Catching the market bottom worth it?

Christopher Mills
October 17, 2022

I'm part of a number of groups where people talk about investing, and right now, one of the most asked questions is about timing the market. People are reading headlines by credible brands about how much the market is down and how much lower it's going, and then read an article that says if you buy now or wait X months and but, you could double your money and so the list goes on. I completely understand the psychology behind that, the temptation and the excitement because I've been there myself. But, I've learned and if you've followed me for a while, you'll know that I believe in what Warren Buffet said, "time in the marketing, not timing the market". I do believe that there are slight variations of this based on where you are in your investment journey, though. For example, if you're well-positioned and have cash, lump sums whilst a market is down is a great move but you need a decent idea of what you're doing. By in large, 'time in' is definitely better than 'timing' and that's what we're going to look at today.

In order to approach this, I had to do some digging as I wanted to gather facts from various sources on the topic of 'timing' versus 'time in'. I came across a fantastic article that covered this topic in depth and provided me with enough to share my thoughts with a good foundation. The article I came across is on Seeking Alpha by Evelyn Trias and it's a brilliant one. I'll link to the article at the end of this if you want to read further. Let's get cracking...

We're going to look at the last 3 market crashes, the Tech Bubble, the Financial Crisis, and Covid. Here are what the charts of the S&P500 ETF ($SPY) looked like around the 3 crashes:

1999 Tech bubble
2007 Financial Crisis
2020 Covid Crash

Now, we're going to look at three different people who made three different investment decisions, and then we're going to compare the results.

  1. John invests $100 at the peak of the market and continues to invest $100 every month thereafter. John's the poor chap who invested at the worst time.
  2. Dorothy saves $100 each month, then starts investing $100 per month at the bottom of the market. At the end, she adds her initial savings. Dorothy's the one who waited for the bottom but then didn't go all in.
  3. Michelle saves $100 each month, then starts investing by putting her savings in at the very best time (bottom of market) and continued to invest $100 per month from there. Michelle's the perfect timer.

One would immediately assume that Michelle would come out miles ahead, I mean, she invested a lump sum at the perfect time and then road the bull market forward. But is that the outcome?

This study took the three personas and applied them to the three market crashes. The study wanted to see how different the financial outcomes were of these three investor types.

How's this for an outcome:

"Based on history, it pays (quite literally) to begin investing ASAP, and to keep investing in the market as often as possible... even in the worst case scenario where the market crashes right after you start to invest. History shows that by investing early, you do ~10.3% better on average than you'd do if you saved your money and only started to invest from the lowest month of the past three bear markets. On the other hand, flawless market timing (Persona 3 in my example) only earns ~3.1% more money than the investor who starts investing right before the crash. Although investors may be wary because markets are at all-time highs, history has shown that investing early and often is generally the best approach - even if you start right in front of a bear market."

IMPORTANT: The person who timed things perfectly only earned 3.1% more than the person who started early and at the top of the market. That's a big deal, that's your take away from this post right there!

There is a lot of fear in the market right now, looking at CNN's fear and greed index reveals the following:

Because of this fear, I'm picking up three prominent scenarios:

  1. Those people who are freaking out and selling up.
  2. Those people who are freaking out and not investing.
  3. Those people who are trying to time the bottom.

For the person freaking out and selling up, that's something I talk about all the time. Selling when you're scared because of what you've read on some headline is incredibly risky because the chances are that you're going to be selling at the worst possible time, and when you decide to get back in, it will be after the bottom when the market is recovering - this is sadly so common. For the second two people, those not investing or those trying to time the market, this article really is for you because as you'll have seen from the results, it's about getting started rather than timing the market. Nobody can time the market, and if you miss the bottom, you could end up making far less than the person who just got going. Remember, timing the absolute bottom is near impossible, and missing it by a matter of months can make all the difference - here's what I shared on Instagram:

When it comes to recessions, pullbacks, and depressions, the news gets flooded with noise about these topics. At the same time, people start talking about the recovery, how long will it take, when will it happen and how do I benefit from a market recovery? These are all important questions but they're questions that don't have answers because nobody can predict the future. However, we can take a look at the past to see what happened previously.

Here are some interesting facts about market rebounds, this is how the recoveries have gone on average previously:

➡ 1 month from the bottom: 15%
➡ 3 months from the bottom: 21%
➡ 12 months from the bottom: 44%
➡ 24 months from the bottom: 63%

One of the problems is that most people try to time the bottom of the market, thinking that they're going to buy at the cheapest point - that's simply not possible unless you have a crystal ball. What I can say, is that if you're waiting for the bottom and you're slow, within a single month, 15% of that potential gain is missed, and within 3 months, 21% is lost. That's really fast! This is why most people comment about "time in the market, not timing the market" which is what Warren Buffet said.

Makes sense now?

Interestingly, JP Morgan (a massive investment banking company) performed a study. In this study, they looked at data over a 20-year period from Jan 1999 to Dec 2018 and found that if you missed the top 10 best days in the stock market, your overall return was HALF of that compared to if you were investing in a regular basis. Do you think you could time those 10 best days? No chance. The only way to hit those 10 best days is to start immediately and continue to invest often and consistently - this is a long-term game.

--

I've been that person who's sold out of fear, I've tried to time the bottom and I've bought consistently. To be really honest, the more I invest, the more I realise that investing is really boring - make your share purchases frequently and consistently, and that's it. To make a great success without ridiculous risk, you need to learn how to be a boring investor. If you're like me, then perhaps you'll have a split-personality too, haha, I have one personality that I've taught to invest 90% in a boring way into SPY and QQQ, and then my other personality that invests the 10% into more speculative plays, trying to time the market, pick risky stocks and the likes. I see that 10% as my gambling fund and told myself that if I lose it, it's gone and I'm not able to deposit again. So far it's gone well, I jumped into some risky stocks and made good money on the way up and into Covid, and there's a tidy sum now that I'm holding onto but 90% of my money is in SPY and QQQ, nice and boring - I'm okay with that.

Click here to read the original article on Seeking Alpha.

Christopher Mills

I run a successful agency, my other passion is personal finance.

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