According to the experts from Compass Invest JSC, when you look at the financial markets in the long run, your chances of success increase dramatically.
Do you have money in deposit? If we turn to the statistics with a record amount of deposits that Bulgarians hold in banks, it is very likely that the answer to this question is "yes".
But did you know that your money on deposit actually loses its purchasing power with each passing month? Because the best interest rates offered on deposits are in the range of about 1% per year with annual inflation of about 3%.
More and more Bulgarians are realizing that the loss of purchasing power is a problem (or that their savings held in bank deposits could buy less goods and services after a year due to low interest rates and high inflation) and are beginning to look for alternative investment opportunities.
This is evidenced by data from a study by UniCredit Bulbank, published on October 28, 2019 *. According to it, the investments of Bulgarians (in financial products other than deposits) are growing by a quarter per year, but are still only 2% of savings. This points to two things. First, that the market of investment products in our country has great potential for development. And secondly, it lags far behind other countries in the region.
Perhaps many depositors who have not yet turned to alternative investment opportunities are wondering what type to choose or when is the best time to switch from deposits to another type of investment.
And the answer to this question may be - as soon as possible! You will hardly have a chance to hit the best moment to invest, or the worst.
For more information you can also consult professionals.
Investors often make the same mistakes. And the reason for this is the mass psychology, which they tend to follow. The main problem of savers is that they are often indecisive and wait for the best possible moment to invest in the market, postponing their investment decisions.
But you should not forget the following. According to a study by one of Europe's leading asset managers (Amundi Asset Management) about 90% of investors' returns are determined by the asset classes and markets they have selected and only about 10% by the choice of individual stocks, or most a good time to invest.
One example:
Let's say you were terribly "unlucky" and invested in international markets at the worst possible time (in the last decade) - the day before the bankruptcy of the US investment bank Lehman Brothers. We can recall that this event marked the official start of the second worst financial crisis in the stock markets in their history.
Looking at it from now on and eleven years later, an investment the day before the bank's bankruptcy was not such a bad decision. The broad US index S&P 500, which is a barometer for the performance of financial markets around the world, closed at a level of 1,251 points on that day (September 15th 2008). Eleven years later, the index has already risen by 147% to new record levels, which translates to 8.6% average annual yield. Such a return would have turned BGN 1,000 invested in the broad US index 11 years ago (and at the worst possible time for investment from a historical point of view) into BGN 2,470 to date.
However, those who looked at things in the short term may have recorded serious losses if they panicked and closed their positions. Because six months after September 15th 2008 the S&P 500 lost 40% of its value. And then individual investors massively made the mistake of closing their positions, posting their losses, instead of patiently waiting for better times to come.
The broad US index S&P 500 hit a low of 666 points on March 6th 2009, spending less than five weeks at levels below the psychological limit of 800 points. Five months after reaching its bottom the index returns at levels above 1 000 points. In other words, about a year after the crisis, investors were at an acceptable loss, even though they hit the most inopportune moment for investment.
The truth is that waiting for the right moment can be extremely expensive!
Think of all those experts who have been warning for years and expecting a correction in US indexes or even a "bear market". Despite the momentary fluctuations of US indexes, they managed to find their way up, leaving disappointed all of the investors who stood on the "sidelines" and waited for the best time to invest.
It is no coincidence that the growth of US indexes this year, to new records, was missed by many market participants who tried to hit the best possible moment to invest, or waited for the end of the record long "bullish market" of indexes.
Why would it be better for investors to be constantly in the market, instead of trying to choose the right moment?
We will now look at the pros of being more passive with your investments and constantly being in the market, instead of trying to hit the best possible moment to invest. No, that doesn't mean you don't invest, you just have to be patient. Patience is one of the main virtues of investing. And often patience can be expressed by not doing anything and not constantly updating your wallets.
A study conducted by the financial company Fidelity Investments ** analyzes the results of the clients in order to see which of them have the best performance. The most profitable group actually consists of those who have bought and forgotten their investments – meaning that they have never touched or changed them.
It turns out that this group avoids the two main mistakes in investing - poor timing and giving in to emotions. Investors following this strategy know that investing is not an easy task. They don't think they have to constantly know what's going on in the market or try to "beat" it. They have understood that investing must have a long-term horizon and should not be influenced by momentary fluctuations. The study shows that investors who missed the worst days of the market often missed the best, which contributed to the bulk of market returns.
Of course, patience in the stock markets should not mean that you should not look at your financial statements at all or periodically, for example once a year, rebalance your portfolios.
However, what you should not do is throw yourself into too active trading or indulge in extreme emotions.
To summarize, no one can say where the market will go. The important thing is to be patient and disciplined. And while no one can determine the best time to invest, if you look at the financial markets in the long run, your chances of success increase drastically, whether there will be moments of difficulty (in the short or medium term) or not.
You can also increase your chances of investing by seeking the advice of professionals who will help you better clarify your investment goals and risk appetite.
If you liked the material and want to look for alternatives for your savings - see how you can do it by investing in MF Compass Global Trends.
COMPASS INVEST – Your Personal Investment Advisor.
Compass Invest JSC is a licensed management company by the Financial Supervision Commission since 2006.
Important information: You should keep in mind that the value of the shares and the income from them may decrease, profits are not guaranteed and there is a risk that you will not return the full amount of the invested funds. Past performance is not a reliable indicator of future performance, unit prices and their returns may decrease as well as increase, and investors may not receive the amount they originally invested. No profits are guaranteed. Investments are not guaranteed by a guarantee fund set up by the state or another form of guarantee. The prospectus and the document with key information about the investor can be obtained on paper and/or electronic media in Bulgarian in the office of the management company on the address: Sofia, 19 Georg Washington Str., 2nd floor every working day from 9 am to 5 pm and on the website of Compass Invest JSC.
The material is of an educational nature and is not advice for buying or selling financial assets. Trading on the stock markets can be extremely risky and bring not only profits but also serious losses for investors. Make sure you are fully aware of all the risks before you decide to invest in the financial markets. If possible, it would be good to consult with certified financial advisors.
* The entire study of UniCredit Bulbank, published on October 28th 2019, can be read here.
** Fidelity's study of why it's better for investors to try not to time the market can be read here.