A reader recently noted that stocks generally have now fallen some 25 percent from their highs late last year. He wants to know if this is “a good time to buy.”
Before answering, I want to commend this reader. He has a reasonable and historically verifiable confidence that the market will recover. Many people, after a steep price slide such as stocks have suffered during the last nine months, lose their nerve and convince themselves that values will never recover. Accordingly, they sell their holdings. Often, they do this close to the bottom, which locks in their loss and also locks out any possibility to recover when the market eventually — as it always does — recovers.
With that in mind, I can answer briefly: Yes, it probably is a good time to buy. But since I consistently warn readers against “timing” the market, this response requires some important context.
For the long-term investor — and stocks should only ever be a long-term investment — it is never a bad time to buy stocks. Even if you buy at peak prices and suffer an immediate (paper) loss in the value of your purchase, history shows that, ultimately, the market will always recover any such losses and go on to higher peaks. Time is the essential factor here, and because my consistent advice has been not to buy stocks if you will need the money in less than five years, the investor who has unfortunately bought at the peak presumably can wait for that future recovery. Because stocks have sunk so much over the last nine months, the time it will take to see gains is probably shorter than five years, but even so, the investor needs at least a two-year horizon before planning to withdraw the funds.
And because markets are always unpredictable over the short run, it might be psychologically valuable to buy stocks in two or three stages. This way, if the market continues its slide, you will still have cash to put in at even lower prices and you won’t feel as bad as you might have had you put all of it in at the same time. At the same time, if the market suddenly turns up and you must chase it with what you held back, you will at least have the comfort of knowing that you bought in some at just the right time.
2 thoughts on “A Time to Buy?”
Great advice! Just posted it on LinkedIn!
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What great advice! Too many people panic and sell at low prices, thinking that they can no longer stand the pain, then buy at higher prices for fear of missing out. Dalbar publishes studies every year that affirm that this behavior causes individual investors to underperform the market. As you point out, investors should assure their liquidity needs, then adopt a 2 year horizon for their investment decision. That process would avoid poorly timed sell decisions. THANK YOU!