Stop Trying to Perfectly Time the Market Bottom

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’.

    Instead of striving for perfection, plan for imperfection.

    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.

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    Current Bear Market vs Past 2 Bear Markets

    The stock market is in the crapper. Today alone (March 12, 2020) the S&P 500 fell by 10%. That was the second worst day since 1987.

    The market is down about 25% from it’s highs. Believe it or not, the market’s all time high was about a month ago.

    How far will this go?

    I compared the current bear market to the previous two bear markets in 2000-2002 and 2007-2009. As you can see in the chart below, the current bear market (to March 12, 2020) is only about half the depth of the previous two.

    Also, the speed of the current decline is blindingly fast compared to the previous two bear markets. During the last two bear markets it took about 250 days to decline as far as we’ve declined in just 18 days.

    It’s quite unbelievable. The current decline is closer in speed to the crash that happened after the Lehman collapse – which occurred in the middle of the 2007-2009 bear market.

    Given the severity of the coronavirus impact to the real economy, the current bear market might only be half finished. The news flow continues to worsen. Still, over the past couple days I have started to pick away at a number of dividend paying stocks (like RY, TD, BCE, IBM, MMM to name a few). Because you never really know when it’s over.

    I look at it like I’m trading my capital for a permanent and growing stream of income. Yields on some dividend-growers are around 5-6%. Even if the current yield was my only source of return I’d be reasonably happy. However, the stocks I’m buying should continue to grow their dividend over time, raising the yield on my initial investment.

    I’m probably early and the market will continue to decline. As the market declines I’ll continue to buy more. The lower it goes, the more aggressive I’ll get. That means at some point I’ll start shifting my purchases to some of the big tech names that don’t necessarily pay dividends.

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    Stock Declines from Recent Highs

    Another short post. I’m just sharing useful information as I see it.

    This bear market is quickly creating opportunities for long term investors. Many brand-name stocks are down considerably from their recent highs. Some of these companies will be devastated by the coronavirus. Others marginally impacted. Do your research.

    This bear market is quickly creating opportunities for long term investors.

    The market is still in the shitter so stocks may continue to decline in value. I would be cautious when putting new money to work. But the stocks listed below are on sale right now.

    Think about it this way: if there were a pair of Nike Air Max 1’s you had your eye on for a year and suddenly they dropped in price by 25%, would you buy them?

    As of 3pm on Wednesday, March 11, 2020 the following brand-name stocks have dropped up to 69% from their recent highs:

    Lyft: -69%
    Pinterest: -59%
    Expedia: -47%
    Snapchat: -46%
    Uber: -45%
    Tesla: -36%
    Twitter: -35%
    Disney: -33%
    Shopify: -32%
    Intel: -26%
    IBM: -26%
    Facebook: -24%
    Nvidia: -22%
    Google: -21%
    Microsoft: -20%
    Amazon: -17%
    Apple: -16%
    Netflix: -11%

    Source: Jon Erlichman, anchor for Bloomberg’s “The Open”.