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Buy shares despite a slide in the stock market: sticking to savings plans teaches investors psychology

2022-08-04T19:42:21.618Z


Why continue to invest in equities on a monthly basis when new risks are appearing every week? Many share savers who build up assets through a savings plan are currently considering a break. 5 reasons why it's worth staying stubborn right now.


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Statue "Fearless Girl" in front of the New York Stock Exchange:

Not letting yourself be guided by fear and greed is one of the most important factors in investment success.

Savings plan investors have good reasons to stick with their strategy even when the stock markets are turbulent

Photo: Johannes Eisele / AFP

The greater the stress, the greater the desire for a break.

The Dax lost around 20 percent in value in the first half of the year, the US tech index Nasdaq 100 around 30 percent.

Inflation, the threat of recession, rising interest rates, trouble spots in Ukraine and now also in Taiwan: New risks for the stock market are almost appearing in the weekly market.

For the majority of stock savers who invest a fixed monthly amount in a mutual fund or ETF savings plan, the question arises: why do I keep investing in stocks that are currently falling in value?

Why don't I give myself a break, save the money and wait until the worst is over?

Instead of watching the depot value melt away, I could sleep more peacefully again.

See the value of your deposit melt away – and keep making deposits

Especially since the outlook until 2023 is not encouraging.

A further increase in inflation is likely, and the economic prospects for the euro zone continue to deteriorate due to massive increases in energy prices, writes the investment company Bantleon.

China is also facing a real estate crisis, not to mention China-US tensions over Taiwan.

You could simply interrupt your savings plan with a mouse click and only resume it when the world situation around China, the USA and Russia has eased somewhat.

Stay true to your own strategy

"Interrupting a long-term stock savings plan now is not a good idea," says Martin Weber, an economist at the University of Mannheim and a specialist in behavioral finance theory.

The saver has opted for a strategy with a fixed goal - and one should not be unfaithful to this strategy in rough times.

"Even if it's difficult: These phases are part of it. Enduring them is an important factor for investment success," says Weber.

The behavioral finance expert gives five reasons why investors should remain stubborn right now.

Cost Average: Buy stocks even if they are cheaper

The situation on the stock exchange is the opposite of that in the supermarket.

The more expensive stocks get, the more people want to buy them.

And if they become cheaper, as is currently the case, the lower prices tend to deter private investors.

An investor who buys shares through a long-term savings plan, on the other hand, chooses a different strategy: he or she does not have to deal with the daily fluctuations on the stock market every day.

The savings plan is based on the belief that over the long term – i.e. over a period of 10, 15 or 20 years – equities achieve better returns than other investments.

Anyone who believes in the long-term growth of the global economy can also relax through a price trough: During this phase, savers even get more shares for their fixed monthly payment.

At the end of the savings plan period, he achieves an average purchase price for his shares that is guaranteed to be lower than the price he paid during the stock market boom.

"There is a simple way to calm down during weak stock market phases," says Weber.

"Just drag the chart of an index you invest in to the 5- or 10-year period. Then the price dip that is pointing so steeply downwards in the 6-month chart doesn't look so dramatic anymore."

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Market timing doesn't work - it just pleases your broker

Second reason to stick to the savings plan: Market timing doesn't work.

Getting out of a savings plan is easy, but getting back into the savings plan at the ideal moment is almost impossible.

Nobody can determine the ideal time to enter or exit the stock market, unless they have a crystal ball like the widow Schlotterbeck in the robber Hotzenplotz.

The only thing that market timing reliably produces instead of stock market success are high buying and selling costs.

Investor legend Warren Buffett described market timing like this: "If you believe in market timing, then I want to be your broker - not your partner."

"The realization that you can't be smarter than the market inevitably means that you're more likely to rely on a regular and inexpensive savings plan," says Weber.

That saves a lot of money, because constant in and out is a return killer.

In addition, a savings plan is easy on the nerves: "If I save regularly, I can sometimes read the sports section instead of the stock market section."

Broader base with ETF savings plans

Third: Those who regularly invest money in a global ETF savings plan (e.g. pay a fixed contribution to the MSCI World Index every month) escape the so-called home bias trap.

Investors from Germany tend to invest more money in DAX companies because VW, Siemens and Co are closer to you than groups from India or China.

With this concentration on the home market, however, they are buying into an increased risk.

The export nation Germany is currently suffering particularly badly from the global economic downturn, while the Indian economy is currently benefiting from the fact that it is receiving cheap energy supplies from Russia.

Australian raw material mines offset losses at BASF

If you rely on a large basket of shares via ETF instead of individual stocks, you are on the safer path.

For example, the high profits of Australian mining companies absorb the losses of German chemical companies in the share basket.

"Being broad helps to stay calm," says Weber.

Stock success: time beats timing

Fourth: According to behavioral finance, you don't need a "good nose" to have long-term success on the stock market.

(see: The fairy tale of market timing).

In addition to money, you need patience, composure and discipline to stick to your strategy.

"Return and risk necessarily belong together on the stock market," says Weber.

"If I can't stand the risk, then I can't expect high returns in the long term either."

This is also a reason to stick with a stock savings plan over a long period of time instead of constantly chasing after supposed entry opportunities.

"Those who remain calm in a crisis are more likely to get rich," Weber summarizes this behavior-oriented approach.

Of course, crises can escalate further in the coming months and share prices can continue to collapse.

However, the basis for the concept of the share savings plan is the conviction that sooner or later companies will overcome the crises and swing back onto the growth path - from which the shareholders then benefit in the form of dividends and price increases.

Anyone who, in view of the current crises, does not share this conviction and expects a global crash should indeed get out of savings plans and consume heavily.

Fifo: avoid tax traps

Fifth: If you sell part of your shares from your securities account, you should speak to your tax advisor beforehand.

The tax authorities apply the "first in, first out" (FIFO) rule to partial sales of shares.

This can lead to unpleasant surprises.

Example: An investor bought 100 shares in a company at a price of EUR 10 per share 10 years ago and another 100 shares at a price of EUR 50 per share a year ago.

The share price is currently quoted at 40 euros.

He now holds 200 shares in the company, the total value in the portfolio is 8,000 euros.

In order to secure profits, the investor sells 100 shares from the portfolio.

The tax office is now assuming that he will sell the paper he bought for 10 euros first (first in) first (first out) – i.e. with a current share price of 40 euros, he will achieve a price gain of 30 euros per share.

25 percent withholding tax then applies to this total of 3000 euros in price gains: the investor has to pay 750 euros in withholding tax, although he has currently still made price losses with the other half of the investment.

One way to avoid the FIFO tax trap would be to distribute the different tranches to different accounts - but this way remains blocked with a savings plan.

Tax aspects should not be decisive for the personal investment strategy.

However, the fact that the urge to save taxes is just as pronounced as the fear of losses is also one of the findings of behavioral finance.

Source: spiegel

All news articles on 2022-08-04

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