Timothy M. from Galveston, TX asks: Hello Mitch, I think the economy is going to do well in 2022, and I was looking at the stock market correction as an opportunity to “buy the dip.” Problem is, I was waiting for the S&P 500 to hit 4,200 before investing, and I’m worried it may be too late. Do you think there’s still more correction to go, and that I should keep waiting? Or invest now?
Mitch’s Response:
Thanks for writing, Timothy. Let me first say I appreciate your optimism about U.S. economic growth in the new year, and long-term I think your instincts about buying dips in the stock market will serve you well.
But I think there are some problems with your approach.
My first question would be, how did you arrive at 4,200 as the ‘buy level’ for the S&P 500? Was that based on a percentage from the peak or just an arbitrary figure? I understand your goal of trying to buy when stocks are in correction mode, but to assign a level for the S&P 500 assumes that someone could know how deep and how long a correction might last – both impossible feats. Anyone who tells you exactly how far, percentage-wise, the stock market will decline is just guessing.1
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The second point I’d make here is to remind you, and all readers, that market timing is not a good idea. If you have cash available to invest, and your long-term goals are to generate growth or income or both, then what will ultimately matter is how much time you spend investing in the market – not how well you time the market. In my view, trying to time entry and exit points based on short-term market fluctuations will hurt total return over time more than it will help. Investors are far more likely to be wrong more often than they are right.
That all being said, I think your perspective on 2022 being a good year for economic growth and your belief that this is a stock market correction, not a bear are both correct. In other words, it is smart to want to buy when you see broad U.S. stocks decline rapidly and sharply, particularly within a backdrop of strong macroeconomic and corporate earnings fundamentals. I just do not think it’s wise to try and get your buying decisions perfect, which results in waiting for a level on the S&P 500 that may never be reached.
Historical data can help give context to why perfect timing in a market correction is not necessary (and as I’ve mentioned, not possible over time). Consider that an investor buying the S&P 500 when it is 10% off its high – regardless of whether it is the actual trough of the correction – would have netted a median return of +15% over the next year (data since 1950). Simply staying invested also captures this upside on the other side of a correction, with no market timing needed.
With that being said, in times like these, it is better to base your decisions on research, not emotions! Don’t sell and exit the market or wait on the sidelines out of fear.
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Disclosure