Whether you’ve been investing for four decades or four weeks, you’ve no doubt heard this classic piece of investment advice: buy low and sell high.
And it’s generally good advice because the less you pay for your investments, the greater your chances may be for earning bigger returns.
But how low is low? Since stock prices have already fallen so much, shouldn’t you wait until the market hits bottom before investing?
Ideally, that would be a smart move. In reality, however, it’s impossible for anyone to predict when a bear market will hit its lowest point.
Did we bottom out before the huge rally on Oct. 13, which turned out to be the stock market’s biggest day in seven decades? Or are we going to bottom out following the drop of 733 points on Oct. 15, the second-worst day ever for the Dow Jones Industrial Average?
Given such wild extremes, it’s pretty hard to project when the market will finally hit its lowest point. Still, identifying the bottom isn’t strictly a matter of guesswork because we do have a history that we can study.
Of course, in the investment world, what’s happened in the past can’t necessarily predict the future.
Nonetheless, it’s also true that the financial markets over time, have shown some definite patterns. Consequently, it’s interesting to note that, since 1900, the average bear market has lasted slightly over 13 months, according to Ned Davis Research — and the current bear market is 12 months old. So, unless we are facing a truly disastrous economic outlook, history suggests that our present bear market could be close to running its course.
If we are nearing a market bottom, what does it mean to you?
It means opportunity. A bear market tends to bring down the prices of most stocks — even those that represent strong companies with good prospects.
Right now, you have a chance to buy these quality stocks at lower prices. And buying quality stocks at good prices can be a formula for long-term investment success.
But what if we’re not yet at the market bottom? If you buy stocks now, and the market declines further, won’t you be making a mistake?
That depends, in large part, on how much farther you think the market may fall.
Following the Oct. 15 drop, the S&P 500 was down 38 percent in 2008. That’s already a pretty big drop and it’s certainly big enough to have dragged down the prices of even good stocks.
Could these prices fall further? Of course. On the other hand, quality stocks are typically the first ones to bounce back when the market recovers, so if you wanted to wait until you were sure we hit rock bottom before investing, you might miss the first stages of a rally, which is when the biggest gains typically happen.
In all likelihood, we are in for more volatility in the months ahead. And it will only be at some point in the future when we can look back and truly identify the market bottom. By then, it may be too late to take advantage of it so don’t miss the opportunities you have today.
Scott Flake is a financial adviser with Edward Jones. He hosts a weekly informal investment discussion on Tuesdays at 10 a.m. at Gerardo’s Italian Bistro. For more information, call (928) 468-1470.