by Scott Ronalds
There’s an old IKEA ad that I love. A woman is running out the door loaded with bags and yelling to her partner, “Start the car! Start the car!” Her thinking being that the cashier must’ve made a mistake ringing in the goods, so they better hit the road before someone figures it out. Now when I see a deal that’s too good to pass up, I utter those three words to my wife.
Are we at a “start the car!” moment in the markets? I’d say no. But it’s a decent sale, nonetheless.
Stocks in general are 20-30% cheaper than they were at the beginning of the year. If we accept that we’re never going to pick the market bottom, the numbers suggest it’s a good time to buy. Tom cited some stats in a recent article, courtesy of legendary investor Bill Miller: in the 15 instances since 1938 when the U.S. stock market (S&P 500 Index) was down at least 20%, you’d have made money over the next year on 11 out of 15 occasions if you invested at the -20% point (not the market bottom), with the average return being 16%. Going out to five years, the record was perfect, and the average annual return was 13% (all figures are in U.S. dollars).
When looked at this way, it’s a compelling time to be purchasing stocks if you’ve got a 5+ year time horizon. Sure, the sale may get even better, but the discount door could also be closing soon. If you’re looking to invest in quality businesses, there’s rarely a better time than when prices are down, expectations are low, and pessimism is high (a good contrarian indicator).
Without a doubt, it’s not an easy thing to do. Adding money to your portfolio when you’re staring down losses month after month takes a strong stomach. Or you may be in retirement and drawing on your portfolio, in which case buying is not an option (although rebalancing may be). It’s easy, too, to put together a list of reasons not to buy, with a pending recession and escalating war in Europe at the top.
But if you’re the type that likes a sale, you might want to think about warming up the car.
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