Is this the right time to invest?

Yes. As a Chinese proverb says: “The best time to plant a tree was 20 years ago. The second
best time is now.” Same story for investing, the best time to invest was the first time you
had some small savings, the second best time is now. And exactly for the same reason for
which we should plant trees. The sooner you will plant the tree, the sooner you will get the
fruits.

The mathematical reason lays in the compound interest effect. If you re-invest interest (or
returns) from an investment, you will accrue further interest (returns). The longer you keep
investing these returns, the greater the compound interest effect.
The easiest way to explain compound interest is using an example: Bettie is 45 years old and
decides to invests CHF 200 a month. At a yearly return of 4%, over 20 years she’ll have
almost CHF 75’000 by the time she reaches 65 (48’000 contributed, and around 27’000 of
compound interests). If she had started investing when she was 35, at 65 she would have
accumulated almost CHF 140,000 (in those ten additional years she would have contributed
only an additional CHF 24,000, but and received around 40’000 in interests).

Some of you may be thinking: “Ok Rosa, this makes sense in normal times, but we are
leaving an exceptional pandemic. Shall we wait until the situation clears?”
First things first, I hope that you and your family are staying healthy and safe.
Then, yes, it’s an exceptional moment, and we don’t know when and how we will go back to
normality, nor how that normality would look like. But the answer is still the same. You
should invest.

Waiting for the right timing to invest, or try to buy at the lowest and sell at the highest
(so called “market timing”) simply doesn’t work. It is impossible to consistently predict
when a specific investment has hit its lowest or highest. Plenty of studies have shown that
“time in the market” is the way to go: just stay invested, until the original reasons for
investing change or you’ve reached your intended goal.

During the last couple of months Covid-19 has caused panic selling in the market. People
inherently want to keep track of their money and when markets are fluctuating, market-
timers will be tempted to sell their investment too quickly to capture a small profit, or (in
this specific case) to avoid a loss. This is known as the “behavior gap”.  As Carl Richards
states, “We’re wired to avoid pain and pursue pleasure and security. It feels right to sell
when everyone around us is scared and buy when everyone feels great. It may feel right –
but it’s not rational”.

During the past twenty years, we had few unsettling moments for many investors. The
recession of 2008–2009 for example made some investors so fearful, they thought that
sitting out for a while seemed like a good strategy. But trying to avoid the worst drops
means also missing the opportunity for gains. For example, if we look at the last 20 years,
CHF 1’000 invested in the SMI would have grown to around CHF 2’300, with an average
annual return of around 4%. But missing just 10 of the best days in that period would have
reduced the annual return to 0.7%, and missing 20 of the best days in that period would
have put the investor in negative territory. Of course, investors could also leave the market
and miss the worst days. However, studies show that people generally sell when the market
is down, and they return after the market has already begun to bounce back.

Again, rather than trying to predict highs and lows, it’s important to stay invested through a
full market cycle. Focus on the time you stay invested, not the timing of your investments.
The best strategy is to invest gradually in a diversified portfolio, aligned with your investor
profile. In this way it’s easier to put aside emotions and reduce the volatility and the losses
during negative markets, capturing fully the positive market phases.

In our next conversations, we’ll explore how to create your own Investor Profile and then
we’ll be ready to explore the universe of available investments.