I don’t know if we’re at the bottom or if the market will fall another 20%. There are smart people out there who spend every waking minute studying the markets – some think investors should start putting money to work now, others think investors should remain in cash and wait.
Who’s right? Who do you listen to?
If you’re so inclined, there are a few things that might suggest a market bottom:
- Markets no longer react (or react little) to bad news
- Nuggets of good news start to appear in the news
- Daily market moves (up or down) decline in range
- VIX index starts to decline
- 10 year US Treasury Yields start to rise
Timing the bottom is part art, part science and a massive dose of wizardry. After all, even Ray Dalio – arguably one of the smartest investors out there – has made big mistakes during the recent bear market.
Stop trying to perfectly time the market bottom! It’s almost impossible and it’s more than likely you’ll be wrong. The bigger question is does being wrong even matter?
The markets are already down about 25%. We’re closer to the bottom than we were a month ago. The bottom could happen tomorrow, next week or next July. It’s almost impossible to know. Instead of striving for perfection, plan for imperfection.
Let’s look at the last bear market that bottomed March 9, 2009. If on that date you invested $100,000 you’d have $495,270 a decade later. (See chart below.)
However, if you invested $100,000 20% before the bottom (i.e. markets continued to decline by 20%) or 20% after the bottom (i.e. after markets already appreciated 20%), you’d have $379,657 or $414,793 respectively. Still solid results for being 20% ‘wrong’.
Taking it a step further, what if you entered the market more gradually? Instead of investing a single $100k lump sum 20% before the market bottom you spread out your investment over 10 days.
This method of investing is called ‘Dollar-Cost-Averaging’ (DCA), and is a strategy aimed at reducing the impact of market volatility on a large dollar investment. In this example your portfolio value after 10 years is $410,399. This result is very close to what you would have achieved if you timed the bottom perfectly.
Of course, maybe the timing doesn’t quite work out the same this time around. This crash is different. They’re all different. Regardless, if you have cash you want to put to work you basically have 2 choices: 1) DCA into the market on a regular basis or 2) wait until the bottom is more obvious and then invest.
Either way, a decade from now you probably won’t notice the difference.