Everyone is waiting for the stock market to come back down again.
I get it. Wouldn’t it be great if the stock market fell just one more time so you could buy the dip?
Even the billionaires are sat on the sidelines screaming for another stock market crash and praying for a better entry.
But what if it never comes?
The last two months were crazy. Stocks collapsed into the fastest bear market in history. And then bounced right back out.
This is a classic dead cat bounce, isn’t it? It’s got to come back down again, surely?
Most traders think so. Just look at these numbers:
68% of investors think we’re in a bear market rally (i.e. a temporary bounce before the next move lower).
61% of high-net investors (more than $1 million investable assets) say they’re waiting for another pullback before buying.
There’s more cash on the sidelines right now than during the worst point of the 2008 crisis.
Everyone is waiting for this so-called relief rally to end so they can buy lower. Everyone thinks we’re at the ‘return to normal’ phase of this classic chart:
When everyone is waiting for the same thing on the financial markets, it almost never comes.
The S&P 500 has already reclaimed 66% of its decline. Most technical analysts would admit that’s significantly higher than the typical ‘bear market rally’ of 50-62%.
And is it really a bear market if the biggest companies in the world (Apple, Amazon, Microsoft) are at all-time highs?
A prudent investor would at least entertain the idea that March 23rd was the bottom and this really is a recovery.
What if this isn’t a ‘return to normal’ phase on the previous chart? If anything, this feels a lot more like ‘disbelief’ on the Wall Street psychology map.
Making a decision right now is tricky. Do you risk buying right at the top of a dead cat bounce? Do you wait for another correction that might never come?
How will you feel if the stock market goes back to all-time highs and you didn’t get any exposure at all?
There’s no right answer to these questions. Absolutely no-one, and I mean no-one can tell you what’s going to happen next. Billionaire investor and Warren Buffett’s business partner Charlie Munger summed it up pretty well last month:
Everybody talks as if they know what’s going to happen, and nobody knows what’s going to happen.
Buffett and Munger missed the dip too. They’re sitting on a cash pile of $138 billion and they didn’t spend a penny through the March selloff. If two of the world’s best investors don’t know where the market’s going, it’s okay to admit that we don’t either.
The only time-tested way to make sure you don’t miss out is to dollar-cost-average your way through. If you want exposure to the market, buy a little bit every week, every month, no matter what the price.
Yes, you might buy at the top of the market, but you’ll buy at the bottom too and it’ll even out over time.
If you believe the stock market will be higher in five or ten years, this is a fairly proven strategy to build wealth over time.
Plus, it takes away the stress of trying to time the market, which is almost certainly not going to happen.
Unless you went all-in on March 23rd, in which case, why are you even reading this?
Disclaimer: The article represents the author’s opinion and should not be considered investment advice from CCN.com. The author holds no investment position in the above-mentioned securities.
Last modified: May 26, 2020 7:23 AM UTC