- Regular investments into the market mechanically buys more (less) when prices fall (rise), relieving you of the task of estimating timely moments for investing.
- History suggests that when the S&P 500 falls 20% from its previous peak, there’s usually more pain to come before the market finds a bottom.
- If you’re highly risk-averse, you might look at SMI and wait for the index to bounce to a relatively high level.
The answer depends on how you define “safe.” That’s a long conversation because every investor has a unique risk tolerance, time horizon and investment objective. What appears “safe” to you could frighten the hell out of your neighbor. Despite the caveats, we can at least start to think about how the odds stack up when the market takes a dive by crunching some numbers.
Perhaps the first observation is that that taking advantage of sharply lower prices is usually a good choice. Because prices move inversely to expected return, buying stocks after, say, a 20% haircut equates with investing at a time when expected return has jumped by a comparable degree. Of course, there’s a time factor to consider. Realizing the higher expected return will (probably) take years.
A reasonable way to smooth out the noise is dollar-cost-averaging. Regular investments into the market mechanically buys more (less) when prices fall (rise), relieving you of the task of estimating timely moments for investing.
If you’re inclined to be clever, a first step might be looking at how drawdown informs expectations. For example, the S&P 500 Index is currently nursing a 20% drawdown (as of June 29). Declines of that magnitude or deeper are commonly labeled as “bear markets.” More importantly, history suggests that when the S&P 500 falls 20% from its previous peak, there’s usually more pain to come before the market finds a bottom. On that basis, the odds don’t appear to be in our favor at the moment that the worst has passed, or so history implies.
The main takeaway: the market’s dive, although relatively deep, has yet to reach the maximum depths previously recorded. That’s a basis for remaining cautious for thinking that the correction has run its course.
Editor's Note: The summary bullets for this article were chosen by Seeking Alpha editors.
For further details see:
When Is It 'Safe' To Invest In Stocks After Corrections?