Unfortunately, stocks don’t just announce when they’ve hit a bottom. I hear it a lot from my clients and prospective investors, “I’m going to wait for stocks to hit a bottom.” My usual snarky response is, “you and every other investor.” If it were only that easy. In reality, when stocks bottom, they often quickly take off higher from that bottom level. We saw this happen in March 23, 2020 after stocks dropped 35% from February 19, 2020.
S&P 500 (March – November 2020)
We also saw this in the beginning of March 2009. At the bottom of the Great Financial Crisis, stocks hit a low after dropping 57% from their 2007 peak.
S&P 500 (Great Financial Crisis)
During those times, nobody knew we had hit a bottom in the stock market. If anything, they were both extremely scary times to invest new money or become more aggressive.
Stock market bottoms form when most of the sellers have sold everything they want to sell and buyers take control of the market since there are very few people left that are willing to sell at those lower prices. This pivot point has no indicators at that time that put up an ALL-CLEAR sign. This is why the 3 Ds of Investing (Discipline, Dollar Cost Averaging, and Diversification) are vital to any successful investors. The bottoms of markets are also typically marked by a high level of uncertainty, concern, and sometimes outright fear of stocks going even lower.
How can you take advantage of stocks near a bottom?
The 3 Ds of investing are a great place to start when you’re trying to take advantage of stocks dropping or nearing a bottom. The reason is because you don’t need to predict when the bottom is happening.
1. Discipline
Having a set investment strategy and sticking to it when markets drop is very important. Markets don’t always go straight up. By markets, I’m referring to all types of asset classes including; stocks, bonds, real estate, cryptocurrencies, gold, silver, and even cash (which losses value to inflation). Part of an investment strategy has to include when an investment goes down because it’s a matter of when not if an investment is going to fluctuate down. Big money is made when these drops happen and a good investment strategy has a plan to take advantage of this. For example, when stocks drop, adding more at lower levels or becoming more aggressive within the portfolio by selling more conservative positions and adding to higher risk positions.
2. Dollar Cost Averaging
Having a set preplanned dollar amount that is consistently added to a portfolio will help take the emotion out of investing money. Many people do this without knowing it, when it comes to their 401k plan at work. Payroll deductions automatically get invested into 401k plans at a set amount on a consistent timeframe.
3. Diversification
Having money spread between asset classes like stocks, bonds, and cash can help smooth out fluctuations in a portfolio. Also, making sure all of those asset classes are not overly invested in the same positions. Diversification can give the opportunity to take advantage of an area that has dropped off like stocks have this year. Having cash available to take advantage as stocks have moved lower is why portfolios need to be diversified.
When Stocks Have Hit a Bottom
No one can accurately and consistently predict market bottoms. Similarly, no one can do that for stock market tops. Having an investment strategy that incorporates market fluctuations and using the 3 Ds is a great way to help take advantage of the opportunity that comes up when a market eventually has a drop.
Thanks for taking the time to read through this post. If you have questions about your specific investment situation, don’t hesitate to reach out.