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.