How do stock market investments work
How I bring my inner market timer to its knees
If you want to build wealth, then come up with a clear strategy and implement it. Come what may.
The most important thing is to make it clear to you what the goal of your wealth accumulation is and what the corresponding investment mix should look like. It doesn't really matter which product you ultimately choose.
The difference between success and failure therefore makes a clear plan and the guts to stick it out in the long term. This is your recipe for success for building wealth.
The two pillars of freedom
After some back and forth, I figured out my strategy. However, it is not just my assets that are at stake here. It is the capital of the entire financial fortune family. I don't want to make any mistakes.
Thanks to our very high savings rate, we can invest money every month. We only hold a small nest egg. Anything beyond that is pumped into wealth accumulation.
Our investment strategy is based on two pillars:
- Stock market
The first is our two rented condominiums in Prenzlauer Berg and our own home.
The motto here is quite simple: Reduce debt!
We achieve this through a high repayment rate and special repayments where possible and sensible. Unless we are completely wrong with our road map to financial freedom, these debts should be paid off in the next ten years.
Full against the wall
It's a bit more complex with stock market investments.
We spent a long time trying to find a strategy with which both Ms. Finanzglück and I feel very comfortable.
We have chosen the following approach:
- We invest passively in just three ETFs.
- Our investment horizon is forever - we only buy, not sell.
- We have set a target weighting between the three ETFs that we try to restore with each new investment.
- We do not practice market timing.
The first three points work so far without any problems.
There is a problem with the fourth point. At the moment I am completely crashing into the wall.
A little digression on market timing
Buy low, sell high
Investing in the stock market can be that easy. Every peat nose should be able to do it.
Really? Studies are constantly being published that doubt this. Predicting price developments has more to do with clairvoyance than with a proper analysis. The short-term developments in the markets cannot be reliably projected.
You probably won't find the perfect times to buy and sell.
Most of the price gains (and losses) are only made on a few days a year. If you miss that, then you hardly have a chance to catch up again. We're not even talking about the lost dividends.
Market timing doesn't work - neither for professionals nor for us small investors. I am convinced of that.
Theory vs. Practice
Therefore, market timing has no place in our stock market strategy. We just always buy, no matter where the markets are.
Temporal diversification is the name of the game. Not market timing.
Specifically, I wait until a middle four-digit sum has accumulated on the current account (beyond the nest egg). Then I throw Excel on.
How many shares in the three ETFs do I have to buy in order to restore the desired target weighting? That is then pulled through.
So far, so clear. Actually not that difficult. Unfortunately, this works better in theory than in practice.
Because secretly, without noticing, I threw my principles overboard. I subconsciously try to time the market.
How did I find out?
There were two incidents that puzzled me.
My poor little penny
For the birth of our little groschen, we received some generous monetary gifts from the family. We decided early on to feed our two Lütschen their ETF portfolios with the cash gifts. We regularly save an MSCI World ETF for the little ones. We collect gifts of money separately in our current account until a four-digit amount is accumulated. Then the amount is invested in one fell swoop.
Groschen is now nine months old. The young lady is slowly fledging and has already decided to move out of the parents' bedroom.
What about their cash gifts for the birth? They are still sitting nicely in their parents' current account - for nine months. I just couldn't have the heart to invest. Somehow I was afraid of an imminent market collapse that would have destroyed part of my little angel's fortune.
So instead I waited - and missed the 8% gain over that period. With that I achieved exactly the opposite of what I wanted.
But that was just the first example.
Political ruin of the stomach
Our big journey is about to begin! The Finanzglück family moves to the Canadian Rockies. I'm as happy as Bolle, but I am aware that this adventure will make a big dent in our savings rate. We don't usually have the change lying around for such a trip.
So since we decided to go on our trip, I've stopped investing in the stock market and pimped our cash for it. That makes sense too. After all, we don't want to sell ETF shares to pay for our vacation.
The holiday fund is now sufficiently full. In addition, we have even saved a surplus that can actually be invested. I could have fed our ETFs with it weeks ago.
I don't have it.
Why? Because I've had a really bad gut feeling since the US elections ended. That's why I hesitate to invest our money.
The market timer has taken control
No one can predict the impact the presidency of Donald Trumpov, aka President Pinocchio, will have on short-term stock market developments. And that's all that's what market timing is all about.
We could march into the next world economic crisis with open eyes through an isolating economic and trade policy. Or the markets are experiencing their second spring due to lower taxes, less regulation and high infrastructure investments. Maybe nothing happens.
The gut feeling beats my mind here. And always firm druff.
My inner market timer has taken control. I am becoming irrational. That never goes well with an investment strategy.
I have to stop this. My previous Larifari attitude, when and how much is invested, cannot go on like this.
Now you fight with harder bandages. Nothing helps.
With shackles to success
The Finanzglück family needs firm rules in order to declare war on market timing.
From now on, investments will be made on fixed dates - quarterly.
After three months, enough liquid funds should have accumulated to be able to invest at least 1,000 euros per ETF - below that, the transaction costs are proportionally too expensive for me. If not enough has been saved, then nothing is invested and it continues three months later.
I will enter the dates firmly in my calendar and follow through. No matter what. I set the days so that they don't fall on the weekend. Investments are made in the afternoons when the markets are most liquid.
I put shackles on myself, even though it scratches my self-confidence. I admit to myself that my well-filled tummy is crazy. Unfortunately, there is no way around it.
So I'll bring my inner market timer to its knees.
Our wealth accumulation will thank us.
Do you practice market timing, consciously or unconsciously? What investment strategy are you pursuing? I'm looking forward to your comment!
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