Has the Stock Market Hit Bottom? Here's a Better Question to Ask.

Over the past six months or so, the stock market -- as measured by the S&P 500 index of 500 of America's biggest companies -- has fluctuated considerably. During that period, the S&P 500 topped 4,000 several times and also slipped below 3,600. Volatility is par for the course with the stock market, though. Indeed, the S&P 500 was recently down more than 15% from its 52-week high.

It's enough to cause some investors to question whether the market has now hit a bottom, and whether it's a good time to buy stocks now. That's not a very useful question to ask, though. Instead, investors might ask, "Is now a good time for me to buy stocks?"

Image source: Getty Images.

Some stock market history

A brief look back at some stock market history can be enlightening:

Data source: The Motley Fool.  
* with dividends reinvested

One thing you might notice is that the stock market often moves in big ways -- double-digit gains (and, sometimes, double-digit losses) are far from uncommon.

Try now to imagine yourself as an investor with cash in hand at the beginning of each year. In 1995, you might have assumed that once the market has surged by close to 40% in a single year, it's unlikely to rise in the following year. You'd have been wrong, though -- it popped by more than 20%. Many might have thought that surely, it couldn't rise again -- but it did, by more than 30%. Then there were two more years of double-digit gains.

It's likely that more than a few investors exited the market during that period, sure that a drop was around the corner. They'd have lost out on a lot of gains, though.

Meanwhile, if you thought that the market had hit a bottom in 2000, after it dropped 9%, you'd have been wrong again, as the S&P 500 fell again in 2001 -- and then in 2002, before posting a nearly 30% gain in the following year. By now you should be seeing how you can easily be wrong, thinking that we're near a bottom -- and that trying to time the market is a rather futile endeavor.

Is it a good time for you to buy stocks?

Instead of wondering whether the market has hit a bottom, making it a perfect time to invest in stocks, a better question to ask is: Is it a good time for me to invest in stocks? Here are some indicators that it's a good or bad time:

It's likely a good time for you to invest in stocks if:

• You are armed with money you won't need for at least five or so years (if not more, to be more conservative) -- since the market can be volatile over the short term and you don't want to have to sell during a downturn.
• You know what to expect from the stock market -- such as volatility and average annual gains of 10%, give or take a few percentage points, depending on the particular years in which you invest. 
• You have a decent understanding of investing basics and can research and choose stocks on your own -- or you're planning to invest in one or more low-fee, broad-market index funds, which are terrific for any kind of investor, really.
• You have a long-term focus and plan to buy stocks with the aim of holding them for the long term.

It's likely not a good time for you to invest in stocks if:

• You don't know the first thing about investing. (If that's you, take some time to start learning.)
• You have high-interest rate debt, such as that from credit cards, to pay off. (You don't want to be aiming for 10% to 15% returns in stocks while paying 20% to 25% in interest.) Pay off any high-interest rate debt as soon as you can.
• You don't yet have an emergency fund loaded with at least a few months' worth of living expenses, in case your household suffers an income setback due to a job loss or other event.

For many, if not most people, any time can be the right time to start investing, whether the stock market has risen or fallen a lot lately. After all, if you're investing for the long run, the market will likely end up higher than it is now a decade or two hence.

One good investing approach is to dollar-cost average -- investing a set amount in stocks regularly, in good times and bad, as you'd do with a 401(k) retirement account, for example. Such an account will regularly receive a portion of your paycheck and it can automatically plunk it in investments you choose -- such as a low-fee index fund or two.