Buy when there’s blood in the streets.
It’s a simple strategy in practice, but it isn’t easy to implement. It’s tough to confidently buy when everyone else is scared (and odds are you can find plenty of reasons to be fearful too).
Whether you believe in day trading, buying and holding forever, or something in between, investing during turbulent times will make for the best returns.
That’s because of two factors.
First, stock market studies have shown that one key to performing well is to be fully invested in the market at all times. That way, you catch all the market’s best performing days.
According to such studies, by missing the 10 best-performing individual days of the stock market, investors lose half their gains, going from a 12 percent return to 6 percent.
It gets worse. By missing the top 30 days, the returns on stocks go negative.
If you’re completely indexed to the market, this study makes sense. There’s just one downside though: The stock market’s best performing days tend to cluster in bear markets, when everything in sight is being sold off.
That’s the second factor. So, why does this happen? Because extreme selling leads to extreme buying, typically as some glimmer of hope overcomes the pervasive fear.
The Dow’s biggest rally ever occurred on Oct. 14, 2008, amidst the second-biggest market crash since the Great Depression. The next five largest gaining days occurred between 2000 and 2002 as tech stocks were going bust.
The facts couldn’t be simpler. If the market is giving off daily returns that are among the top 10 performing days, we’re in a bear market. That means there’s more downside ahead, negating the benefits of any one-day gain.
Most know the study about missing the market’s best days. But let’s look at the flip side to that: Missing the market’s worst days by being in cash.
Depending on the studies used, missing out on the market’s worst days has, at worst, a negligible impact on your portfolio. Over a longer time period, however, the returns could be up to two and a half times higher than someone who simply stayed fully invested and took hits during market corrections.
In short, these stock market studies have proven another glib saying on Wall Street: “Don’t lose money.”
You make your money when you buy. So, when investing in turbulent times, wait for the right valuation in assets you want to own, not one day moves in the market.
The market is turbulent right now, but it’s hardly record-breaking. We’re also facing political decisions in the US and Europe that could affect markets over the next few weeks. Stay cautious, but don’t stay completely on the sidelines.
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