For the vast majority of people, the US stock market is the best readily available generator of investment profits. A classic example has to do with if you invested just before a stock market crash. As a rule, if you stayed the course and stayed invested for years or decades, your investments would do just fine. With a sufficiently long holding period, pre-crash investments catch up to the long term average. Having said that, many fortunes have been made by those who bought good stocks at steep discounts at the trough of a stock market crash. So, should you invest in a bull or a bear market?
What Do You Do With Money You Have to Invest?
So, you inherited a healthy sum of money and you want to put it to work for you. You have a decent job or business that you are not going to expand. Thus, your investment will be in stocks, bonds, or maybe real estate. Alternatively, you are able to put aside money from every paycheck for retirement, college for the kids, or to start that business of your own. Should you invest in a bull or a bear market? If you put off your investment for the right time, what do you do with the money?
Are You Able to Time the Market?
According to CFRA Research the stock market bottoms out on average five months before the end of a recession. So, on average, your best time to put money into a mix of stocks would be a few months before a recession is over. Unfortunately, timing the end of a recession can be as difficult as timing when they have begun. When markets fall, they go down due to fundamental reasons like profits falling. And they go down because investors sell their stocks to avoid losses. Panic selling often happens in a sharp market downturn. When fundamentals have stabilized, profits are starting to reappear, and market sentiment turns positive, stocks tend to head upward. This is often an ideal time to purchase stocks with good growth potential and strong intrinsic stock value. But what do you do with your money while you wait? Does this mean you should not buy stocks in a rising market or a flat market? It does mean that you need to be careful of getting into a rising stock market just before the top when fundamentals have been exhausted and fear of missing out is the only thing taking the market higher.
When to Buy in Bull and Bear Markets
If you are investing for the long term you can rely on decades of evidence that the market keeps going up over time. You do not need to sit on cash for years while the market goes up in fear of a crash. And you do not need to perfectly time a market bottom to make money. A commonly used approach to long term investing is called dollar cost averaging. With this approach an investor chooses a sum or money and a timing schedule such as every paycheck, every month, quarterly, etc. He or she chooses a mix of growth and value stocks and even bonds. Then he or she puts the same amount of money into those investments every time. As the market goes up the investor will not be tempted to invest too much just before a crash. When the market falls the investor will be able to buy good long term investments at substantial discounts.
Should You Invest in a Bull or a Bear Market? – SlideShare Version