The S&P 500 just tagged a post-crash high, and we’re within spitting distance of $3k. And, get this, the Nasdaq is only 4.4% off its record. With that market’s round trip getting ever closer to completion, I’ve been reminded again of the wisdom behind buying during a bear market. Long-term investors with the intestinal fortitude to put money to work during times of crisis are always rewarded eventually.

This go around, you didn’t have to wait long, at least in large-caps. The eventuality of market recovery is what drove us to include the ultimate capital deployment scheme in the Bear Market Survival Guide. I’ve discussed it before (see here, here, and here), but let’s look at how you would have fared if you followed the script.

Suppose you had a $20k opportunity fund split into four buckets of $5k to be invested incrementally when the market declines 5%, 10%, 15%, and 20% off its highs. We could modify the intervals, but let’s see how you’d be faring if you used QQQ. Then, we’ll look at IWM to see what the worst broad market ETF would have generated.

QQQ

QQQ peaked at $237.47 so that’s the number you would have calculated your buy points from, like so:

-5% ($237.47 x 0.95) = $225.60

-10% ($237.47 x 0.90) = $213.73

-15% ($237.47 x 0.85) = $201.85

-20% ($237.47 x 0.80) = $189.98

Buying Thresholds

Since QQQ fell to $164.93, or -31%, it gave you the golden opportunity to pull the trigger at all four thresholds. And with the tech-laced fund almost back to its old peak, you’re now up money on every investment.

You may ask what would have happened if you did the same thing in IWM. The answer is that you’re still underwater and need some time and healing before being made whole. Since IWM ultimately fell 44% before bottoming, it would have been better had you spaced out the thresholds more to something like -10%, -20%, -30%, -40%. You wouldn’t have known that ahead of time, but it does speak to the trade-off in setting your purchase levels. If you invest your wad quickly, you’ll do great during shallow corrections, but wish you waited for bigger discounts during deep bear markets. Alternatively, if you wait too long before buying, then you may only get the chance to deploy the full amount once every decade or so.

Here’s a pic of IWM with the respective thresholds:

Don’t seek perfection. You won’t find it. Having a plan, even if it’s mediocre, is superior to not having one at all and missing out on making money during the rare bear episodes.

Aside from widening the investment levels on IWM, another technique we could mix-in is to wait for some type of confirmation at each interval. Even if it’s something small like buying above a prior bar’s high, your performance would have increased dramatically in IWM’s case. In other words, when IWM dropped 5%, I might have said – Okay, once we take out a prior bar’s high, I’m going to invest the first $5k. The same technique goes for hitting down 10%, 15%, and 20%, respectively.

Take a closer look at its updated chart with the price levels you would have bought at.

With just that simple confirmation technique, you’d go from being down money on all four investments to being slightly profitable. This go around, having a simple trigger would have made all the difference!

In Thursday’s Options Theory blog, we’re going to look at how the general idea of incremental buying would have fared during the Great Depression. Stay tuned.

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