The bear market that you have been so patiently waiting for has finally arrived. The opportunities to catch great companies at a discount is right in front of you, but you’re struggling to put those buy orders in because you think the price can get lower. You’re trying to time the market bottom and want to wait until it hits the bottom before making your move. Next thing you know, the market turns around and starts to go upwards leaving you to wait until the market drops again.
Does the scenario sound familiar? If so then you had experienced first-hand with how timing the market can end. If not then it is likely how your ideal plan to get in the bottom of the market will end up. In this post, I’m going to go over an alternative way to approach a bear market by dollar cost averaging and why you should choose it over timing the market.
1. There Is No Telling When the Absolute Bottom Is
Would you be able to tell me when is the bottom of a stock market crash? Chances are you can’t and if you can then you’re probably one of the luckiest people in the world. Realistically, there is no way for you to know if the market is at a bottom. Every time the price drops lower it can be the bottom, but since you don’t know for sure you’re going to wait on the sidelines if you’re timing the bottom. If the following day prices go up and continue to go up then you just missed the bottom.
I don’t know about you, but chancing your entry into the market by predicting the bottom seems like a low chance game to me. Instead, a simpler and easier way to get into the market is to dollar cost average in. What that means is putting a portion of the capital you have on the sidelines for a market drop into work and repeatedly do so until you run out of capital. Sure this means you won’t catch prices at the lowest but does a 3% difference really matter in the long run when you’re getting double digits percentage of return in the future? The important thing is it gets you into the market and as you will eventually learn it is about time in the market more than timing the market.
2. Removes the Stress of Getting the Right Buy Price
It can get stressful when you’re trying to time the market. How do you know right now is the bottom of the market? Well, you don’t know and when you’re dealing with unknowns it can stress you out.
Dollar cost averaging can easily eliminate the stress of timing the market bottom. With dollar cost averaging you put some portion of your capital to work periodically. Since you’re already in a bear market you know you’re getting a discount even if it is not at the absolute bottom.
3. Help Keep You Less Emotionally Attached to Your Investment
Some investors can get too emotional towards their investment and timing the market definitely contributes to it. Think about it for a moment, if you put in all the hard work to deem the price you bought was the market bottom you want to ensure it is. When the price drops lower after you bought, you start thinking you made a big mistake and that you should have waited. The emotion you get from being wrong can build up to a habit of waiting for the bottom, which can lead you to miss opportunities in the future.
When you have a system in place for your investment decisions, you can reduce the influence of your emotions. A system like dollar cost averaging can help you remain emotionally detached from your investment because you are following a system of rules you have set up. The less emotion is involved the easier it is for you to look at your investment with a clear head.
4. Investing Is Long-Term Not Short-Term
Investing is long-term so even if you time the market correctly, you’ll need to time it right every single time there is a drop. It is unlikely that would be the case, so you will miss some bottoms and remain on the sideline without deploying any capital. Each time you miss a bottom it can cost you some big growth in the future due to compounding. When you are dollar cost averaging into the market, you’ll be able to capture some of the discounts. It might not be the bottom level price, but getting into great companies at a discount is not anything to complain about.
I hope this post was helpful to you. If you found this post helpful, share it with others so they can benefit too.
To learn more about actionable steps you can take during a bear market you can check out my post on navigating a bear market. If you’re new to investing and need a guideline to help you start your investment journey you can check out my post on setting yourself up for financial success.
To learn more about why dollar cost averaging can be so powerful yet simple of an investing strategy you can check out an article by Nick Maggiulli.
To get in touch, follow me on Twitter, leave a comment, or send me an email at steven@brightdevelopers.com.