Is it a good time to invest in index funds?
Posted: Thu Dec 12, 2024 3:16 am
Many people are wondering whether or not it is a good time to invest in index funds . They have heard on television that the volatility of the world stock markets is at its maximum and that the uncertainty caused by Covid-19 will continue for a long time.
It is logical that they do not dare to put their savings in the stock market and find themselves with a -5% or -10% within a few days. Losing money is not a pleasant experience .
However, for long-term investors like us, these apocalyptic news about the financial markets should not worry us in the least: the statistics are on our side and show that it is always an excellent time to invest in index funds .
If you have any doubts about this categorical statement, we invite you to continue reading. Below we will explain why trying to find out when is the best time to enter or exit the stock market, or to invest or disinvest in an index fund, is a waste of time and profitability.
World stock markets are always at their highest levels
If we look at the chart of any global index fund , such as the S&P 500 or job seekers database the MSCI World, we will see that never before in history have these indices been as high as they were at the beginning of 2020. Nor have they ever before been exposed to such high volatility.
However, looking back, we can see that they were also at historic highs six months ago, right? Just a year ago, the same thing happened: they were at their highest point. And what about two, five or ten years ago? Exactly, they were also at historic highs.
It is normal for the world's major stock market indices to be almost always at record highs for a very simple reason: despite financial crises or COVID-19, the world is thriving and is a better place with each passing year.
It is enough to see how global poverty is decreasing, economic inequalities between countries are reduced, life expectancy is increasing, infant mortality is decreasing, diseases are being eradicated, hunger and malnutrition are being fought, and human development indicators are improving.
These global improvements have a direct impact on the financial sphere. Despite the crises, the world economy has improved dramatically in recent years . You only have to look around you and see how easy it is to buy any product or cover your most basic needs. Do you think your ancestors were as lucky?
Market timing will doom you as an investor
Despite what you just read, many investors do market timing to try to figure out the best time to invest or divest .
As if they had a crystal ball with which to foresee what will happen in the future, they buy when they think the stock market will rise and sell when they think it will fall.
However, reality shows that it is impossible to know what will happen in the financial markets , especially when investing in the short term.
Market timing is not a smart strategy and investors who practice it end up losing profitability in the long term. This loss of profitability is known as the “ behaviour gap ” and, according to numerous studies, ranges between 1 and 1.5% per year.
Another very interesting study analyzed the S&P 500 for 20 years (from January 1994 to December 2014) and concluded that if investors want to obtain maximum returns, they should keep their money invested at all times , no matter what happens in the world.
The annualized return for this index over that period was 9.85%. However, if someone had missed just ten of the index's best days, their return would have fallen to 6.10%. That's 38% less for being out of the market for just 10 days out of a total of 7,300!
In the last century there have been two world wars, the crash of 1929, the oil crisis of the 70s, wars of all kinds (Korea, Vietnam, the Cold War, Iraq, Afghanistan...), the fall of the Berlin Wall, the collapse of the USSR, the dotcom bubble, the crisis of 2009... and despite all this, any index fund that had replicated a global index would have obtained spectacular returns.
It is logical that they do not dare to put their savings in the stock market and find themselves with a -5% or -10% within a few days. Losing money is not a pleasant experience .
However, for long-term investors like us, these apocalyptic news about the financial markets should not worry us in the least: the statistics are on our side and show that it is always an excellent time to invest in index funds .
If you have any doubts about this categorical statement, we invite you to continue reading. Below we will explain why trying to find out when is the best time to enter or exit the stock market, or to invest or disinvest in an index fund, is a waste of time and profitability.
World stock markets are always at their highest levels
If we look at the chart of any global index fund , such as the S&P 500 or job seekers database the MSCI World, we will see that never before in history have these indices been as high as they were at the beginning of 2020. Nor have they ever before been exposed to such high volatility.
However, looking back, we can see that they were also at historic highs six months ago, right? Just a year ago, the same thing happened: they were at their highest point. And what about two, five or ten years ago? Exactly, they were also at historic highs.
It is normal for the world's major stock market indices to be almost always at record highs for a very simple reason: despite financial crises or COVID-19, the world is thriving and is a better place with each passing year.
It is enough to see how global poverty is decreasing, economic inequalities between countries are reduced, life expectancy is increasing, infant mortality is decreasing, diseases are being eradicated, hunger and malnutrition are being fought, and human development indicators are improving.
These global improvements have a direct impact on the financial sphere. Despite the crises, the world economy has improved dramatically in recent years . You only have to look around you and see how easy it is to buy any product or cover your most basic needs. Do you think your ancestors were as lucky?
Market timing will doom you as an investor
Despite what you just read, many investors do market timing to try to figure out the best time to invest or divest .
As if they had a crystal ball with which to foresee what will happen in the future, they buy when they think the stock market will rise and sell when they think it will fall.
However, reality shows that it is impossible to know what will happen in the financial markets , especially when investing in the short term.
Market timing is not a smart strategy and investors who practice it end up losing profitability in the long term. This loss of profitability is known as the “ behaviour gap ” and, according to numerous studies, ranges between 1 and 1.5% per year.
Another very interesting study analyzed the S&P 500 for 20 years (from January 1994 to December 2014) and concluded that if investors want to obtain maximum returns, they should keep their money invested at all times , no matter what happens in the world.
The annualized return for this index over that period was 9.85%. However, if someone had missed just ten of the index's best days, their return would have fallen to 6.10%. That's 38% less for being out of the market for just 10 days out of a total of 7,300!
In the last century there have been two world wars, the crash of 1929, the oil crisis of the 70s, wars of all kinds (Korea, Vietnam, the Cold War, Iraq, Afghanistan...), the fall of the Berlin Wall, the collapse of the USSR, the dotcom bubble, the crisis of 2009... and despite all this, any index fund that had replicated a global index would have obtained spectacular returns.