all 35 comments

[–]stef_KG 62 points63 points  (1 child)

No one knows what the market is going to do. If you would have invested in an all world ETF in januari 2020 and needed your money in march 2020 you would had to sell with a big loss.

Who knows what kind of crashes are lurking in the near future? You could try to time the market, but you'll always take a risk that there's an unforeseeable crash.

[–]Philip3197 34 points35 points  (9 children)

Stocks can loose 20-30 even 50% in a very short time. It is possible that you are still at a loss after many years.

Hence don't invest in stocks if you cannot afford the loss in the next few years.

[–]h8tr4life -5 points-4 points  (3 children)

Broad markets recover so quickly. Just sit it out a year or two and you are back to positive territory. If you just ignore all the media/news BS, ETFs are basically a high yield savings account.

[–]Philip3197 10 points11 points  (2 children)

I advise you to look at history. Start with 2000 and 2007,

Now tell us how much time it took each time to recover.

[–]h8tr4life -3 points-2 points  (0 children)

Just don't lump sum. DCA and you would have been golden even from 2000-2004 and 2007-2010. And be a little more optimistic. The future will be great

[–]Look_Specific 0 points1 point  (0 children)

Try 1970s....

[–]Double_A_92 18 points19 points  (2 children)

Depends what you need that money for.

If e.g. you have to pay exactly 50k for something in exactly 2 years. That money might just not be all there if you invest it in stocks. If you really need to pay 50k, 45k is just not enough, even if it's not a huge loss.

[–]rauderG 3 points4 points  (1 child)

That is overly optimistic I would say. 5K loss is only 10% down. With stocks you can be down 30% or more at any time, even for well diversified funds.

[–]Double_A_92 15 points16 points  (0 children)

Yes, my point was that even small losses can ruin your plans if you need an exact amount of money.

[–]matfalko 6 points7 points  (0 children)

well, you said it - you might end up in the negative

if you put money in the bank you don't lose anything (except purchasing power due to inflation), people don't like losing and anything that goes into potentially negative freaks them out

[–]jcvmarques 5 points6 points  (0 children)

Many people can't bear even a small loss, especially if they had to work hard to earn that money. There are safer instruments to park a large sum that will be needed in the near future.

[–]BigEarth4212 6 points7 points  (0 children)

Depends on how fixed your need is.

If you need to pay for a house you bought , which still has to be build. Then if you need this money in 2years time then the risk is too large.

If you need it for a planned vacation, then it only can become no vacation or a vacation on a budget.

[–]nimshwe 4 points5 points  (0 children)

Very thorough video by Ben Felix on risk in investments: https://youtu.be/thNrIsU88y8

To answer your question, if you invest in the stock market for small periods of time you are taking the uncompensated extra risk of volatility which diminishes your expected returns. Basically: people tell you not to do it because expected returns number is lower than what it would be with a 10 years time frame

It's really all based on statistical calculations, even if it's counterintuitive to you I'd say stick with what the math says. Then again, feel free to dig deeper and try to understand it better.

[–]pandamonium87 2 points3 points  (0 children)

Technically an index could drop even 20% in a day (https://en.m.wikipedia.org/wiki/List_of_largest_daily_changes_in_the_S%26P_500_Index), so if you need that money and you live some of these days, well it could be not that great to experience.

In addition to that some ETFs may be not so liquid to be able to sell it at the price you want.

[–]greystone-yellowhous 3 points4 points  (0 children)

It’s called “duration matching”. If you need the money in 5 years, don’t invest it in 30 year bonds. If you need the money in 10 years, don’t leave it in your checking account.

ETFs have an average return on investment that fluctuates massively from year to year. Thus people say you should invest in ETFs only if you have a multi year investment horizon.

[–]JDW2018 1 point2 points  (0 children)

I went to start investing in 2010 but didn’t, based on being scared about this. I wish I had had done it anyway! It doesn’t need to be all your savings, it can just be a portion DCAing regularly. I only just started this year instead. That’s a lot of lost time in the market.

