The return on shares is an important topic for investors. But we remember something else from our childhood: if a visitor slipped us a coin, it went straight into the piggy bank. “Always save”, said our parents, after all, they also always diligently took their savings to the bank.
These days, investing is the new saving. Find out here what returns you can expect from shares and what else you need to consider.
Are shares dangerous? Myths of the stock market
Even today, there are still people who traditionally “save” their money in a bank account. For them, investing in shares is far too risky. But is this really true, or is it a widespread myth?
Of course, anyone who thinks they can make big returns on shares within a few months is on the wrong track. Investors who buy and sell recklessly and without any plan end up digging their own financial grave. But if you keep feeding your savings account out of fear, you won’t fare much better.
Yes, the stock market can sometimes be scary. One day share prices rise, the next day they fall again, and often for no apparent reason. But if you are prepared to
- Patience
- Long-term planning
- Systematic investment strategy
Even major crises, such as the dotcom bubble or the financial crisis, were unable to halt the long-term upward trend on the stock market. The coronavirus pandemic has confirmed this once again.
In the long term, equities worldwide achieve an average return of just under seven percent per year. And while we’re on the subject of figures: An annual increase of just under seven percent will double the value of your original investment after a good ten years. However, you can only benefit from all this if you take the plunge and invest.
Point Capital is a reliable partner for your investment needs. Contact us today to find out more about our investment principles and services.
Why do equities generate such attractive returns?
The past has clearly shown that shares are the most profitable choice in the medium to long term. Not even bonds, gold or real estate can keep up. Why is that the case? Because they are backed by companies in which people work. This can be seen as follows:
- Commitment: Companies get involved and come up with new ideas to improve products and services.
- Efficiency: Companies are always looking for ways to produce even more efficiently while increasing quality in order to optimize profits.
- Further development: Companies are actively developing day by day – this is particularly beneficial for your investments.
Active development is not the case with other types of investment, as they only develop passively. While a company can always outgrow itself, gold, for example, always remains gold.
Of course, companies can also suffer a setback or even go bankrupt, which cannot happen with gold. However, companies can react more actively to setbacks. Investing in shares will therefore yield the best returns in the long term.
Let’s take a look at the figures. What returns do shares generate? Let’s start with one thing first. Even if you have made the perfect stock selection, you are not safe from price setbacks. No share price is linear and you should be aware of this.
Long-term planning: the key element
If you have to sell during a weak phase because you didn’t think long-term, you will lose money. A short-term investment horizon is a common investor mistake and can be easily avoided. Rule number one is therefore: only invest as much as you can probably spare for the next five to ten years. Only then will you be in a position to survive lean periods on the stock market.
What is the probability of a positive return on equities?
The probability of a positive return on shares after a three-year investment period is 79%. That’s not bad, but it could be much better. After nine years we are already talking about a probability of 95 percent and after 15 years even 100 percent. (Note: The calculations were made on the basis of the MSCI World Index).
Why is that the case? Experience has shown us that share prices always recover over time. Sooner or later, they emerge from crises, pandemics and the like with new highs.
As a long-term equity investor with an international focus, you can expect an average return of around seven percent per year. However, this only applies if you do not lose sight of the issue of diversification.
What is the relationship between equity returns and diversification?
Basically, the following applies here: The more risk-averse you are, the more return is theoretically possible. If you play it completely safe, the whole thing is reversed. Which path should you choose? As an investor, you naturally want as much return on your shares as possible with as little risk as possible.
What at first sounds completely contradictory can actually be combined – with sensible diversification. This means that you spread the total amount you want to invest over several shares. You are clearly better off with a mixed portfolio than with a single investment. The reason for this is logical: each security performs differently. As a result, they all involve different risks and these need to be spread.
Even if the general trend is upwards, the strength of the price movement and the fluctuation range can still differ. This is why different shares as part of a portfolio together have a different risk than individual shares.
Of course, you could also hit the bull’s eye with a single investment. But the probability of making sustainable profits with a diversified portfolio is significantly higher.
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Tips for sensible diversification
How exactly does diversification work? Point Capital recommends the following tips for successful diversification in order to reduce equity risks:
- Different sectors: When choosing securities, you should definitely look at different sectors. If your portfolio concentrates exclusively on companies from the automotive industry, for example, this is known as a “cluster risk”.
- Geographical diversification: Invest in companies from different countries and regions to reduce the risk of local economic or political crises.
- Different market capitalizations: Spread your investments across companies of different sizes. A mix of large, medium-sized and small companies can help to optimize your risk of losses.
As a rule of thumb: ideally, you should invest in around 20 to 30 different shares. This is the best way to protect yourself against the risk of a complete loss of your investment.
Success on the stock market with Point Capital
Who likes to take risks when it comes to their own assets? That’s right, nobody! With us at your side for your investment , you invest with a high degree of security. A large proportion of our family assets are also invested. Entrust us with your assets: Because we treat it as if it were our own.
If you want to be successful on the stock market, you always have to be up-to-date and constantly monitor and analyze the markets. This requires specialist knowledge and a lot of time – something that private investors often fail to do.
That is why we take on this task for you and continuously assess the opportunities and risks in the current market situation. This enables us to act particularly quickly and achieve a sustainable, attractive return for you. Would you still like to keep your stock market knowledge up to date? Subscribe to our newsletter!
We look forward to hearing from you and will be happy to advise you on all aspects of asset investment, investment principles, asset management and the right investment strategy for you.
