Your ETF can lend securities or swap returns with financial institutions. If the counterparty defaults, your investment is typically well-protected.
You can eliminate company-, sector-, and country-specific risks by diversifying your investments broadly.
Market risk affects all investors, but long-term investing usually smooths out short-term fluctuations.
Mean reversion refers to prices trending toward an average over timeâhistorically, the MSCI World has returned about 7% annually.
Avoid panic selling during short-term declines; over time, returns are generally positive.
Like any investment, ETFs carry risks. In return for investing your money, you are rewarded with potential returns. A general rule of thumb is: the higher the risk, the higher the possible returnâassuming the investment performs well.
However, you are not completely at the mercy of risk. You can strategically choose where to take risks and keep them relatively low through diversification and informed decision-making.
Donât Put All Your Eggs in One Basket
Relying on a single company is risky due to factors like competition, regulations, and management. The same applies to industries and countries, as their future performance is hard to predict.
You can eliminate company-, sector-, and country-specific risks through diversification.
nstead of picking a few stocks, invest in hundreds or thousands of companies across industries, regions, and continents.
The easiest way to achieve this is by investing in globally diversified ETFs, reducing the impact of company bankruptcies, regional downturns, or industry slumps on your portfolio.
Individual Stocks vs. Germany vs. Global Index
Compare the performance of 3 German companies (Fresenius, Siemens, and BMW) with DAX and a globla index (from year 2002 to 2021):
Aspect
Fresenius, Siemens, BMW
DAX (German Stock Index)
MSCI ACWI IMI (Global Index)
Composition
3 German Large-Cap Stocks
40 German Large-Cap Stocks
~9,150 Stocks from 39 Countries
Diversification
Poor
Moderate
Very High
Annual Return (Nominal)
5.2%
5.6%
8.7%
Volatility
27.7%
24.4%
19.8%
Maximum Drawdown
-55.5%
-43.9%
-42.0%
The global index shows the highest nominal returns (before taxes and deductions) and lowest volatility (less variation in annual returns).
The maximum drawdown (largest observed loss) is also lowest in the globally diversified index.
This suggests that broader diversification leads to higher stability and better risk-adjusted returns compared to focusing solely on individual stocks or a national index.
Long-Term Stable Returns
Even well-diversified ETFs like the MSCI ACWI IMI Index have experienced varying returns and losses over the years. If you had sold shares just before a downturn and needed to sell again at that moment, you would have incurred a loss. Therefore, itâs essential to consider how much money you can set aside for the long term.
Over a 10 to 15-year period, investors have consistently achieved positive returns. Holding investments over the long run allows you to ride out market downturns and benefit from lower prices. The longer you hold ETFs, the more their returns tend to align with an average value â a statistical effect known as regression to the mean. Holding MSCI World ETFs for an extended period reduces the impact of short-term fluctuations on overall returns.
A study comparing MSCI World portfolios from 1969 to 2018 shows how average returns evolve over different holding periods. The graph illustrates the worst (red), best (green), and average (blue) performances for holding periods ranging from 1 to 40 years, highlighting the benefits of long-term investing.
Avoid panic selling
If you had sold at the worst possible moment, you would have realized a loss. However, if you had waited out the downturn, you would have seen gains after 10â15 years. Itâs important to stay calm, even when your portfolio shows losses for a while. Historically, the stock market has always recovered over time đ.
Risk-conscious investing pays off
There is always a residual risk that cannot be diversified away: an emergency might arise, requiring a large sum of money, or the economy could enter a crisis. Thatâs why you should only invest as much as your personal risk tolerance allows.
Your acceptable risk level depends on factors such as age, life stage, income, and personal circumstances. Asset allocation helps you determine the right balance between risk-free and risk-bearing asset classes in your portfolio.