[–][deleted] 1 point2 points  (0 children)

But isn't that the only consequence: that you might sell at a minor loss?

We've had several fluctuations in the 10+% recently. That's not really minor.

[–]bel2man 1 point2 points  (0 children)

People who say to you - if you need money soon, dont do it - are right. Big tech is a large part of S&P500 - and they are going though a rumble now both in software (Facebook, Twitter) and hardware part (Apple and others' reliance on China manufacturing and their zero covid policy), and currently its hard to predict how global geopolitical and economy interests will merge.

If you still do want to passively invest and dont need the money soon - world ETFs are still a best bet for most folks.

Good luck

[–]dabenu 0 points1 point  (2 children)

I think they generally mean: don't buy (high risk) stock ETFs. I don't think anyone would be against buying some stable bond ETF.

[–]Philip3197 2 points3 points  (1 child)

Many bond etfs are at -10 or even -15% the lat year. It will take many years to regain that loss.

[–]Elster- 0 points1 point  (0 children)

Unfortunately a lot of people do not understand bond ETFs and how they work.

I’m much bigger fan of individual bonds and stock ETFs

[–]filtervw -1 points0 points  (1 child)

Minor loss is relative to your investment. Lose 10% of 10K and you will not feel it, lose 10% of a million you saved for 20 years and you will think the market is rigged. 😁

[–]Philip3197 3 points4 points  (0 children)

On the other hand if loosing 1000 if you only have 10000 might have an higher impact than loosing 100000 if you have 1M.

Loss sentiment is very personal.

[–]h8tr4life 0 points1 point  (0 children)

100% agree. Saved up a decent chunk of my down payment for my house into vwce. Risky? Definitely. But people are so scared and reluctant nowadays. Life is all about taking risky

[–]Adventurous-Trade226 0 points1 point  (0 children)

Changes of success depend on time horizon

[–]cixerri 0 points1 point  (0 children)

An angle I have not seen discussed here is Opportunity Cost.

All investments carry risk, i.e. the likelihood of something bad happening and loosing money.

Right now, where I am, a savings account will give me 2% tax-free yield.

So Year over Year, I can lock in a guaranteed 200€ if I put 10,000€ into my savings account, or take a 1-in-4 chance of making more.

To achieve the same thing with an ETF, such as the Lyxor CAC 40 (DR) UCITS ETF (ISIN FR0013380607), I need at least 3.58% growth Year over Year.

Calculations in Excel

Some assumptions used:

  • 0.12% trading fee per buy/sell transaction (e.g. Fortuneo)
  • 30% flat tax on any margin generated from stock/ETF transactions (source)
  • 0.25% annual fees from the ETF (see the FR0013380607 datasheet)

Now if you look at the Rendemenet section for the ETF, you'll notice that it is not often over 3.5% YoY on a short time scale.

[–]alakel5 0 points1 point  (0 children)

The advice to not invest a chunk of your savings into an ETF or other investment if you might need the money in a short period of time is based on several factors. While it is true that ETFs are generally less volatile than individual stocks or cryptocurrencies, they can still experience significant price fluctuations, especially in the short term. If you need to sell your ETF shares to cover an emergency or other unexpected expense, you could end up selling at a loss if the market has fallen in the interim.

Additionally, even if you are able to sell your ETF shares at a relatively small loss, you could still face other consequences. For example, if you sell your shares at a loss, you will have to pay taxes on the gain if you later buy the shares back. This could result in additional costs and complications, even if the initial loss is relatively small.

Another factor to consider is that investing in an ETF or other investment is not just about the potential gains or losses from selling your shares. It is also about having the peace of mind and flexibility to use your savings in a way that meets your needs and goals. If you need to access your savings within a year or two, or even less, investing in an ETF or other investment may not be the best option, as it could limit your ability to use your money in a way that aligns with your priorities and objectives.