“Far too risky” – this is what many Germans think when it comes to investing in equities. At first glance, there appears to even be some justification for this reluctant stance, given we frequently hear about significant declines on the stock market. This was again the case this year: The leading German DAX index lost around 12 percent (as at: November 18, 2018), following a double-digit increase in 2017. In light of this rollercoaster ride, many Germans do not like to invest in equities.
Savers miss out on potential returns
Private individuals’ investments reflect this trend: Only around one tenth of Germans’ huge amount of financial assets is invested in equities, according to calculations by the Deutsche Bundesbank. By contrast, approximately 40 percent of assets are parked in savings and current accounts or time deposits, or are languishing in the form of cash.[1] There are no price losses to worry about when your money is held like this. But neither is there much interest to be gained.
Looking back at history, it shows that a preference for low-interest savings accounts is suboptimal, at least from a returns perspective: Over the long term, equities generate more returns. “In the last 118 years, equities have been the asset class to generate the highest returns,” explains British financial historian Elroy Dimpson, who has been researching the performance of various asset classes for many years.[2]
Over the long term, all stock market crises have been ridden out
Even if the stock market can sometimes fall for a certain period and some equities never recover completely from such a crash, to date the stock market as a whole has always made up even huge temporary losses, and then gone on to reach new highs. This is underlined by the long-term price chart for the leading German DAX index, which was set at a level of 1,000 points as at December 31, 1987, and officially introduced on July 1, 1988.
Stamina
Over the last 30 years, the DAX has undergone sharp declines several times. The index has fallen by more than 20 percent on six occasions, for example at the start of the Iraq war at the beginning of the 1990s, after the Internet bubble burst at the start of the millennium, or during the 2008 financial crisis.
However, the chart also shows that the stock market has recovered on each occasion, and then climbed to new heights. Of course, after such severe declines, prices did not go on to recover overnight. Investors had to be extremely patient during some phases. This was the case after the largest price slump in history following the euphoria over the Internet, when it took 2,648 days – more than nine years – until these losses had been made up. However, with most other declines, it took far less time to recover.
The MDAX has also been able to survive various crises
German secondary stocks, which are replicated by the MDAX index, have performed similarly to the blue chips in the DAX. Even the most severe slumps were regularly made up for after some years. At present, the MDAX is around 30 times higher than it was 30 years ago.
Regular saving produces long-term success
It is exactly for this reason that rationally calculating investors see price declines to be more of an opportunity than a drama, especially if they are aiming at accumulating assets for the long term. They know that those who invest regularly in the stock market in a broadly diversified manner, for example with a fund savings plan, buy equities cheaply during correction phases (see the video on the cost average effect).
Deutsches Aktieninstitut backs up these findings with concrete figures, which not only take into account the last 30 years but extend back to 1967. According to Deutsches Aktieninstitut, since 1967, investors with a simple savings plan for German blue chips have always been able to generate a profit after 20 years at the latest, even if they entered the market at an absolute high.[3]
1. Source: Deutsche Bundesbank, Monthly Report, July 2018.
2. Source: Credit Suisse Global Investment Returns Yearbook 2018, Summary Edition, p. 11.
3. Source: Deutsches Aktieninstitut, Lebensstandard im Alter sichern – Rentenlücke mit Aktien schließen (Safeguarding the standard of living in old age – closing the pension gap with equities), December 2016 (German only); historical internal returns of the DAX 30 index (1967–2015).
