5 common misconceptions
How high is the risk of funds and ETFs?
Are they suitable for retirement planning?
They are not a new invention, but myths still surround ETFs and investment funds. Which are true and which are not? We shed light on common misconceptions about investing in exchange-traded passive ETFs (Exchange Traded Funds) and actively managed funds.
Investing small amounts is not worthwhile
Especially in Europe, the opinion is widespread that financial market investments are only something for the wealthy. The reality is different: While money in savings accounts is shrinking with near-zero interest rates, an ETF or fund savings plan can be worthwhile even with small monthly amounts. Many people massively underestimate the relevant compound interest effect.
For example, let's assume an annual increase in value of 5.3 percent. This corresponds to the average worldwide inflation-adjusted return on shares over the last 121 years (US dollars, exchange rate risks not taken into account) and represents a realistic point of reference. If you save 50 euros a month for 20 years at this rate of return, the securities account will be worth 21,063.71 euros at the end. Of this, 9,068 euros are accounted for by the increase in value. And, mind you: adjusted for inflation. Please note that past performance is not a reliable indicator of future performance.
ETFs and investment funds are riskier than shares
While ETFs and mutual funds also have price fluctuation risks, they are generally less risky than individual stocks due to their internal diversification. But there are differences. The number of individual stocks in a fund plays a role, as does the allocation to different sectors and countries. An ETF on the MSCI World Index with 1,600 shares, for example, has a lower risk than a fund that specialises in one sector.
In the case of managed funds, the quality of the management is also an important factor. This can be assessed, for example, by means of the Morningstar rating, which takes into account the fluctuation margin in relation to the (excess) return in metatrader 4 exness. This ratio is called the Sharpe ratio. Ultimately, there is a suitable ETF or fund investment for investors with a wide range of risk preferences. And you do not have to invest exclusively in equity funds or equity index ETFs. With funds or ETFs that invest in other asset classes (e.g. commodities, bonds or real estate), you can additionally diversify the portfolio risk.
ETFs and funds are not suitable for retirement provision
It is true: No one can predict the future exactly. However, with a long investment horizon of 20 years, the probability of a positive development of a broadly diversified investment is extremely high. Although the short and medium-term fluctuations of the markets are to a large extent random and occasional dips do occur, in the long run the indices have a positive tendency resulting from the growth of the underlying companies. On top of that, profit distributions in the form of dividends add to the performance of ETFs and funds.
The effect of this over the long term is illustrated, for example, by the DAX excellent return triangle: Any entry point between 1970 and 2005 led to a positive return with a holding period of at least 15 years.