Don’t Panic! Keep Calm and Think Long-Term

People tend to react to uncertainty with irrationality. Over the past few weeks, this has been exemplified by panic buying. We also saw investors backing out of possibly risky assets. Driven by fear of a drop in market conditions, investors often sell stock at a loss. But if fear is a bad advisor, what should we do instead?

In the current market setting, with a loss of 30 percent of the German Stock index (DAX 30) in just a few days, many investors question the wisdom of further stock investments. The rates are dropping as uncertain investors reject their shares. However, the probability of greater loss is high, as many shares as well as ETFs are currently disreputably assessed. But the past has shown that rates have the ability to recover. Therefore, long-term thinking is currently the best strategy.

The shares you already own don’t disappear; they just end up being bought up by other investors. There are some investors that use the chance to acquire shares they’ve had their eye on. Those who have invested in a low conversion rate of shares use this situation wisely. Due to the low prices, they receive more for their money than they would have a few weeks ago. A crisis like the one we’re experiencing can therefore be a good chance to let your capital grow on its own, or possibly even to invest more money into it.

An ETF savings plan allows you to make yourself independent from the investment. The plan automatically invests a pre-arranged monthly amount into the account. In an event of a market change, you benefit from the previously acquired shares. The continuous investments, regardless of the state of the market, leads to an eventual mean market rate. The financial investment aims at being a long-term investment of at least three years. This allows you to stay calm in times like these, when your account may be classified as low. In the long-term, the market will recuperate itself and so will your investment.

If you find yourself panic-stricken, review your readiness to assume the risk. You might discover yourself to be less stress resistant than you initially anticipated. This is not a negative thing! It is important to recognize the situation and adapt accordingly. Only invest money that you don’t need in the immediate- to medium-term.

Here are the three positive aspects of the financial crisis to keep in mind:

  • Contracyclical bargaining: The current purchase of low-cost shares.
  • Long-term thinking: There are no indications that the current crisis will be permanent.
  • Safe investments: ETFs are less risky than single shares.

Driven by fears of a recession, the US central bank has grasped at radical solutions. They lowered the key interest rate by a full one percent, bringing it almost to zero, and announced a packet of measures in alignment with other banks. The European Commission has advocated for an emergency program worth millions to support establishments and citizens in the current crisis. This targets European debt, deficit and aid rules to be construed to their furthest extent in order for European states to decide on emergency relief. In addition, millions are to be directed to corporations to keep them solvent so they can continue to invest.

Why Right Now is a Great Time to Start an Investment Savings Plan

Many investors are currently in a panic: the stock gains they accumulated over the past few years have vanished within a few days. However, investors who are starting a savings plan with a long-term investment horizon have no reason to panic. Here are two potential outcomes of the current situation:

1. Prices continue to fall (which cannot be ruled out): If the prices continue to fall, it is even positive for savings plan investors when they start their savings plans. Now you get more ETFs for your money, because they’re cheaper. The effect is even more pronounced because: If prices fall by 33 percent, savings plan investors receive around 50 percent more shares for their money.

Example: Let’s assume a savings rate of €150 per month and an ETF price of €150. This means that an ETF share can be bought every month. If the price of the ETF falls by 33 percent to €100, you can buy almost one-and-a-half ETF shares, i.e. around 50 percent more.

The compound interest effect and long-term nature of the investment result in a dramatic leverage that pays off in significantly higher returns over the years. Contrary to how things may seem at first glance, declining prices are good for savings plans, so now is a good time to start one! Bear in mind that you need to have a long-term investment horizon.

2. Prices rise again: Should the prices recover in the next weeks and months, savings plan investors will benefit directly from rising prices. The long-term effect might be larger if the initial prices continued to fall for a time, but since the growth is now more than 50 percent, this is still an attractive return.

So you see: No matter how things pan out, if you have a long-term investment horizon, you’ll definitely see benefits from starting a new savings plan.