I’ve learned over the years that if you embarrass verbose people at dinner parties it usually doesn’t end well for anyone. So, I simply asked how he would know when the market bottoms out and what the signal would be for when to start buying again.
He looked at me quizzically and replied something like: “Oh, you know, once things start going up and the economy is doing better. That’s when it’s safe to get back in. Why would you want to buy stocks now, only for them to lose money right away as they fall?”
I respectfully nodded, which I hope gave the impression I was suitably impressed. Then, because I felt I had a fiduciary responsibility to my more impressionable friends, I waited until our “resident oracle” moved on to explain why “waiting for the bottom” in order to invest was an awful strategy.
Trying to time the market bottom is incredibly difficult. Not only do you need to get fundamental valuation analysis to be absolutely correct, but you also need to be able to gauge the “animal spirits” of market participants in the short term.
Generally speaking, by the time “things start going up,” it’s already too late to buy back in. That delay can be extremely costly.
If you stay on the sidelines with a fist full of cash, “waiting for the bottom,” you’re almost assuredly going to miss out on some of the best days in the market. The vast majority of the best days in market history took place immediately following the market bottom (when people were at their most pessimistic).
The above chart shows market returns over 7,000 trading days from January 1, 1995, to September 30, 2022. If you missed the 10 best days in the market, your annual growth rate evaporated from 7.7% to 4.7%.
If you’re wondering what that sort of reduction in annual returns would have done to the raw value of your portfolio, here’s a similar look at the period of 2006 to 2021: