Three Scenarios for Stock Investment

Who led the digital transformation in your company? CEO? CFO? CIO? No. It was Covid-19. Sometimes the lessons learned from an economic crisis are so good, they leave the world economy better off in the long term.

Stock Investing at the WORST possible time

If you had invested in the stock market in the summer of 2007 right before the Subprime Mortgage Financial Crisis, you would immediately have lost over 50% of your investment, yet today your total return would still have been above 60% of your overall investment.

Over the past 80 years, stocks have on average yielded a real return of 7% per year. Compare that to 6% for property (incl. rent from tenants), 4% for bonds, 0% for commodities, and -4% for cash.

On any given day, stock prices can easily go up or down by 10% and can double or halve in a single year. It is those market movements that overall average out to the strong 7% in the long term.

7% per year is equivalent to doubling the real value of your investment every decade. That means that after one decade on average you have 2x the initial investment, after two decades 4x, then 8x, 16x, 32x, etc.

Investing at the BEST possible time

Many people are now asking themselves if it is finally time for them to make a financial decision and get into the stock market, as prices have generally declined.

Warren Buffett famously said: “Price is what you pay. Value is what you get.”.

For some companies the ‘deal from the lower price’ is equivalent to If the local supermarket offers Coca-Cola for half price, but the Coca-Cola is also half size. I.e. not really a deal.

For other companies and major corporations, however, their share price reductions may not reflect fairly, that they are quite crisis-resistant, or may even benefit from it. Some stocks may have gone up in price to reflect the increased profitability they are likely to achieve, but, for the right stocks, the price may not have gone up enough to fully reflect this yet.

Investing at the most AVERAGE of times

It is difficult (and unnecessary) to achieve perfect market timing in the short term. For most investors, it makes best sense to invest steadily over time. I.e. setting aside an amount of the yearly, quarterly, or monthly budget for the investment process, and thus averaging the investment timing out over time. Some of the monthly investments will have been made at a discount and others at a ‘too high price’, but those will average out.

In the long term, such an approach is likely to leave many investors very satisfied.

Jeppe Kirk Bonde is an Elite Popular Investor on eToro. Residing in the UK, he has a background in management consulting and an M.Sc. in Finance and Strategic Management from the Copenhagen Business School.

 

This is a marketing communication and should not be taken as investment advice, personal recommendation, or an offer of, or solicitation to buy or sell, any financial instruments. This material has been prepared without taking into account any particular recipient’s investment objectives or financial situation, and has not been prepared in accordance with the legal and regulatory requirements to promote independent research. Any references to past or future performance of a financial instrument, index or a packaged investment product are not, and should not be taken as, a reliable indicator of future results. eToro makes no representation and assumes no liability as to the accuracy or completeness of the content of this publication, which has been prepared utilizing publicly-available information.