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
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
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:
- How you can learn from one investor's stupidity.
- Dividend stocks to get you through a bear market.
- Why you've missed the best day to buy.
