Dax: Investors should buy indices via ETF rather than individual stocks

2019-10-19T12:43:37.836Z

The Dax is trading at its highest level in twelve months. A comparison shows why index investments lead to long-term success - and shareholders who seek adventure with individual investments often fail.

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18/10/2019

Recovery in the DaxThe best equity investors are boring

From Kai Lange

Kai Lange

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IPO of Uber on the NYSE: The highly traded mobility service was flooded. By contrast, broad stock market indices such as Dow Jones and MSCI World have continued their climb.

The Dax is trading at its highest level in twelve months. A comparison shows why index investments lead to long-term success - and shareholders who seek adventure with individual investments often fail.

Relaxation in the US-China trade dispute, hope for an end to the Brexit drama: The Dax stock market chart has gained more than 6 percent over the past two weeks, rising to its highest level in 12 months. However, Dax investors have to cope with strong price and mood swings this year. At the end of 2018, the German leading index fell to 10,400 points, and the fluctuation range of the Dax 30 index has since been around 20 percent. For investors, the question arises: If an index fluctuates so much - is it possible to target the stock market with the targeted selection of individual stocks, the so-called "stock picking"?

A look at the numbers will help in the answer: The Dax has gained about 8 percent in the past 12 months - the dividend payments of the 30 Dax companies included. The Dax's three-year performance is even up around 20 percent, despite warnings of a rallying global recession. Investors who invest in a "boring" Dax ETF and bundle all 30 Daxs into one index fund can therefore look forward to a decent return on a 12-month view.

This average performance of 8 percent is offset by the outliers in the Dax - in both positive and negative sense. Among the Dax flyers this year are the shares of RWE and Adidas: After several years of crises and the sale of parts of the company, the energy provider RWE Börsen-Chart has managed to get rid of its carbon-dioxide Dino image and become one of the most important providers of regenerative energy To re-present energies in Germany. In the past twelve months, the RWE share has gained more than 50 percent. Since its fall, which caused the stock to plummet to around 10 euros in early 2017, the stock market has almost tripled. With this comeback story, RWE is even the success story of Adidas stock market chart show in the shade: The Dax favorite Adidas has been raising its sales and earnings forecasts regularly for more than three years, the stock market value has increased almost sixfold since 2015. Over a 12-month horizon, the Adidas share is up around 40 percent.

50 percent plus with RWE - but 40 percent loss with Wirecard

40 percent plus with Adidas, more than 50 percent plus with RWE - in contrast, the Dax performance of 8 percent looks almost modest. However, this simple calculation works only for investors who claim to be smarter than the overall market because of superior intelligence (for whatever reason). Say: From a basket of 30 stocks to pinpoint the few stocks that will beat the market average clearly.

In the case of RWE and Adidas that would have worked well this year. One could have picked out as "stock picker" but also other stocks. Lufthansa for example. Or Wirecard. There were plenty of recommendations for the purchase of these shares: the Lufthansa stock market chart, for example, had climbed even steeper until spring 2018 than currently Adidas. The stock market value of the airline had almost tripled in 13 months, analysts screwed their price targets further and further up. Then followed the crash: Since January 2018, the highly praised airline has almost halved its stock market value again, the minus in the past twelve months is about 20 percent.

Rise and fall: Lufthansa and Wirecard were also success stories

Or Wirecard. Between spring 2017 and summer 2018, the electronic payment service provider put investors in a state of euphoria, the stock market value more than quadrupled during this period. The DAX climber promised to be a sure success bet on the digital future - until allegations of the "Financial Times" about an allegedly unclean accounting break the market value of Wirecard again. Since autumn 2018, the company has lost around 40 percent - and kept its investors in suspense this week with extreme price fluctuations.

Profits of 40 and 50 per cent for Adidas and RWE, losses of 20 and 40 per cent for Lufthansa and Wirecard: These numbers make it clear that investors with a stroke of luck can beat the Dax performance of 8 per cent - but can also go miles long if they are wrong with their "stock picking". Although it is a nice feeling, if you cut off by a fortunate luck better than the overall market. But it is even more painful to make sizeable losses with a mistake in various individual stocks if the overall market develops positively overall.

And who could seriously predict the exact time when the success story of Lufthansa and Wirecard would end - and when would the comeback of the RWE share, which had fallen over many years, begin? Speaking of a comeback: Who set 12 months ago on a recovery of the deeply plunged Deutsche Bank share, is currently sitting on losses of almost 30 percent.

Dear boring and liquid than exciting and broke

Anyone who takes a look at these ascent, crash and comeback stories should come to the conclusion as a long-term shareholder: As a "boring" investor who floats with the broad market with the help of a passive index fund, one is better off than one Investor looking for excitement with stock picking. Of course, 50 percent plus in price within twelve months provide an adrenaline rush. But 33 percent minus also cause great pain. With 8 percent return, as the Dax has achieved in the past twelve months (the historic annual average yield of the past 30 years is just below), can live well - and above all, sleep soundly.

Create globally: MSCI World beats Dax by far

Being smarter than the market as a whole - this wish, which banks and brokers have been living very well for many years, has already been rejected by US economist Burton Malkiel in his stock market classic "A random walk down Wall Street". Trying to pick a single grain of sand on a beach, which is much more magnificent than any other, is blessed with little chance of success. It makes more sense to spread a cloth and thus to cover the entire beach / market: This comparison also brings long-term investors back to the index fund or ETF.

Incidentally, a Dax ETF is too small a segment compared to the global stock market. Anyone who concentrates exclusively on Germany in terms of their investments also takes far too high risks. A global stock index such as the MSCI World, taking into account the dividends paid (TR, "Total Return") has increased in the past three years, about 40 percent, leaving the Dax far behind. The MSCI World Index contains around 1,600 companies from 23 countries: this "cloth" is much wider than the Dax. And boring. And in the long run also much more successful.

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