It’s a new quarter in the investment world. It reminds me of New Year’s Eve, where you stand on the precipice of a new year and have hopes and dreams you hope will come true because the calendar has turned over one day to the next.
And so it is with our investments. We hope against hope that the new quarter we’re now in will be kinder to us than the previous one, especially since the previous one has been so awful. One of the debates among investors in markets like this is how you know when the market has made a bottom and is about to turn back up. Some days in this market look good, and some look bad. How is one to know when things are going to turn upward permanently?
The answer: you don’t. If anyone — professional or amateur, expert or beginner — tells you they have a surefire way to judge the bottom of a downturn in the market, run in the other direction. The best they can do is an intelligent guess, whatever their skills or programs or methodology. Market timers, as they are called, are notoriously weak when it comes to the figuring of their profits.
The only way to tell a bottom in the stock market is to look back at it six months later. In other words, hindsight is the best guarantee that you were right … or wrong. In the economy this seems to be true elsewhere: economists can’t tell you you’re in a recession until you’re either deeply into it or finally out of it.
So if you can’t predict the bottom in the stock market, what difference does it make? Not much. That “bottom” can be pretty broad (no jokes, please), meaning that it doesn’t just happen on one particular trading day but over a specific time period, perhaps days or weeks.
And this should be good news to those of us watching and waiting to see when we can or should jump back into the stock market. If we’ve been smart and gone somewhat to cash while the market thrashes about and sinks like a stone, we should be in the position of having some cash to put back to work for us when it seems the worst is over.
All of this takes watching, waiting, discerning. You have to watch the news, listen to the talking heads, see which direction their conversations are going: up or down, positive or negative. If the news begins to sound a bit more optimistic, if Chicken Little stops yelling that the sky is falling down, then you can begin to nibble on stocks that were beaten down. The good news about all of this is that after a market has turned downward, you are almost forced to apply the greatest maxim in investing logic: buy low and sell high. If most stocks have dived, you are by definition going to be buying them back when they are low.
You have to take the risk eventually that the market is going to turn around. Otherwise, you’ll miss the opportunity to ride stocks back up. But be careful what you’re looking at. If it’s a sector that has been severely beaten up, like financials or housing in the U.S. market, make sure you pick the cream of the crop, the best of the best to nibble. Don’t pick the most speculative stock in that sector but one you know has performed well in the past.
You do have to be extra careful you don’t risk your investment assets because someone has told you of a “sure thing,” particularly in a market like the one we’re in. In a raging bull market, you can pick quite a few stocks that will make you money. In a bear market or one that is recovering, it’s not this easy. You have to do your homework and your research and then trust you’ve made a good decision, watch your stock(s) carefully so you can get out if you made a mistake.
(And yes, you can easily make a mistake. We’ve talked about this in the past: it’s okay to make a mistake in the stock market, as long as you adjust quickly and accordingly. Don’t spend a lot of time beating yourself up but move on.)
It’s always tricky, isn’t it, this investing stuff? And perhaps you’re like me in that outmaneuvering the market (as if the market is a person and out to trip me up!) is as much fun as making money on a particular stock. Well, okay, maybe not as much fun, but fun.