The stock market has taken a calamitous turn for the worse due to the shutdowns associated with the COVID-19 pandemic. By several measures it has been the fastest, most severe decline on record.
Yet stocks since have recovered ground, even as millions file for unemployment and tens of thousands of businesses remain essentially closed.
That has a lot of people suggesting that the wild ride for stocks isn’t over and that a new decline is imminent. After that, they posit, it will be time to buy stocks once again.
Will you know when the stock market has bottomed for good, if it hasn’t already? Will anyone? Not to ruin the ending here, but you won’t. Nobody will get it right.
Of course, that won’t stop dozens of pundits from trying. Their game is simple: Throw out your best guess and if you happen to hit it, you look brilliant.
If you don’t, nobody will remember, except maybe the small number of people who heard your guess and invested at that moment.
The problem with bottom picking is the same as the problem with picking a top. A lot of people will get it wrong, and some will get it right by accident.
If you’re committed to investing, the goal is not to try to time your purchases but spread them out over time in a disciplined way. Regular contributions to a 401(k) for instance, or quarterly to your IRA.
It’s likely that your time horizon, when you need your investment back as cash, is long. For most investors it’s years, not months.
The thing to remember is that bull markets can go on for decades. Bear markets tend to last months. As you buy in a bull market your earlier investments begin to look better and better, but only if you manage to continue to make them.
As you buy in a bear market, assuming you have years left to invest, you’re getting a chance to replicate those early bull market prices. It won’t feel good, but cheaper is better.
Trying to guess when to sell and when to buy introduces risk. You will feel pressure to go big, to sell everything, only to watch the bull market keep climbing up. Or you could feel pressure to bail out on the deepest depths of the bear, locking in losses permanently.
Regular, periodic investing, also known as dollar cost averaging, takes away this risk by eliminating the need to guess. You’re always a buyer, in small increments.
You do eventually become a seller, but only to rebalance and take income in retirement. Even then, you will be following a set schedule, not trying to guess the best moment to take action.
MarketRiders, Inc. is a registered investment adviser. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and, unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Past performance is not indicative of future performance.