In 2020, the world entered a bear market as the coronavirus pandemic disrupted economies everywhere. Few investors could have foreseen that event with any clarity, let alone known exactly when the market would bottom out or when it would turn higher again. But that doesn't mean investors didn't have an opportunity to buy on the cheap.
The 2022-23 bear market, while absent the pandemic precipitant, wasn't all that different. It lasted much longer, but eventually turned for similar reasons. For investors, the opportunities are once again there for the taking. The key in both cases was to use such downturns, not to time them perfectly.
A great story
Benjamin Graham, a Wall Street legend who helped to train Warren Buffett, had a story about investing that has not only stood the test of time but offers some wonderfully insightful. He explained that investing on Wall Street is like having a partner called Mr. Market. Mr. Market is prone to wild emotional swings. Some days he is excited and happy and will buy your stocks at what seem to be very generous levels. On other days, he is downbeat and pessimistic and will sell you his stocks at levels that seem cheap. The idea is to buy from Mr. Market when he's willing to sell on the cheap.
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Buy low/sell high is great advice, but it can be hard to put into action perfectly. When, exactly, will the market's mood change direction? Nobody knows, even though it is often pretty obvious when it's generally downbeat or generally positive. Trying to time the absolute bottom will drive you into sleepless nights and stomachaches, but accepting that the best you can do is to be about right will keep you on an even keel.
About right can be good enough
For example, Texas Instruments' (TXN 1.27%) stock price fell nearly 25% in 2022. That was among the steepest drawdowns the stock has seen over the past decade. The dividend yield rose toward 3%, near the highest levels in the company's history. Although the chip industry continues to face headwinds today, the 2022 decline was very clearly a buying opportunity, even if you didn't time the absolute bottom.
In fact, with a yield of 2.8%, this technology stalwart is probably still fairly attractive for long-term investors. That remains true even though the bottom appears to be behind the stock. Dismissing it just because it was cheaper last year doesn't make much sense.
There are other stocks that you could say the same thing about, including Medtronic and Hormel Foods. The key in all three of these cases, all from different sectors, is that the companies have proven histories of success and they appear to be out of favor for temporary reasons. You don't need to get the absolute bottom to benefit. You just need to have the courage to get in at a time when others may be selling, and then hold for the long term to benefit from these companies' proven abilities to grow their businesses. "About right" is all you need.
Spread your purchases out over time to ensure success
That said, you can still do just fine without even putting in that much effort. Another choice is dollar-cost averaging. This is essentially buying a set dollar amount of a stock, mutual fund, or exchange-traded fund at regular intervals. It's impossible to buy only at the bottom with this approach, as it ensures you will be buying when prices are high and when they are low.
That said, because you will be buying more when prices are low and less when they are high, your average purchase price will more than likely end up being lower on average. It sounds too easy to be true, but it's actually one of the simplest ways to increase your investment success over time. And you never once have to try to perfectly time an investment.
Another way to tap into this is by automatically reinvesting dividends, which means you buy more shares with each dividend payment. When prices are higher you'll buy fewer shares, and when prices are low you'll buy more. In the end, your average purchase price will likely be lower on average, as well. Pair that with Texas Instruments, Medtronic, and Hormel, and the investment thesis gets even better for those "about right" stocks.
Skip the pressure of being "perfect"
Investing is hard enough. Why make it even more emotionally demanding? Perfectly timing the market, or an individual stock, year in and year out is virtually impossible to do with any consistency. It isn't worth trying. Being about right is more than enough and there are plenty of ways to do it, from dollar-cost averaging (the punt option) to simply identifying when the market is pessimistic (using tools like valuation metrics and dividend yields). Maybe (most likely) you won't predict the bottom perfectly, but you can still achieve great financial success by getting close.
