It’s January 2007 in Ireland. All is great with the world, it’s like one big party that we are being told will never end. You have accumulated €250,000 that you want to invest. You already have 5 properties and you’ve heard that you can invest in a thing called an ETF. A friend tells you to invest in the MSCI World Index. You don’t know what it is, but your friend swears by it, so you stick the whole €250,000 into an ETF tracking the MSCI World Index.
The first year is great and your €250,000 grows to €273,925. And you didn’t have to do anything to make this money or deal with any banks. But then the world changes, your €273,925 falls -40% and is worth €163,451 just a year later. In a world where the value of a stock investment falls by that much, you can bet that things aren’t going well for most. Do you bail or do you stick it out?
By the end of 2010, you’re heading in the right direction and you investment has grown back to €240,158. Almost back to your original investment. If you can make it back to par, you can take your money out and you haven’t lost anything. But then the Greeks get in trouble and there’s talk that the euro is going to collapse. This makes the market nervous and your money falls back down to €228,102.
It won’t be until 2012, 6 years after your initial investment that you are in the black. The market is on the tear now but you don’t know it. Sure, wasn’t 2007 a good year and look what happened then. Do you take your money out?
In the next 6 years, there are negative returns in 2015 (-0.32%) and 2018 (-8.20%) but the rest have been positive. If you had stayed invested, your €250,000 would have been worth €435,064. But would you have stayed invested?
If you took your money out at the end of 2012 and managed to get one of those 5% per annum five year fixed accounts that the banks were offering (they were well gone by 2012), your money would be worth €339,613 today.
|Year||Growth||End of year value|
Finance tends to talk in percentages and when we talk about returns, we talk about the annualised returns. Like in the example I gave you, the annualised return was 4.73%. If I just told you the annualised return, you would go away believing your investment grew by that amount each year. You wouldn’t even start to think there could be a year when your €250,000 is worth €163,451, a drop of 35% of your original investment!
You can see that over time, investing in equities is worthwhile and you will make money, even if caught up in the worst recession in our lifetime. But if you want to make big returns, it’s going to be a hairy ride along the way and there will be time when you lose money bigly. Make sure you can handle it before you invest your money.
If you have any questions, drop me a line at firstname.lastname@example.org