The key to successful investing is not to predict the future. Rather, it is about learning from the past and understanding the present.
1 - Life expectancy is increasing:
Thanks to medical advances and healthier lifestyles, our life expectancy is continually increasing. The following graph shows the probability that a person aged 65 today will live to be 80 or 90. A couple aged 65 may be surprised to hear that at least one of them has a 50% chance of living another 25 years and living to 90.
2 - Cash is rarely king (Part 1):
LEFT: Zero-sum game Investors often believe that money in savings or call money accounts, available at any time, offers a safe haven or even regular income in stormy times. However, due to the era of low interest rates, after inflation and taxes there is often only a small return or even a loss! Even with rising interest rates, investors must be careful not to save themselves into poverty in the long term due to high inflation.
RIGHT: Cash is destroyed by inflation Risk-averse savers who leave their money lying around without earning interest will find that inflation eats away at the real value of this money over time. With an annual inflation rate of 2% over a time horizon of 40 years, non-interest-bearing amounts lose more than half of their purchasing power - which corresponds to the amount of goods that can be bought with this money.
3 - Cash is rarely king (part 2):
Cash performs below average over the long term
Anyone who parks their money in traditional savings products only receives very low returns in the long term. As a result, savers miss out on the performance that could be achieved with a long-term investment on the capital markets. In the past, equities in particular have been able to generate significant returns over a long time horizon. Even if the path can be a little bumpy at times.
4 - Start early and reinvest income:
LEFT: Compound interest can work wonders Compound interest means that you can earn returns not only on your original investment, but also on the accumulated gains from previous years. The effect is so great that even skipping a few years of saving can make a huge difference to your future returns. If you start investing at the age of 25 and put 5,000 euros a year into an investment with 5% growth per year, you will have built up almost 300,000 euros more assets by the age of 65 than when you started at 35. And you would only have invested 50,000 euros more.
RIGHT: Reinvest income from investments when you don't need it You can make even better use of the power of compound interest by reinvesting the income from your investments to further increase the value of your portfolio. Reinvesting your investments can make a big difference in the long term.
5 - Return and risk often go hand in hand:
There can be setbacks when investing
The assets that have achieved the best performance since the beginning of the 2000s have also been the ones with the bumpiest performance. As the chart on the right shows, investments with lower risks have also tended to generate lower returns. If you want to achieve high returns, you should be aware that you may have to accept greater fluctuations along the way. If, on the other hand, you do not want to take any major risks, you must remain realistic about the expected returns.
6 - Don't panic - fluctuations are nothing unusual (Part 1):
The road can sometimes be rocky
There are turbulent phases in every year and 2022 is certainly no exception. The red dots on the following chart show the maximum share price slump over the course of the respective calendar year. These phases are difficult to predict, but in most years, double-digit market declines in between are nothing unusual. Investors should therefore not be surprised. Fluctuations on the financial markets are normal and investors should prepare themselves in advance for ups and downs instead of reacting emotionally in a difficult market phase. The gray bars show the return for the respective calendar year. They illustrate that in most calendar years the stock market has recovered and delivered positive returns despite price weaknesses.
This means keeping calm: A weak phase on the stock market often represents an opportunity and not a reason to sell.
7 - Don't panic - fluctuations are nothing unusual (Part 2):
Good things happen to those who wait
While the markets can always have a bad day, a bad week, a bad month or even a bad year, history shows that investors are much less likely to suffer losses over longer periods of time. It is important to maintain a long-term perspective. This chart illustrates this concept. Investors should not necessarily expect the same returns in the future as we have seen in the past. But a diversified mix of stocks and bonds has not delivered a negative return in any rolling 10-year period, despite the wide swings in annual returns we have seen since 1950.
8 - Investing across the board counts (Part 1):
Patience is a virtue
Selling after the market has experienced a sharp decline is usually the wrong strategy. However, it can be difficult to resist the urge to panic after a market decline. People usually sell after stocks have already fallen. As the chart shows, large outflows often occur when share prices are already close to the bottom. This means that investors who sell lock in their losses and miss out on a potential recovery.
9 - Investing across the board counts (part 2):
Stay calm when everyone else is getting nervous
Last year was a better year for the markets, after a much more difficult 2022 that saw US equities fall 25% to their lows. While it can be tempting to sell after declines of this magnitude, past experience suggests that 12 months after a 25% drop, returns have often been positive. A common mistake made by investors is to sell when the market has bottomed, as this limits the opportunity to take advantage of the upturn that can follow a market downturn.
10- It's all in the mix:
Don't put all your eggs in one basket
The last 10 years have been a volatile and turbulent ride for investors, with natural disasters, geopolitical conflicts and, most recently, a global pandemic. Despite these difficulties, cash and commodities have been the worst performing of the asset classes shown here. A well-diversified portfolio comprising equities, bonds and some other asset classes has delivered an annualized return of almost 7% over this period. While downside risk is still an inevitable part of investing, the diversified portfolio has given investors a much smoother ride than investing solely in equities, as the "Volatility" column of the chart shows.
Q: J.P. Morgan
