Calling a bottom in the stock market has always been popular among strategists and television personalities, but the truth is very few investors actually call a bottom correctly. A market that is firmly in bear market mode is a very tough one to predict because of the sheer uncertainty. As an individual investor it is wise to avoid trying to be a hero.
5 Reasons to avoid calling a bottom
1. It is nearly impossible - This is the most obvious of the reasons, but so many people seem to overlook it for some reason. Calling a bottom in the stock market is next to impossible and if you actually happen to call a bottom once, the chances of you doing it a second time are that much smaller. Keep a sane outlook and realize that calling a bottom is extremely difficult.
2. You don’t need to - The truth is during bear markets there is no need to call a bottom in stocks. During a bear market stocks are hit very hard and rarely come back quickly at all, which allows you time to let the market settle down before you invest. It is much wiser to miss the very bottom on stocks than taking a huge chance on calling the exact bottom.
3. Stocks can fall extremely quickly - If you need any evidence of this just look at late 2008 when the markets were losing about 20% in a week. Those who call a bottom in a bear market subject themselves to losing a whole lot of money in a very short period of time. There is definitely a reason they call it trying to catch a falling knife.
4. Time is on your side in investing - Over the long run investing in the stock market is a winning proposition, but not if you are constantly trying to find the bottom of a bear market. Let the market do its thing and sit on the sidelines in cash or cash equivalents. There will certainly be opportunities to get in the market, but don’t rush making your decision.
5. You are often fighting the economy - Over the long haul the economy is the driver of the stock market and in a bear market an economy is typically either slowing considerably or even contracting. An economy in a tailspin is not something you want to be dealing with in the stock market. During economic recessions a stock market may look “cheap” for months but continue to get cheaper and cheaper for quite some time.
The most dangerous thing about calling a bottom in the stock market may be that it is so tempting to do. As one sits and watches their favorite stocks get hit so hard it is easy to want to pull the trigger and be a hero. The wise investor will be patient and avoid the temptation to try to find the stock at its very cheapest price.
Aaron K. Smith is a freelance writer with experience working in the mutual fund industry and writing about investing and the stock market.
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