How important is the entry point when investing in equities?

What do we need to consider when investing in equities? What are our expectations for our equity investments? How do we position ourselves for the next 6 to 12 months in equities and where do we see the returns in a long-term view? We shed light on these questions and share our short-term outlook as well as our assessment for the long term.

Long-term classification of equities

It is well known among analysts and investors that equities generally yield an average of 6-8% per year. Due to the high fluctuation in the meantime, this return can only be reached with a long-term investment horizon. As a rule, such a return can be achieved with a high degree of certainty over an investment period of 10 years. We put these statements in the historical context and the trend view.

The chart in the middle third shows a blue area with most of the area above the red target return of 8%. This blue area shows the 10-year average return at 11.09% p.a.

However, a longer investment horizon may be necessary in the case of extreme events. The historical analysis shows that with an investment at the peak of the technology bubble in 1999 / 2000 (orange area in the top third of the chart) resulted in a negative average return after 10 years. This is shown in the middle third of the chart with the orange area shifted forward by 10 years.

In order for this extreme event to occur, the financial crisis in 2008 was needed in addition to the bursting of the internet bubble. Seen in a historical context, these are two exceptionally large crises. The graph in the bottom third (orange area) shows that an average return of 8% per year was achieved again from the end of 2015 with unchanged investments in equities. We conclude from this that with an investment period of 17 years, a loss can almost certainly be avoided and a target return of 8% is achieved. As mentioned, the example shown contains two extreme developments that we do not expect to occur to this extent and with this frequency in the coming years. Not even in the case of the war in Ukraine.

The higher the equity ratio, the longer the required investment period and the higher the investor risk. How much risk investors can and want to take is an individual matter. And these must be determined together in order to achieve a balanced relationship between return and risk. The risk questionnaires commonly used in the financial industry are often hypothetical and not sufficiently helpful, which is why we at Colin&Cie, in cooperation with the University of St. Gallen, have developed a process that enables us to take the most comprehensive look possible at the financial situation and match it to the individual goals of our clients.

Subordinate importance of the time of entry

The right time to enter the market must be considered when investing in equities, but loses importance when investing for many years. Extreme situations, such as at the turn of the millennium with exaggeration features (see the strong deviation from the trend line in the orange area), cause us to adjust the tactical orientation of the strategies, i.e. in this case to underweight the equity quota. A broad spectrum of indicators supports us in this analysis.

European equities exactly in the long-term trend

One of these indicators are trend channels over different time horizons. As an example, let's look at the 30-year trend channel of European equities. No exaggeration features can be identified; on the contrary, equities are exactly in line with the long-term trend in this long-term view. Consequently, we assume a development in line with history with expected returns of 6-8% for the coming years.

The chart also puts the last two sharp equity market corrections into perspective: The decline due to the imminent economic slump caused by the COVID pandemic in 2020 is not nearly comparable in magnitude to the declines following the bursting of the Internet bubble in 2000 or the great financial crisis in 2008. The outbreak of the war in Ukraine caused equities to correct only slightly and can hardly be detected in the chart. Especially the last few months with the beginning of the war in Ukraine have shown that quick adjustments of the share quota can increase the error rate and endanger the long-term return if the timing is wrong. Sticking to the chosen investment strategy is important for long-term success. Our broad selection of indicators supports us in identifying extreme situations that improve the expected result through tactical adjustments of the equity ratio (temporary deviations from the neutral ratio).

Weighting of equities and outlook for the next 6 to 12 months

A development along the historical average returns within the trend channel results in a neutral weighting for equities. Equities are currently still well supported by cautious investor sentiment. However, risks will return as the year progresses with weaker economic data, leading to an increase in volatility.

Disclaimer - legal notice

This publication was produced by the Investment Office of the Colin&Cie Group. The information and opinions contained in this document are based on sources we believe to be reliable. However, we cannot guarantee the reliability, completeness or correctness of these sources. All information and quoted rates are only up-to-date at the time of this publication and are subject to change at any time without notice. The content is based on numerous assumptions made by the Colin & Cie Group. It should be noted that different assumptions can lead to materially different results. The forecasts and assessments are only current at the time this publication is prepared and can change at any time without prior notice. Past performance of an investment is not a guarantee of future results. Certain investments can experience sudden and substantial losses in value. This information and views do not constitute a solicitation, offer or recommendation to buy or sell investment instruments or to carry out any other transactions. We recommend interested investors to consult their personal advisor before making decisions on the basis of this document so that personal investment goals, financial situation, individual needs and risk profile as well as further information can be duly taken into account as part of a comprehensive consultation. The information contained in this publication is marketing material that is distributed for advertising purposes only.