Has the Stock Market Hit Bottom? Here’s a Better Question to Ask
By November of last year, October’s low was looking more and more like the bear market’s bottom. The S&P 500 was soaring. Economic headlines were, well, at least hopeful.
Now there’s some doubt. The S&P 500 hasn’t made any forward progress since the middle of April, and remains below its early February peak. Maybe investors suspect lower lows are in the cards.
Before worrying about whether the stock market has hit its ultimate bottom or not, however, there’s a better question to ask. That question is, do you really care if the bear market has run its full course?
Most investors shouldn’t sweat it.
Better to be in than out
Don’t misunderstand. If you can successfully step into stocks closer to a low than a high, you should. Timing the market consistently, however, is tough to do; most people can’t do it. That’s why you’re typically better off not even trying.
Instead, the smart-money strategy is staying invested all the time even when it’s uncomfortable to do so. A few statistics might help motivate you to embrace this mindset.
The first of them comes from brokerage firm Edward Jones. The company’s data indicates that in the last five confirmed bull markets, the S&P 500 gained an average of 25% within their first three months. In a similar vein, mutual fund company Hartford says that over the course of the past couple of decades, a little over one-third of the market’s biggest daily gains materialized during just the first two months of new bull markets.
The point is, being late to the proverbial party can be very costly.
Another noteworthy statistic also comes from Edward Jones. The company reports that remaining fully invested in the S&P 500 between 1980 and the end of 2021 would have netted you an average yearly gain of 11.8%. Missing out on just the 10 best days during that time frame, however, would have dialed back your annual return to only 9.7%. Miss the 20 biggest daily gains during that period, and your average yearly gain slips to 8.2%. If you weren’t invested for the S&P 500’s top 40 daily gains, the annual return is dialed back to less than 6%.
The kicker: Hartford says that over 40% of the S&P 500’s biggest daily wins logged over the course of the past 20 years took shape during bear markets.
Play the odds you can actually predict
Maybe it won’t matter. Perhaps the stock market will finally start getting some traction from here and move on to higher highs. Maybe October’s bottom was the ultimate bottom. You just don’t know.
But, that’s the point — you can’t predict the market’s short-term ebbs and flows since they’re usually rooted in fear and greed rather than reason. Trying to make such predictions can do more harm than good.
The market’s long-term track record is far more reliable, though, reflective of capitalism’s intended never-ending growth. On average, 3 out of every 4 years is a winner, and when adding its dividends to the tally, the S&P 500 has averaged an annual gain of more than 10% over the course of the past century.
That’s the growth trend you should be looking to plug into. Hoping to jump in at a bear market bottom that may already be in the rearview mirror is just too risky for most investors to bother attempting.
This article was originally published on this site