There is no reason to fear the markets
Growth is one of the most natural features of human society. The fear of investing comes from a possible price drop. It is, however, irrelevant.
Radoslav Kasík | Investment academy | 8. April 2018
- Market risk is natural and not dangerous.
- Invest in real assets with real employees.
- Economies and value always grow in the long run.
- Investing in index ETFs ensures that you always own the best of the world.
Market risk is for majority of people the main reason why they do not invest. They are afraid of loss on their investment.
Market risk refers to the uncertainty about development of value of securities. For example, if you bought stocks, market risk simply means a drop in their prices. As the name suggests, it results from the market itself – for instance, changes in investor sentiment, unfavorable economic developments or failure to meet expectations. However, this risk is natural and you cannot eliminate it. But you really need not be afraid of it.
Why not to be afraid of market risk?
Because it is always outperformed.
When you invest, you are buying real assets - real companies
Market is not the graphs, curves and percentages you find on financial websites. The market is recipient and user of a large portion of your monthly expenses. These are real companies with real employees and social responsibility. These are companies whose products or services you buy on a daily basis.
Whether you want to turn on the light in the morning, buy a chocolate, call your parents or refuel your car, you almost always pay for these services to a company which is listed on the stock market and is part of the market.
If you could own any of these companies, you would not say no. Your life would be taken care of. Companies listed on an exchange are global leaders in their fields. These are the largest companies with turnovers and profits in trillions.
To invest means to own these companies. Investing means owning these businesses. Thanks to the market you can benefit from your daily consumption.
Price is a sentiment, value grows in the long term
In the long run, it is irrelevant where the market is currently heading. With the horizon of dozens of years there is only one direction. Upwards.
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The market price of assets reflects mainly the current mood of investors. It rarely reflects the real value. Price fluctuates around the value. Price is a short-term and sensitive indicator. Value is reflected over longer horizons and it is more stable.
The investor, first of all, has to be interested in the value.
In the 1980, the top 10 companies of the S&P 500 index were worth 236 billion dollars. Nowadays, only the largest company of the index, Apple, is worth 870 billion dollars.
Economies always grow in the long run and so does the value of securities
As the economies grow, wealth in the world grows too and it does so with you or without you.
One of the reasons for the growth is inflation, which is the natural phenomenon in our economy. Inflation means rising prices of goods and services in the economy.
The world economy is growing because mankind is constantly advancing, innovating and inventing new technologies. The society, by its very nature, is not satisfied with what it has. It still wants more, there is still something to discover and to develop. Unless you stop eating, working, having fun, traveling and doing sports, the world economy will grow and you can capitalize on it.
40 years ago, we had no clue about the internet that would connect all people around the world. 30 years ago, we had no idea about smartphones, which can now remotely operate your household appliances. 20 years ago, we did not believe that cars would drive on electricity or that we would be making payments through the internet. Or that diseases which killed millions of people just years ago, currently do not pose any threat.
Nowadays, we take all these things for granted, but they were a fiction only a few decades ago.
Composition of ETF funds changes over time, which also ensures their growth
Finax invests into indexes, which one can picture as sets of stocks of several companies or as a representative sample of the market. Composition of indexes changes and it is being adjusted for development of the market.
For example, 40 years ago, you would be vainly looking for the currently biggest companies like Microsoft, Google, or Amazon, which are nowadays the market leaders. Former huge companies such as Kodak, US Steel, Standard Oil or Panam do not exist or do not mean much in the world economy anymore. Today you would not find 88% of the companies from the Forbes Fortune 500 from 1955.
However, that´s exactly the reason why to invest in indexes. Only investing in indexes guarantees that your portfolio contains the most successful companies you can find at any given time in the global economy.
Market risk is the last obstacle for investing. Using proper allocation and sufficient time-horizon eliminates it over time.
Ultimately, time always outweighs the market risk. Just as emotions are the biggest enemy of investing, time is its best friend.
The longer is your investment horizon, the lower the market risk. Indeed, time enables compound interest to become apparent. With prolonged investment period, the probability of higher profits is increasing.
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Try invest tax smart with low cost ETF funds.
Short-term allocation of money in traded assets is a speculation, not an investment.
The following table shows how likely and how much you would earn in individual Finax portfolios at selected time frames over the last 30 years.
Note: All data relating to the historical development of the Finax portfolios is modelled and based on data back modelling. We described how to model historical performance in How we model historical portfolio development. Past results are not a guarantee of future returns and your investment may result in a loss.
Markets always had and will have excesses when the price deviates from the real value. There will still be extreme movements in both directions. However, at the end, there is only one direction. Upwards.
Markets have overcome world wars, major financial crises, number of shocks, bubbles, political crises, and they have grown in the long run. By looking for arguments against investing, you are ripping off yourself and your offsprings.
Unwillingness to invest because of the market risk is like not visiting the doctor because he could diagnose you with an illness.