Investing in the Stock Market: 3 Reasons Why You Should Start Today

Investing in the Stock Market: 3 Reasons Why You Should Start Today

The economy is trending downward, stock prices are falling, and inflation rates are on the upswing. Read on to discover why, in spite of this – or perhaps because of it – now is a good time to start investing in the stock market.

Leaving money in a savings account is a losing proposition. Inflation ensures that every franc is worth less and less over time. Anyone not content to watch their assets dwindle should invest at least a portion of their money in securities. Even if, or precisely because it has been a difficult year for the stock market.  

Why Are Stock Prices Falling?

Prices are falling across the board. Through October of this year, the Swiss Market Index (SMI) has lost 20% of its value. Uncertainty prevails throughout the markets due to the energy crisis, the war in Ukraine, rising inflation, and the trend in interest rates. In such uncertain times, large-scale investors sell their stocks, pull their money from the market, and park it on the sidelines. There’s a popular saying that “The stock market is the only place where buyers run away from a clearance sale.”

When Should I Buy Stocks?

Now could be an opportune time to start investing in stocks. Here are three good reasons to do so. The low prices at the moment are just the first reason, but not the most important one. The two other reasons point out that, in principle, there’s no truly bad time to enter the market – provided that the investment horizon is long enough:

1. You Are Buying at Low Prices

Almost all the stocks depicted on the Swiss Market Index (SMI) have lost value since the start of the year. As a result, they are now available at a comparatively “cheap” price. Experience shows that the stock market rebounds after a period of falling prices, and that within a year prices are at the same level as before. As soon as the economy has found its footing and uncertainty fades, stock prices tend to climb again. Of course, there is no guarantee, but there’s little reason to assume that things will be different this time. Anyhow, one thing is statistically proven: The stock market is always six to nine months ahead of the real economy. When the economy has bottomed out, stock market prices start climbing again.

But nobody can reliably predict when markets will start to recover or when the lowest point – the optimal entry point – has been reached. It could have happened yesterday, or only happen two years from now. Exactly when a stock market crisis began, when the bottom of the dip was reached, or when the resulting recovery began to take hold can only be determined in retrospect. That’s why it’s a good option to buy in small tranches, but to do so on a regular basis (see tip in the box below).

Tip: Invest Regularly in the Stock Market, Even in Small Amounts, Thanks to Index Funds and ETFs

Nobody can say exactly when stock prices will begin to fall, or when they will rise again. That’s why it’s advisable to invest in the financial markets bit by bit on a regular basis. If one invests monthly, they will go into the red in periods when prices fall, but then benefit fully from the upswing once prices begin to rise again. In that way, market volatility gets smoothed out.

Smaller budgets – even amounts of just a couple hundred Swiss francs – are suitable for Index Funds or Exchange Traded Funds (ETFs). These involve passively managed funds with low fees. You aren’t buying stocks outright, but rather portions of a basket full of stocks. For example, there are index funds that represent the entire Swiss Market Index and ETFs for every conceivable area of interest.

2. You Are Benefitting by Earning Compound Interest

The earlier you start investing, the more likely it is that you’ll earn a positive return. In the past, to be assured of benefitting from an upward move in prices – when viewed over the entire term of the investment -- one had to look at investment horizons of 10, 15, 20, and ideally 30 or 40 years.

In any case, there’s also what’s known as the compound interest effect. This magical effect unfurls when investment is made over the long term and on a regular basis (see tip in the box above). This compounding effect applies when, over the course of the entire investment term, any gains are immediately reinvested. Reinvestment funds take advantage of this effect, continuously reinvesting any gains that are realized.

Ideally, investing would begin when one begins working. A 16-year-old who invested 100 Swiss francs of their apprenticeship wages in a fund each month could amass almost half a million Swiss francs by the age of 65. Applying a historical average annual return of 7% in the stock market, and thanks to the effect of compounding interest, their total assets would amount to 472,043.25 Swiss francs. Of course, it’s not clear whether or when such returns will be repeated. It is, however, almost certain that anyone investing over the long term will be rewarded two-fold: through long-term rising prices, and through the effects of compound interest.

3. You Are Providing for Old Age and Saving on Taxes

The classic application of investing with a long investment horizon is old-age pension provision. In Switzerland, the 3rd pillar, as it’s called, is practically indispensable. It was actually only intended as a supplement to old-age benefits from the 1st pillar (Old Age and Survivors’ Insurance) and the 2nd pillar (pension funds/Occupational Pensions Act), but is becoming increasingly important.

The 3rd pillar comprises the restricted pension plan, also known as Pillar 3a, and the free pension plan in Pillar 3b. The kicker: Instead of regarding Pillar 3b purely as a savings account, the deposits can also be invested on the stock market. In this case, too, making regular deposits is recommended (see tip in box above). Numerous digital solutions and apps with low fees now make it very easy to invest money from Pillar 3b in funds with more or less equity shares. And anyone in Switzerland who saves – or invests – via Pillar 3a receives a guaranteed benefit free of charge: They save on taxes. Payments into Pillar 3a can be deducted from taxable income, thus reducing the annual tax burden.

Each year, the Confederation sets the maximum amount that savers or investors can pay into Pillar 3a. For 2023, this amount is 7,056 Swiss francs annually for employed persons, and a maximum of 35,280 Swiss francs or 20% of net income for self-employed individuals. However, less can be paid in, or a small amount can be invested in a fund monthly. Think about smoothing the effects of market volatility and compound interest.