Of Dollars and Data: Right Now, But Wrong Later
The stock market has turned bearish. And many investors are now expecting a further drop in stocks every day, rather than a gradual rise as seen during a bull market. That may lead many to cash out of stocks now, following their latest drop over the past few months, while waiting for a market rebound.
Such a move may save further losses in the short-term. But the data shows that such a move may be a mistake in the long-term.
As reviewed in the Of Dollars and Data blog, investors could sell off stocks six months into a decline (about now for the current drop). If they start buying again about six months after the bottom, to ensure the bear market is generally over, they tend to lose out.
Only in two instances, the end of the dotcom bubble, and the housing crash, would have seen this strategy beat the market. That’s because both of those drops featured crashes of nearly 50 percent from the top, and played out over an 18-month period.
Because markets often have six-month periods where there’s an overall drop, this strategy creates a lot of false positives. That could mean selling out after a drop, taking a loss, and missing out on most of the recovery gains.
All in all, it’s clear that market timing can have mixed results. Generally, it makes more sense to take a buy and hold approach with market drops, rather than trying to time big moves in and out.