Last Friday, March 13, the stock market ended the week with a nearly 10% gain. As I write this on Monday morning, it’s down 10%.
What’s an investor supposed to do in a market like this?
Buying at market bottoms can make you a lot of money. During the Great Recession that began in 2007, the market fell 50%, hitting bottom on March 5, 2009, with the Dow Jones Industrial Average closing at 6,594 points. (It’s now at about 20,000.) If you were lucky or smart enough to buy anywhere near that bottom, you’d have tripled your money, even after the market’s recent nosedive.
Of course, deciding whether a bottom has been reached is easier said than done. The reasons behind bad markets are unique; so are the ways to decide when it’s time to dive in.
Anyone who claims they can tell you today when the market is going to hit bottom is either a liar or a fool. Nobody can know that because the situation is constantly changing and unpredictable.
The following is my best advice, but it’s obviously not guaranteed. Proceed at your own risk and only put money that you won’t need within five years in stocks.
Now, let’s explore signs to look for indicating the crisis is approaching a turning point. As I did during the last recession, I’ll be trying to buy stocks during this market collapse. Here are some signals I’ll use to decide when the time is right.
1. When we begin to solve the underlying problem
Until we know the extent of the coronavirus pandemic, we can’t know what it’s going to take to fix it.
Now that test kits are finally starting to show up in quantity across the U.S., we can begin to assess the problem and take specific actions to address it. Until that occurs, I’ll be mostly on the sidelines.
Keep in mind, however, that when the spread of the virus peaks and new cases begin to flatten, the market will likely take off. Stocks are forward-looking. If you wait until the future is certain, it will be too late. In short, don’t think about investing when the pandemic is over; buy when you can see the light at the end of the tunnel.
The process of seeing that light will be gradual. That’s why it’s a good idea to gradually step into the market. Buy one-third of a position when you think the turn might be coming. If the market continues lower, buy another third. When you’re convinced it can’t be much longer, buy the rest.
2. When the sky is falling
I just checked my stock account: Many of the stocks I own today I bought on March 30, 2009. As it happened, that was near the market bottom. Why did I buy then? Because I believed the news literally couldn’t get much worse. There was panic in the air, which made the market overshoot to the downside.
As I wrote years ago in “The 10 Golden Rules of Becoming a Millionaire“:
“Rich people ring the register when the economy is booming, but that’s not when they created their wealth.”
You get richer by investing when nobody else will: when unemployment is high, the market is tanking, everybody’s freaking out, and there’s nothing but fear and misery on the horizon.
The cyclical nature of our economy all but ensures bad times will occur periodically, and human nature all but ensures that when bad times happen, most people will freeze like a deer in the headlights. But downturns are the time you’ve been saving for.
If you think the world is truly ending, buy canned food and a shotgun. If not, step up. As billionaire investor Warren Buffett famously advised, “Be fearful when others are greedy and greedy when others are fearful.”
Bottom line? You should never panic. But when other people do, it creates opportunity.
3. When the cavalry rides to the rescue
The government has several tools to address a weak economy, including monetary stimulus (lowering interest rates) and fiscal stimulus (putting money in people’s pockets with things like tax breaks).
The Federal Reserve just slashed rates to near zero, and Congress will soon pass a fiscal stimulus bill. Will these steps be enough? Since the market fell by nearly 10% this morning, it must not think so.
Perhaps that will change when federal legislation is signed into law and details are released. If it’s not enough, additional steps can, and should, be taken to keep Americans spending and employed, thus helping our economy to recover.
Make a list and check it twice
For most people, investing in stocks means using an index mutual fund or exchange traded fund (ETF), which is a great way to spread the risk among a big basket of stocks, rather than focusing on just one or two stocks. But if you’re the stock-picking type, now’s the time to create your shopping list.
The stocks I’m looking at are solid, blue-chip companies with healthy dividends. In fact, I bought a beginning position in Verizon (VZ) on Friday at $52.41, about where it is as I write this, despite today’s big decline.
Did I buy too early? Probably, but at the price I paid, Verizon’s dividend is nearly 5%. That fat dividend, which I believe is safe, will help keep the stock from tanking, as well as earn me 5% while I wait. What’s not to like?
Bottom line? Big, solid, fast-growing companies, especially those with healthy dividends, will bounce back first and offer the most protection if your timing is off. At this point, it’s best to avoid small, speculative stocks.
Timing is everything
In the 40 years I’ve been investing in stocks, I’ve made plenty of mistakes. One I’ve made consistently is failing to grasp how long it takes for major events to resolve themselves.
I’m not the only one. Back on March 6, Larry Kudlow, former CNBC host and currently President’s Donald Trump top economic adviser, said, “Long-term investors should think seriously about buying these dips.” Trump said similar things when the market was thousands of points higher than it is now.
Obviously, not great advice. But it highlights two important points:
- As I’ve already mentioned, be prepared for a longer slog than you originally imagined.
- Don’t pay too much attention to those with a dog in the fight — such as Trump and Kudlow, who both depend on a healthy economy to stay in office.
Getting in at a low point means stepping back, being patient, reading, watching and listening to as much objective advice as possible. Don’t take advice from politicians, commissioned advisers or anyone else with a vested interest. Develop your own feel for what’s happening before jumping in.
Will conducting research be a pain? Maybe. But it’s nothing compared with the pleasure you’ll get when you watch your efforts rewarded with monster gains at some future date.
That’s the way I plan to play it. Will it work? Only time will tell.
Learn by listening
For more information and advice, listen to my most recent “Money” podcast: “4 Ways You Must Prepare Financially for Coronavirus.” You can listen to it online here or download it wherever you normally get your podcasts, including Apple, Spotify, RadioPublic, Stitcher and RSS.
If you haven’t listened to a podcast yet, give it a try, then subscribe. You’ll be glad you did.
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