With stocks 20% to 35% off their highs, is this a buying opportunity?
If you’re a long-term investor the answer is a resounding “yes.” How could it not be? The hard part is knowing if you’ll get a chance to buy stocks at an even steeper discount in a month or three months or six months. That right there is why people (myself included) get paralyzed when opportunity knocks.
Just because sowing seeds during a bear market is the smart thing to do, it doesn’t mean it’s easy.
In the Bear Market Survival Guide, we outlined a capital deployment scheme for putting money to work in a bear market. I’ve also written previously about it here and here.
The idea is to buy incrementally at specific thresholds such as -20%, -30% and -40%. As with all instances of scaling-in, it creates a potential win-win. If you buy stocks today with SPY 24% off the highs and this ends up being the bottom, well then, you’ll be happy you put some money to work. But if the 24% drop grows into -30% or -40%, then you’ll be pleased that you kept some cash in reserve to buy more.
The appeal of the deployment scheme is that you can preset the entries and don’t have to make an emotional decision in the heat of the moment. But, to be honest, it will feel like you’re buying on the way down, not up. And that is the drawback or tradeoff to this approach. I’ve tried to mitigate the regret of buying when the market’s down 20% only to see it fall 30%, however, by using the scaling-in technique.
There is an alternative though.
Some investors prefer to wait for signs that the trend has turned before buying. This is the sentiment outlined by my fellow coaches recently during our halftime reports and elsewhere. They acknowledge the obvious (that this is a long-term buying opportunity) while expressing their preference to wait for the smoke to clear and evidence of a bottom or uptrend to emerge.
This is a perfectly legitimate and valid viewpoint.
The pro is that you’ll feel better when you buy because of the evidence of a bottom that has developed. You’ll be able to say that the trend is turning and buyers are returning, the dust is settling and the uncertainty finally receding.
There is a con, however. If the recovery takes on the form a V-shape then you could miss the sharpest part of the snapback.
Fans of the technique will point out that they’re not trying to nail the low and don’t care if they miss the first stage of the rebound because there will undoubtedly be plenty of upside afterward. I totally understand this point and agree wholeheartedly.
So here we are. Two valid techniques – each with its respective pros and cons. As with all things in trading, the individual needs to assess which path they prefer.
The beauty of a community like Tackle is that you get to see a variety of traders each with their own unique personality and preferences. When you hear seemingly conflicting techniques or viewpoints, look deeper and you’ll discover it’s not a matter one being right and the other wrong. It’s likely that one coach prefers certain tradeoffs over the other.
