Welcome to the first article on the Swiss financial blog! True to our motto “Independent financial education for successful investing”, we want to get started right away. Specifically, we turn the wheel back 30 years and compare the performance of a savings account with that of the world stock index MSCI World during this period. How much would a deposit from that time be worth today? What role does the time of entry play? And what is the meaning of compound interest? Investing instead of saving? You will find the answers in this article.
1 world share index beats savings account – investing money is worth it!
Let’s assume the following scenario: Two people have 10,000 francswhat they 30 years don’t have to resort.
Person A, let’s call her Anna, chooses a safe investment on her saving account the cantonal bank.
Person B, let’s call her Beat, makes a riskier investment in the stock exchange traded fund (ETF). World stock index MSCI World.
The MSCI World forms the market value of the largest around 1,600 companies from 23 industrialized countries away.
Finally, over the 30-year period from January 1, 1989 to September 30, 2018, Anna can 16,012 francs from their savings account (see Figure 1, yellow curve). This corresponds to a nominal increase in value of at least 60 percent or an average annual return 1.58 percent.
With simultaneous inflation of 1.16 percent (annualised), after thirty years Anna’s real value is just under CHF 2,000.
2 10,000 becomes 86,000 francs
A completely different picture presents itself with Beat: When he sells his ETF on the stock exchange again after 30 years, he is proud of it 85,948 francs to his account (see Figure 1, blue curve). This corresponds to an increase in value of 760 percent or an average annual return 7.45 percent. Or more than eight times Beat’s original investment.
What seems incredible is easily explained. Three factors play a decisive role here:
3 The uncanny power of compound interest
If Beat were to have the dividends paid out and consume them, his original investment would “only” be a good four times or more 43,796 francs increased (see Figure 1, orange curve).
The difference of more than 40,000 francs is due to the incredible power of compound interest. Albert Einstein is said to have once described the compound interest effect as the 8th wonder of the world.
4 In the long run we are all dead
Now you might argue that we’re all dead in the long run, or that a 30-year investment horizon is definitely too long.
Agreed. So let’s assume a second scenario, which only provides 10 years as an investment horizon instead of 30.
In our opinion, investments in equities should ideally not fall below this period.
In contrast to savings accounts, stocks can fluctuate greatly in the short term. The MSCI World Index suffered a price loss of over 40 percent in a single year (2008)!
5 Time of entry influences returns
This brings us to the next crux of the matter: the (supposedly) right time to start.
So let’s concretize our 2nd scenario and leave Anna (savings account) and Beat (stock ETF MSCI World) their seed capital 10,000 francs into all sorts 10 year periods have been investing since 1989 (see Figure 3).
– P artner offer –
– – – – –
We also assume that both Anna and Beat will receive the income in the form of interest or Keep dividends in your investment. Thus, both benefit from the compound interest effect.
As Figure 3 clearly shows, investing in shares yields significantly more returns than the savings account, except for two periods.
In Anna’s savings account, the period 1/1/1989 – 12/31/1998 turns out to have an average return of 3.52 percent preferably. On the other hand, the period from January 1, 2009 to September 30, 2018 did poorly for them, with average nominal growth of a measly 0.16 percent per year.
Beat, on the other hand, receives the highest annual return for his share investment for the period 1/1/1991 – 12/31/2000: 12.44 percent! On the other hand, the period January 1, 1999 to December 31, 2008 did poorly for him with a loss of 0.19 percent per year.
the global world financial crisis resp. The suprime crisis of 2008, which was triggered by a real estate crash in the USA, completely ruined its performance shortly before the sale!
6 Currency Risks, Product Costs and Taxes
For the sake of simplicity, we have not taken into account the factors of currency risks, product costs and taxes in the calculations carried out.
In terms of costs, there are usually none with a savings account. When investing in shares, the annual fees (Total Expense Ratio / TER) are now tending towards zero as a result of the strong competition on the ETF market and are therefore also negligible.
– P artner offer –
According to our experience and due to the low costs for ETFs, a currently particularly attractive broker is “DEGIRO” (link to DEGIRO Review). If you are interested, you can contact DEGIRO via our affiliate link Sign up to support our blog.
Disclaimer: Investing involves risk of loss.
– – – – –
Glad you made it this far! Here is a summary of the most important findings:
- In the long term, equity investments pay much better than the savings account!
- The compound interest effect is particularly important for equity investments and long investment periods.
- Equity investments are exposed to much greater fluctuations (risks) in the short term and are therefore only suitable for a longer investment horizon.
- The savings account practically does not fluctuate and is therefore suitable for a short investment horizon.
- The time of entry can have a major impact on the return on equity investments.
- But: There is no such thing as the “right” entry point, or it can only be determined retrospectively. Therefore our tip: invest regularly, e.g. monthly on the reference date, keep it for the long term and never engage in so-called market timing!
In the next blog post, we will further specify the investment topic and address the question of which factors are decisive when investing.
You can get a general overview of the topic of “investing” here: Learning to invest – in eight lessons.