences
Probability of a positive performance in the Dow Jones as a function of the previous year’s return*
The probability of the Dow Jones ending one year plus was 67 percent over that period. If the index had risen in the previous year, then it was just a tad below: at 64 percent. And if he made a good start last year (more than 20 percent profit), it was again 67 percent. For comparison, we still look at how the Dow Jones has beaten after a year of losses. The US blue chip index rose 70 percent of the time. In plain English: The differences are very small and the probability of making a profit was significantly greater than 50 percent in all cases.
Missed profits
It would not have been a good idea to wait for a setback with the stock investment. Those who act in such a way run the risk that they will lose valuable profits, which will later no longer contribute to the compound interest effect and can multiply. How high these profits are on average, shows the next chart.
Much better than returns on deposits
Average price gains (in%) of the Dow Jones as a function of the previous year’s return
On average, the Dow Jones saddled around seven percent a year. After a positive previous year, the average yield was still at six percent. And after an extremely good year with more than 20 percent price gain, the average increase was even more than seven percent. From a statistical point of view, the differences are far too small to be considered dependent on the previous year’s return. In addition, the fluctuation range of annual returns with a standard deviation of more than 20 percent is far too high.
Finally, one decisive factor is that even six percent plus in the share price is far more than interest subsidies currently pay off. Those who wait in vain for a stock market slump for two years miss on average twelve percent return, while inflation gnaws at the purchasing power of their assets. What’s missing in these bills are the dividends. If you take them into account, the wait tactic certainly does not seem recommendable, because dividends not only increase the absolute amount of the return, but also the probability of a positive return.
What you should not forget: This consideration obviously builds on average values. Anyone who buys an investment on the Dow Jones today may also suffer a sizeable loss over the next twelve months. They may even make losses for several years in a row but can also achieve far more than the average six profit per year. Nobody can predict the price development. But we can analyze historical probabilities and draw meaningful conclusions from them.
After 132 years of Wall Street, one of them is not trying to time the market but starting with equity investment as early as possible and investing as long as possible.
If you wish to discuss any points mentioned, Please feel free to contact us by email or phone and we will be delighted to hear from you!
Rebecca Ellis is a Personal investment advisor, based in Zurich| REBECCA.ELLIS@POMOMAWEALTH.COM|PASCAL.CREPIN@POMONAWEALTH.COM
