5 investment myths debunked

Inflation occurs when the prices of goods and services go up for consumers. The central bank of the affected country generally responds to higher inflation by raising its key interest rate. Looking back at history, it’s clear how inflation has chipped away at the purchasing power of cash over time.

Investing as a buffer against inflation

This can be rectified by investing in stocks, bonds, or other asset classes. However, many savers still hesitate, fearing potential losses. Investors must indeed be prepared for losses. But as we can see, cash is not a safe haven either. Putting savings to work, rather than letting them sit idle, opens up opportunities to earn returns and help offset the eroding effect of inflation.

It works just like a savings account, which usually earns interest every year – albeit more modestly right now. This is added to the initial amount and interest is included one year later. The longer this compound interest mechanism operates, the quicker the amount in the account grows. The same goes for an investment if the returns are invested on an ongoing basis. The longer you do this, the more earnings potential you can create.

Exploit the compound interest effect fully

To maximize the power of compound interest, it makes sense to invest excess savings in one go rather than spreading it out monthly, quarterly, or annually. The following chart illustrates the varying potential of the four forms of investment over time, assuming a 10% annual return and excluding any costs.

In reality, a staggered investment can reduce the return on your investment more than a poorly chosen entry point. For example, investing in US equities gradually over months between 1990 and 2024 would have missed out on an average return of up to 5 percentage points compared to investing a lump sum at the start of each year. It was up to 3.7 percentage points on average for an investment staggered over quarters.

Investing everything at once has proven to be the better option in the past.

While investors tend to remember market crashes more vividly than booms, true bear markets have been relatively rare. In the world of investing, the bear symbolizes pessimism and the bull represents optimism. As a rule of thumb, a bear market exists when prices have fallen by at least 20% within two months. A bull market sees prices rise by at least 20% over the same period.

Over the period from 1880 to 2009, lining up all the relevant days, bull markets prevailed for around 14.8 years but bear markets for only around 3.2 years.

Persevere rather than being tempted

“Buy cheap, sell dear” is an age-old truism. Consequently, many investors try to time the market, waiting for the perfect moment to buy or sell. But more often than not, they wait too long. It is usually only clear that the market has peaked once prices are already falling. And the same goes for market lows. What is “as cheap as possible”? Is it the lowest price within a trading day? Or is it the trough of a price slump in a region? Or is it a price weakness caused by a stock market crash or a global crisis?

In practice, the best days to buy or sell are difficult to detect. However, they can have a major impact on the return on your investment. The total return of global equities for the period from 2001 to 2025 shows how much this return was reduced by missing the best days.

Long-term perspective

To fixate on good timing harbors the risk of hurting returns with poor buy and sell decisions. Staying invested is usually the better option. The fear of missing out on the best days tends to fade on its own.

This trend suggests staying invested in the long term can help absorb pronounced losses.

Perseverance drives off fear

To fixate on good timing harbors the risk of hurting returns with poor buy and sell decisions. Staying invested is usually the better option. The fear of missing out on the best days tends to fade on its own.

The chart below, which ranks annual values from highest to lowest (left to right) and color-codes them by asset class, highlights just how much their gross returns can vary from year to year.

A diversified portfolio that includes different asset classes helps spread the risks more widely and leverages more opportunities for returns. A long-term investor has an investment horizon that usually spans at least five years. Historically, a balanced portfolio, which typically consists of around 45% equities and 55% government bonds, has proven to be a solid long-term core investment. Between 1900 and 2024, investors who held such a portfolio for at least five years achieved a positive gross return 96% of the time, with an annual return of 7.9% on average over the long term.

Diversified = risks spread + higher earnings potential

A balanced portfolio combines the stability of low-risk bonds with the return potential of equities. Diversification offsets price volatility, while also opening the door to a broader range of investment opportunities.

Since passive strategies usually adjust to changing market conditions at fixed intervals, for example annually, they can be temporarily exposed to greater risks or miss out on potential earnings opportunities. This is a clear disadvantage.

In contrast, active portfolio managers align their investments with the market environment as required. They can control risk and leverage earnings opportunities at all times.

Agile with discipline

There are market phases in which passive investments can perform better. However, investors that manage their portfolio dynamically based on in-depth research, carefully diversify, monitor with discipline, make far-sighted investment decisions and persevere even in turbulent times, should be rewarded with stable performance in the long term.