After strong bull runs in the equity markets, experiencing a pullback (or decline) is normal. Markets do not go straight up, and they often have to stop to catch their breath even in bull markets. A 10% decline is called a correction. A 20% decline is called a bear market. Usually these happen over the course of a few months or weeks if the markets are moving fast, but what we saw recently happened in a matter of days. And when the markets took their first breath back up, it happened in one day, not “days” plural. This is rare…. once or twice in a career rare and this was the only the third time I’ve witnessed it.
The vast majority of my readers have a long-term outlook on the markets, so it is not surprising that most of you “stay the course” understanding the long-term benefits of not making emotional decisions during turbulent markets. You have hired me to be at the helm of your nest egg, a job I don’t take lightly. And it is times like these that my experience and cool head can serve you well. And I thank you for that.
For some of you reading this, you see a buying opportunity in the equity markets. The headlines love to rile everyone up and the violent down days that telegraph “stocks are on sale” to garner an emotional response. When in fact, we may have seen these same prices as little as six months ago…but I digress. I recently was asked how to time the bottom of this correction, so the money that has been sitting in cash gets invested without any losses and only ride the wave back up. Here was my reply:
After 30 years of trading, what I have learned about the equity markets is this: it's almost impossible to time the bottom of a market correction. And for that reason, I have developed the following trading thesis: try and catch the falling knife. To know where the "bottom" is, we must wait until the markets have started to recover. We look over our shoulder to see that we have not hit any more low points.
Then, and only then, can we call the bottom.
Since we cannot time travel, it makes buying at the bottom challenging...unless we hit it by a happy accident not even knowing we did. A solid strategy to try and achieve this is to dollar cost average in using a strategy of time, not emotion. The theory is when we have seen a loss of -10% followed by another loss of -10%, we should start buying securities we want to own long term. And should the markets go down another X% we have caught the falling knife on the way down. Yes, our hands are bleeding (meaning we invested our cash and it went right down), but this is a known risk when trying to enter volatile markets.
Now, when the markets start to recover and we see a sustained increase of prices, there will be someone in the media calling the bottom and a sense of relief tends to come into the markets. Higher prices may go up quickly or slowly, and contrary to that newscaster’s talking points, that is also challenging to predict. And people may not trust the headlines and still wait for it to go lower again, or this is the beginning of the recovery, and we just don't know it yet. Hard to tell in the moment.
So, somewhere in the last 10% down and first 10% up we can usually find the "bottom" of the market correction. My trading thesis is I try to catch it on the way down (easier to predict) than on the way up (harder to predict) to ensure my long-term investors are buying somewhere in that vicinity of low prices.... thus not missing the correction entirely. Every time I use this trading theory, I’m trading in portfolios are earmarked for a ten-year plus time horizon so we have that cushion of time should we still go down a bit more.
Simply put- I don't wait for the very bottom of the correction; I try to buy in the bottom-ish of the correction. I’m not always right, but I tend to be right enough times that it can make an impact on the long-term growth of the portfolios.
And this is also a good reminder of why we don't put our short-term cash into the stock market, it’s just too unpredictable. One social media message can move the markets of the world in 2025, so we must stay steadfast in our trading thesis and not let fear (or greed) make our cash vs equity allocations.
Kimberly Enders CFP® CWS® CERTIFIED FINANCIAL PLANNER™
Enders Wealth Management
38700 Van Dyke Ave, Suite 125
Sterling Heights MI 48312
www.enderswm.com
#kimenderscfp
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Dollar cost averaging will not guarantee a profit or protect you from loss but may reduce your average cost per share in a fluctuating market.