ETF investors wishing to deviate from their savings plan should ask themselves one question: is the market undervalued now? If you want to invest a large amount once, you must at least have a starting position that is not too expensive for a good return.
But is the market currently cheap and undervalued? Let’s look at the relevant factors that in turn can answer that.
ETF investors: P / E, time and average return
A first clue on this issue may be the price-to-earnings ratio (P / E) in a broad market. Recently, there have been headlines that the S&P 500, a well-known American cross-section, has fallen to below 20. This has contributed to, among other things, earnings growth and slightly falling prices.
What exactly does this value mean? A P / E of 20 means that if the stock stagnates, an earnings dividend of around 5% per annum will be possible. That is why we are now just over it. Although it is a solid valuation target, ETF investors would need moderate growth to get a market interest rate return.
The time factor is also relevant to the average return. Despite falling share prices and a cheaper P / E ratio, the market situation is currently more uncertain. War, interest rates and inflation can slow the economy. And thus possibly in the short and medium term returns for ETF investors. On the other hand, with a long-term perspective and extending over years and decades, the risk / return ratio appears to correspond to previous total returns. After all, there have been rising interest rates, inflation and wars before.
Changed market setting
But ETF investors who want to answer the question of whether the market is cheap now should also consider the overall changing framework. We have years behind us that were marked by low interest rates and a very expansive monetary policy on the part of the central banks. That, in turn, is changing right now. Rising interest rates can also put the economy back on track due to interest rates on borrowed funds.
This shows that the question is not so easy to answer. Alternative products such as time deposits are likely to become more relevant. But in fact, one factor is the one that has the most relevance: In what period do you invest?
ETF investors who are now looking for a way to invest their money for three to five years may want to think a little more carefully about the current market attitude. However, those who plan to invest for decades do not have to worry too much about the issue. What is certain is that the S&P 500, for example, has fallen by more than 20% since its record highs. This at least creates a cheaper purchase price than a few months ago.
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