Fear of crashes and bubbles puts off investors – but wrongly so

If you ask experienced investors what occurs to them spontaneously regarding the equity market in the eighties they would presumably say “the October crash of 1987.” Bond investors harking back to the nineties often mention the bond market crash of 1994. Is it worth investing in the emerging markets? – A currency crisis like that in 1997 could be looming. Tech stocks around the turn of the millennium? Wild dreams about the possibilities of the internet that were followed by a crash. The financial crisis and the Lehman bankruptcy in 2008? Bankers carrying cardboard boxes out of skyscrapers, and even a stock market crash.

Even those investors who were not directly involved in these events (e.g. the millennials) are constantly reminded of them. Television images and newspaper reports of anniversaries or interviews have burnt these memories permanently into the brain-synapses of many an investor and non-investor.

In fact, the DAX and S&P 500 rose three and fourfold in the “awful” eighties. In the nineties things went even better before a few disappointing years came after the millennium. Since the beginning of the seventies German shares have increased by a factor of 26, in the case of the S&P – including dividends – they have even risen 125 times on initial prices. This corresponds to annual returns of 7.2% (DAX) and 10.8% (S&P 500). In the long term, no other asset class can boast such a good performance. The bond markets and the emerging markets, which stumbled at times during the nineties, have since then also generated high returns and in some cases have even outperformed shares.

With hindsight, the aforementioned crashes during the past thirty years of the capital market’s history were often no more than mere anecdotes which, with the exception of the 2008/09 crash, had no dramatic consequences for the medium-term performance of the real economy in the highly industrialized countries.

In the global equity markets – similar to the global property markets – there are always temporary exaggerations. At any rate, there is no sign of a broad-based bubble or “naivety-driven bull market” or similar in the equity market. On the contrary: German investors still appear to find it hard to shift capital into shares with a current DAX PER of 12.5 points. Widespread market euphoria is something else.

Compared to professional investors, private investors have the advantage that they do not need to score investment successes within a twelve-month horizon, but only over the long term, including taxes and inflation. As a rule, they are net savers over several decades and do not need the assets until pensionable age. It is, therefore, a good strategy – especially for private investors – to buy into the equity market patiently and regularly and to suppress the fear of crashes and bubbles on the basis of anecdotal “evidence”.

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