It's the question that's haunted investors since the stock market's very first big pullback: Is it safe to start buying again?
As of now, the S&P 500 (^GSPC +1.02%) stands 19% below its late-December high and up a bit from the 24% loss it was nursing less than a month ago. At least on some days, the bulls seem in charge again. We've all recently relearned the hard way, however, that rebound efforts don't necessarily last. This one might not, either.
But eventually one of them will take off, prompting the question of whether it's safe to step in now that the S&P 500 is 19% under its peak price from six months ago. The answer is a "definite maybe" -- except it may be the wrong question to be asking in the first place.
Reality check
It's tricky. Much of the media's daily coverage of the stock market implies that investors should stand ready to make a move at the drop of a hat. But that's just not the case.
That's not to suggest investors should ignore it all, mind you. If nothing else, it's wise to keep tabs on the market's pulse as a whole and monitor the health of any particular stocks you may own. It's rarely the case, however, that you should feel compelled to make a long-term decision based on nothing more than short-term information.
Then there's the other misleading message subtly buried in the 24/7 coverage of stocks: that these short-term ebbs and flows can be consistently predicted with any accuracy. They can't. And that perhaps is the most problematic matter for investors hunting for the exact bottom: holding off any new trades until it's clearly been reached. If your timing is off by even just a few days, it can cost you big money.
One only has to look back to March 2020 to see this idea in action. Yes, stocks were crashing then as COVID-19 infections moved out of China and into other parts of the world. Between the mid-February peak and the late-March trough of that year, the S&P 500 fell 34%. Less than a month after making that unexpected bottom, it was up 25% from that low. Six months later it had reclaimed everything it had lost during that rout. A year later it was trading 17% above its pre-COVID peak, jumping more than 60% from the COVID crash's low.
And this can't be stressed enough: Practically nobody saw that sort of bullishness coming at the time.
SNPINDEX: ^GSPC
Key Data Points
The thing is, this phenomenon isn't exactly unusual. Some of the market's most bullish days in any given year take shape immediately after its most bearish days. The same goes for entire bull markets.
Data from mutual fund company Hartford helps put things in perspective. The organization's research points out that 34% of any bull market's best (most bullish) days materialize during the first two months of its existence, when it's not yet clear a new bull market has actually materialized.
Connect the dots. If you're waiting for crystal-clear certainty that stocks are back in a long-term rally before diving in, you're apt to end up leaving a good deal of money on the table.
It's a data nugget from Bank of America (BAC +1.54%), though, that really underscores the idea that you're better served by riding out the occasional bout of bearish volatility rather than trying to time your entries and exits. While missing the 10 biggest daily losses from each decade going back to the 1920s dramatically improved the average overall return from the S&P 500, not being invested during the S&P 500's 10 biggest daily wins of each decade in the meantime would have translated into a 90-year gain of less than 30%. That return doesn't even keep up with inflation.
Here's the kicker: Hartford's analysis indicates that half of the market's very best days over the course of the past 20 years took shape during bear markets anyway.
The question is (or at least should be) moot
In short, asking, "Is it safe now?" misses the point. While short-term speculators may worry about these sorts of timing matters, most long-term investors aren't even going to remember the particulars of the current market weakness, or recall if they stepped in closer to the bottom than not. Never mind the fact that nobody can consistently identify the market's bottom at the time it's being made. That only becomes clear after the fact.
Bottom line? Assuming you're truly thinking for the long term, don't sweat trying to figure out how far is too far. Just enjoy the fact that you can buy some stocks at sale prices you didn't capitalize on a year ago.
