There are many regrets you might have if you've been investing in stocks. Some are reasonable, and others not. For example, it's reasonable to regret selling a great-performing stock too soon, leading to you missing out on big gains. And it's reasonable to regret not having started investing sooner, as that might have led to a fatter portfolio by now.
It's not so reasonable, though, to regret not having bought a bunch of stocks when the market bottomed out. Here's a look at why.
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You can't see into the future
For one thing, it's easy to regret not having bought at the bottom, but how would you have known when the market was at a bottom? The market issues no press releases about upcoming surges. No bell is rung when a bottom is reached. It's simply not possible to know for sure when a bottom has occurred -- unless you're looking backward some time later.
Many, if not most, investing greats would agree. For example:
- Respected investor Mohnish Pabrai is reported to have said: "The lesson learned here is that we are never able to buy at the low. Almost every stock I've ever had in the portfolio has always declined after we buy it ... I think it is pretty normal to have it go down and I almost expect it now."
- Seth Klarman has reportedly noted, "You must buy on the way down. There is far more volume on the way down than on the way up, and far less competition among buyers. It is almost always better to be too early than too late, but you must be prepared for price markdowns on what you buy."
- And from Nick Train: "A lesson from previous episodes of stock market panic is that it is impossible to identify the bottom and almost as difficult to get money invested after the market has turned -- because prices rally so quickly."
What would you do?
It's impossible to pinpoint a market bottom -- and it's even hard to predict recoveries by year. Let's get in a time machine and head back to the end of 2000. The S&P 500 dropped by 9.1% that year, per Slickcharts. Would you expect a recovery in 2001? Well, in 2001, the S&P 500 fell more sharply, down 11.9%. Surely, you might expect the market to rise in 2002, right? After all, the market doesn't drop in consecutive years very often.
But alas, the S&P 500 plunged even more in 2002 -- by a whopping 22.1%. Clearly, it's very hard to discern when the market will pop or drop. In 2003, the market headed in a different direction, rising by nearly 29%.
Market-timing debunked
There have been numerous studies demonstrating the folly of trying to time the market. The folks at Putnam Investments, for example, recently noted that if you'd invested $10,000 in the S&P 500 for the 15 years ending in December 2022, you'd have averaged an annual return of 8.81%, ending up with $35,461. If you'd been out of the market on just the 10 days in which the index rose the most, your annual gain would have shrunk to 3.29%, and you'd have ended with $16,246. Missing the 20 best days would have left you with less than $10,000, in the red, and you'd have done even worse missing the best 30 or 40 days.
Those numbers are not surprising, because no one can know which days will be the best -- or worst.
What to do instead
So what might you do instead of trying to buy at the market's bottom? Well, here's some advice from Warren Buffett, arguably the best investor of our lifetime. He has said:
We don't try to pick bottoms. We don't have an opinion about where the stock market's going to go tomorrow or next week or next month. So picking bottoms is basically not our game. Pricing is our game. And that's not so difficult.
In other words, look for undervalued stocks, which exist in every kind of market. Or, if you don't have the time, interest, or skill to do that, just keep plunking money into a low-fee, broad-market index fund, such as one that tracks the S&P 500. That will give you roughly the S&P 500's return from year to year (less those low fees), and in most years, the market goes up.
