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Blog : Don't Miss the Bottom
October 31st, 2008
You may have heard you should avoid trying to pick the bottom. It's actually great advice, since most people call it too soon, and end up taking greater losses than the potential gains from "being right."
However, there are a few things to keep in mind, especially for those investors with a longer term outlook.
Keep in mind that everything presented here is based on data that is both historical and reverse-looking. While it holds true time and time again, you won't see it happening until it has already happened.
For example, when a market does bottom, it is on average a full six months before the underlying recession comes to an end. So, if you're looking to get back into stocks once the economy has healed, you have already missed the boat.
As well, the average percentage price increase over that 6 month span (after the bottom and before the recovery of the economy) is 25%. Again, if you're looking to get back into stocks once they start going back to "normal" valuations, you would do yourself a favor to start buying in before the widely agreed-upon economic recovery.
You won't know when we bottomed at the time, but rather by looking back after the fact. Yes, it is a bad idea to try and pick the bottom. However, it is a good idea to try and pick up bargains that are available sometime during that 6 month span following the bottom.
I think trying to hit a window of several months should be a lot easier for most investors than trying to buy in on the exact day where the markets hit their low. Simply put, it's a wider target, and may produce almost the same profit results.