- Investment expert André Kostolany advises investors to buy shares, hold them for longer periods and not sell again in a panic when the stock market isn't doing so well.
- He takes the view that the equity market will trend upwards over the long term regardless of any fluctuations.
- As returns do indeed seem to smooth out over time, the question of finding the right entry point fades into the background for investors.
Investors should’t react to every piece of news or rejig their portfolios too often.
Market wisdom check
Should I or shouldn’t I? Private investors are inclined to lose sleep over the ideal time to enter the stock market. Stock-market novices are particularly keen to do everything right. Well-known stock-market guru André Kostolany has some advice for them: "Buy shares, take some sleeping pills and stop reading the papers. Many years later, you'll see that you're rich."
Clearly, this is a bit of an overstatement. Kostolany is making two assumptions: firstly, that the stock market will always trend upwards over the long term despite any short-term fluctuations because listed companies generally increase in value. Secondly, that many investors lose money precisely when the stock market plummets and then sell their shares in a panic, fearing greater losses. The "take some sleeping pills" part of this stock-market adage seeks to clarify that it is best to stay calm in times like that and not react hastily to every piece of market-moving news by immediately selling.
This means that the question of finding the right market entry point fades into the background for buy-and-hold investors. But do the figures corroborate this?
Every day there are arguments for and against entering the market
"If you’re looking for information on the right time to enter the market, you will find arguments in the media for and against on a daily basis," says Thomas Schuessler, co-head of equities at DWS. "This makes the decision difficult for investors. But in principle André Kostolany was right. A study from the DWS Research Institute shows that timing – the point at which you enter the market – can have a strong influence on short-term returns, but for long-term investments these differences largely smooth out.
For example, in April 2000, at the height of the first Internet boom, US shares were relatively expensive for investors because valuations were comparatively high. Say investor A nonetheless entered the market at these prices and shortly afterwards experienced the biggest price slump in stock-market history when the dotcom bubble burst.
Meanwhile, investor B bought the same shares just twelve months after the peak, thereby benefitting from the market recovery. But after 15 years, investor B’s returns were only one percent higher per year than investor A’s.
"Long-term investors allow individual asset classes time to go through their full value cycles and thus develop their maximum value potential," explains Thomas Schuessler. "It’s generally easier for investors to achieve investment success with this strategy than with short-term restructuring."
It’s therefore also important that investors don't have other plans for the invested funds. It can often take longer than expected for a buy-and-hold strategy to bear fruit.
Share price fluctuations are not as significant in a regular savings plans as in a one-off investment.
Regular savings plans "force" investors to make regular investments
"That being the case, regular savings plans can be a good option, especially for stock-market novices, as they instill discipline," says Thomas Schuessler. "Investors buy fund units each month for a fixed amount. This continual buy-in means the entry point is smoothed out – in other words, investors get a more favourable average price for their fund units with long-term regular savings plans than they would have done with a single purchase." This means that price fluctuations have less impact on performance than with a one-off investment.
Statistics on regular savings plans from the German investment fund association, the BVI, show that investors who paid 100 euro a month into equity funds with a geographic focus of Germany over the past ten years received returns of 5.5 percent a year.[1]
"This impressive increase is due to the compound interest effect, with the dividend corresponding to interest in equity investments," explains Thomas Schüßler. "With compound interest, interest is paid on the interest. Beyond a certain point, this means that interest income stops being linear and instead increases exponentially. In regular savings plans, fund returns are re-invested. Alongside investors’ regular deposits, this can make a significant contribution to asset growth."
