October 27, 2021

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– Expensive to wait to fall – E24

Nordea has been navigating the stock market for over 50 years, and it has found many myths that can cost you a lot.

Nordea chief strategist Joachim Bernhardsen.

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– Perhaps what surprised me most was that the costs of waiting for a market crash to occur before investing were so great, Nordea equity analyst Joachim Bernhardsen tells E24.

It refers to the myth and belief that one must wait to buy a stock until the market goes down.

Waiting for the market to fall has historically been a bad strategy. It shows several things: Big falls rarely come, and you lose far more than you can gain from waiting, he says.

For example, he points out that waiting for a 10 percent drop may be unwise, if the market goes up 20 percent before the opportunity arises.

You have a probability against you if you wait for the market to fall. The probability of better performance, along with the return, becomes less than the fall that you are waiting for.

The strategist further points out that because the stock market has had a positive trend, the gains of buying at discounted prices after the fall are more eroded by the fact that you lose returns while waiting for the fall.

In the past year alone, there have been new listings for the top companies several times, so selling at the top rarely pays off, according to Nordea Markets.

Don’t sell over the top

Another common myth that Nordea breaks is that one should sell at a peak.

When the market goes a lot, many people think the train is gone, but selling it is a bad strategy just because the market has peaked, says Bernhardsen.

He points out that a peak usually follows a new one, and that only this year there were constantly new records in the stock market. The market often also reaches new heights due to a strong fundamental economy.

– If you sell at the first peak, you will miss out on a lot of returns.

Of all 176 historical peaks in the past 50 years, investors received a positive return in 8 out of 10 cases one year ago, according to Nordea analysis. The average return was 2.4 percentage points higher than the historical peak, compared to a non-peak 12 months ago.

– Trends in the stock market are long. Of course, you can’t rule out being lucky and selling at the peak just before the fall, but historically this has rarely happened.

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Run when you can

Nordea also dispels the myth of “run while you still can”, that is, sell everything once the market goes down for fear of losing all of your money.

Selling right after a small drop in the market, say about five percent, has also proven to be a bad strategy historically. The probability of a positive return three to twelve months after a market decline was approximately equal to the development in the markets without significant declines.

The reason is that the market has historically been strongly inclined to rise again after a fall. This also explains why we see a higher average return in the post-market downturn periods than in the other periods.

And the myth that “investing everything at once never pays off” is inconsistent with historical data, according to Nordea.

Again, you will forfeit the return on the money previously invested. If you are concerned about the risk in the portfolio, the brokerage recommends spreading the funds across a mix of asset classes, ie different investments such as stocks and fixed income securities.

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Although Nordea’s analysis is based on data from global stock exchanges as a whole, there is not much to suggest that the development is different on the Oslo Stock Exchange.

This legend is true

But there is one myth that has held up well over the past 50 years: “Time is your friend.”

With a one-year time horizon, in nearly 80 percent of cases you’ll get a positive return. By extending the time horizon even further, you will in more and more cases ensure a positive return.

Historically, not even the most ill-fated investors have ever lost money with a time horizon of 12 years or more, Nordea discovered.

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Advice based on faith and hope

Obviously, Bernhardsen is that the analysis is based on history in the global stock market, and that no one can predict exactly what will happen in the future. In addition, one can get lucky, even if the odds are against one. The most important thing is to distribute investments that are well adapted to the risks you are willing to take.

We want to end the lives of many of the things you hear in the media and in social media, which often give advice that is not rooted in empirical data (actual experiences, daily journals).

Investment boards have become public property, but they are often based on faith and hope, he said.

The number of private investors on the Oslo Stock Exchange has risen rapidly during the pandemic, and a record number of new arrivals have flocked. As there were no more young people in the stock market.

Young people are increasingly looking for advice on social media to learn more about saving and investing, something many have warned against.

Finanstilsynet is also concerned that more people appear to be basing their investment decisions on social media campaigns that contain misinformation or are highly misinformed.

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