Stop Waiting for the Crash

Picking the exact market bottom to invest may make you feel like a superhero, but in the long run, you don't have to be a superhero to make money investing.

Experts trying to call a bottom in stocks have been thwarted at every turn. When things start to look like they might finally get better, the market finds a way to go lower still. You don't want to waste your money investing into a losing market, but how do you know when it's safe to get back into the water?

When will it end?
The way the markets have steadily moved downward over the past couple of months has felt like torture. Take Monday, for instance. The Dow quickly moved up nearly 100 points in response to the reported government bailout of Freddie Mac (NYSE: FRE  ) and Fannie Mae (NYSE: FNM  ) . Yet just half an hour later, the Dow had lost all those gains, as concerns about Washington Mutual (NYSE: WM  ) and regional bank National City (NYSE: NCC  ) weighed down the market. After dropping as much as 120 points, the average made back some of its losses, ending down 45.

The one-step-forward, two-steps-back pattern has been around for nearly two months now. Although the S&P 500 has lost almost 15% from its May highs, the move down has been unusually gradual, with just three trading sessions seeing closing drops of more than 2%. And we've seen frequent intraday recoveries, like yesterday's, when the Dow went from a loss of more than 200 points all the way back into positive territory -- before finally finishing with a loss of more than 90 points.

Waiting for the starting gun
What's been missing so far from this move down in the markets is a good old-fashioned crash. Consider some of the recent short-term bottoms in the market:

  • On Feb. 27, 2007, the S&P dropped 50 points in response to the Chinese Shanghai index falling sharply. After just a couple of months, the markets were heading back toward new highs.
  • On Aug. 16, 2007, the S&P lost more than 36 points during trading as the true extent of the subprime crisis became clearer. But the index ended the day with a small gain.
  • This January, the S&P fell almost 10% in a single week, after weeks of rumors about Countrywide Financial's possible bankruptcy. Yet it made back most of those losses by the beginning of February.
  • In March, the S&P dropped nearly 60 points in a day and a half in response to the Bear Stearns collapse, but recovered when the Fed-supported JPMorgan Chase (NYSE: JPM  ) buyout was announced.

It's clear that we've been trained to look for cataclysmic days as potential turning points in the market. And in a vacuum, investing on the most volatile days has been the smart move -- at least in the short term.

Not that easy
Yet when you look at the bigger picture, waiting for those potential crash days to invest hasn't automatically been profitable. Consider:

Date invested in S&P

Index Change to Date

Feb. 27, 2007

(13%)

Aug. 16, 2007

(14%)

Jan. 22, 2008

(7%)

March 17, 2008

(5%)

Source: Yahoo! Finance. Does not incorporate dividends.

Even though each of these days turned out to be a short-term bottom for the market, none of them proved to be the ultimate bottom. Trying to guess which day will be the "real" low for a bear market has proven next to impossible.

On the other hand, there's not always going to be a selling climax to guide your decisions. Sometimes, market drops come without fanfare or accompanying news events. And if you decide to hedge your bets by deploying only part of your cash at a crucial time, then you may well get stuck on the sidelines as stocks take off -- as they did after the March 2003 lows.

Moreover, just because the markets are at new lows doesn't mean the individual stocks you want to buy are cheap. Even with yesterday's new two-year closing low for the Dow, stocks like Baxter International (NYSE: BAX  ) and General Mills (NYSE: GIS  ) rose to new 52-week highs. You'd have been better off buying them months ago.

The simple solution
Rather than waiting for a crash that may never come, a regular investment plan means you'll never get stuck out of the market. You may not get the absolute best price you want, but over time, the risks of being out of stocks have far outweighed the risks from owning them.

To learn more about bear market investing, read:

JPMorgan Chase is a Motley Fool Income Investor recommendation. To learn more about how dividend stocks can help protect your portfolio from down markets, try Income Investor free for 30 days.

Fool contributor Dan Caplinger hates bear markets as much as the next investor. He doesn't own shares of the companies mentioned in this article. The Fool's disclosure policy won't keep you waiting.


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Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On July 16, 2008, at 5:15 PM, hughmcd wrote:

    Carpo Diem

    ... I am in harmonious tune with the sentiments expressed in this article . It is for 'Fools' and the less well educated investors out there to realise that there are great opportunities out there in not just bull markets , but especially in bear markets. By investing at these particular moments in time , one can have enormous gains (and satisfaction ) when the clouds lift ...... as they always do !

    ........... seize the moment !

    hughmcd

  • Report this Comment On July 16, 2008, at 7:21 PM, FOOLBEFREE wrote:

    Totally agree. These are the months to buy. Wait for pullbacks like yesterday 7/15/08 to buy, not today. I like buying when the VIX is over 25. On Jul 15 the VIX was over 30--->time to buy, go shopping.

    I bought several stocks on 7/15.

    Also, all the indexes are close to support levels, the Dow support is around 10,750.

    Maybe the bottom is near. You will never know, so I do not spend all my $ now.

    Next time I buy is when the VIX is over 25 and the Dow is approaching that support level of 10750.

    Of course the simple solution is "Rather than waiting for a crash that may never come, a regular investment plan means you'll never get stuck out of the market."

    Anyway, if we buy (all the time even when the market is going up) the good companies that survive recessions and have great megatrends, we will be ok with lots of $ in 5 to 10 years.

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