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Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges
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Head of Fixed Income Strategy
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The Power of Time: Two Tips For Achieving Your Financial Goals
Saxoassetmanagement
Saxo Group
Summary: Buy low, sell high. Buy the dip, let it rip! Two clever little phrases that falsely presume that timing the markets is easy. In reality, trying to time the markets is a bad idea, especially during market turbulence.
Over time, years of instability have tested resilience and commitment from investors with long-term investments. An unprecedented pandemic shut down the world, inflation has increased to record levels, and now we face a global fallout from the Ukraine crisis. It is not easy being a long-term investor right now and we hear you.
Here are 2 tips to help you maximize your time in the market and achieve your financial goals.
Tip 1: When markets slide, think with perspective. Do not panic sell.
When markets slide sharply, emotion and fear tend to overtake our rationale. If this is you, consider these questions before you press the sell button:
- If exiting the market today, do you know when the right time to re-invest is?
- Is this market slide going to prevent me from achieving my financial goals in the long run?
Selling quickly to avoid a painful market plunge may provide short-term emotional relief, but missing out on upswings can leave you feeling even worse, both for your account and your mood. Research from Schroders, makes this point clear by taking a look at what investing $10,000 in the S&P 500 over twenty years looks like if you remained fully invested vs. selling out early and consequently missing out on the best days of market performance:
Source: Schroders, Time in the market not timing the market, David McManus, 2021
Tip 2: Understand the effect of compounding
Compounding may sound like a complex concept, but it is extremely simple. It helps you generate long-term wealth by building returns on returns on returns.
If something compounds – if a little growth serves as the fuel for future growth – a small starting base can lead to results so extraordinary they seem to defy logic. Let’s take the example of Warren Buffett: 95% of his net worth came after his 65th birthday. His skill may be investing, but his secret is time. That’s how compounding works.
Compounding involves investing your money into a well-diversified investment plan. Each time you deposit, a snowball effect takes place. Your plan size grows as the original investment plus the income earned from this investment plan increases. Of course, returns are never guaranteed. Markets can drop and you could lose more than your initial investment.
Let’s see how compounding could look for a well-diversified investment plan. Note how compounding is even more powerful when adding a regular monthly deposit to your portfolio.
Starting Amount | Duration | Monthly Deposits | Return* | End Amount |
€10,000 | 10 years | €0 | 7.5% | €20,610 |
€10,000 | 25 years | €0 | 7.5% | €60,983 |
€10,000 | 25 years | €100 | 7.5% | €145,360 |
€10,000 | 25 years | €500 | 7.5% | €482,871 |
Having patience can help you achieve your goals
When investing long-term, it is important to set goals that are manageable and realistic. It also makes sense to give yourself time to meet those goals. Unless you win the lottery, it is unrealistic to expect financial milestones to be reached overnight. Be mindful, set reasonable goals, and have patience.
Global stock markets can always be threatened by rising inflation, political uprisings, natural disasters, or supply chain disruptions. And if you constantly react to market fluctuation, not only will you pay a price with trading fees, you will also play an emotional price with fear, doubt, uncertainty, or regret.
It can be overwhelming, but don’t panic. Instead, focus on what you can control: making rational investment decisions and following a consistent plan for the long term. Let time be your secret as well.
Saxo’s new goal-based wealth management service, SaxoWealthCare, can help you create a personalized portfolio to reach your financial goals based on your time horizon and risk profile.
To learn more about SaxoWealthCare, click below:
Access on SaxoTraderGO
Access on SaxoInvestor
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