Last week, the US and Iran signed a declaration of intent to end the war in the Middle East. The preliminary agreement is to be finalized in further negotiations over the next 60 days. If this agreement holds and the Strait of Hormuz is reopened for shipping in the long term, this could lead to lower oil prices in the second half of the year than between March and June, a brighter global economy, and support for financial markets.
Is now the right time to invest?
However, an agreement has already been priced in by equity markets—by 12 June, the Swiss equity market index SPI was already trading above its pre-war level from February, when the Middle East conflict began.
Another reason for caution: There is no guarantee that normalization in the oil market will actually occur. It is possible that the infrastructure is so badly damaged that, despite the reopening, normalization proceeds much more slowly than expected. Or the two parties could fail to reach an agreement in the still-unresolved discussion about Iran’s nuclear program, and the situation could escalate again in the months ahead.
Investing: In tranches and with a long-term horizon
With these arguments in mind, the question arises as to whether today is really the right time to enter the market. No one can say whether today or tomorrow is the better time. In our view, however, this is not decisive if investors take two pieces of advice to heart: Invest in tranches and with a long-term investment horizon.
To illustrate, let us take a look at the Swiss Performance Index since 1987. If one had managed to invest in the most favorable entry month each year (at the beginning of the month with the lowest SPI level), the average performance after one year would be around 21%. If one had invested in the least favorable entry month (at the beginning of the month with the highest SPI level), the average performance would be 1.5%. If one had invested regularly throughout the year (investment amount evenly distributed over 12 months), the performance would be around 9%.
If the investment is not just for one year, but over 10 years, the annual performance with the most favorable entry month is 10.5%, the least favorable entry month is 8.5%, and regular investment throughout the year is 9.2%.
Savings account not an alternative to investing
For comparison: Since 1987, the savings account would have yielded an average of around 1.5%. Over the next 12 months, it is likely to be even less: Last Thursday, at its quarterly monetary policy assessment, the Swiss National Bank (SNB) decided to keep its key interest rate at 0%. We expect the SNB to maintain key interest rate at the current level over the next 12 months and to implement a first rate hike to 0.25% only in a year.
Over the long term, it therefore plays a minor role whether one invests at a good or bad time. The main thing is to invest, as the difference in returns between a savings account and the SPI—regardless of the entry point—is significant.
The risk of investing at the wrong time can be further reduced by staggering the entry. Investing in a broadly diversified portfolio reduces value fluctuations during the investment period.
