Cheap Lee Dot Com

Considering the mega bailout that has recently passed and people are anxious to see light at the end of the tunnel, it sounds smart to ask, “Is now the right time to buy into the stock market?” But before you spring into action, this may be the wrong question to ask for several reasons.

One: Asking someone who knows just as much about what will happen in the future as you do isn’t going to provide you more insight than you can offer yourself. Heck, as a prognosticator myself, I called the bottom several times.

Two: By asking someone else, you take the decision out of your hands, and put it in the hands of others, who may or may not know what’s going on. In effect, you no longer feel obligated for your decisions once you find out the answer to this question. Wrong! It’s still your money.

Realize first that answering this question is a waste of energy. You can’t accurately predict if this is the hour, the day or the week to buy the S+P 500, the Dow or another ETF. This is why so many Wall Street professionals are hurting. With all of their words of wisdom, most managers are losing money, and have been for months. If they know when to get in, they also would have known when to get out. To make the point plainly, we can never tell when the best time to buy. And we don’t need to!

First Lesson: Never Catch a Falling Knife

There is an old adage on Wall Street: Never catch a falling knife! Now if a knife falls off the kitchen table, you are going to let it drop. Obviously, you don’t want to get hurt. The same concept applies towards the market. When the stock market starts to drop, you should be looking to get out. In previously posts, we have explored several ideas to help us make that determination of when to get in and when to get out of the market.

• Watching the economy – why would you want to keep investing in an economy that shows signs of a decline and no growth? There is no reason to stay in an economy that is expected to continue to slow.

• Watching market volatility – we all know that as markets sell off, stocks tend to sell off 3 to 4 times faster than they go up. Therefore, their volatility (stock’s recent movement compared to their normal conditions) goes up. And volatility across the entire market can be measured through several indicators like the VIX indicator. When the VIX rises above a certain threshold, you should get out. When it falls below that point, get back in. Keep it as simple as that.

• Stop program – do you have a way to automatically get you out? We are only human and sometimes let our emotions get in the way. Use a stop program to help stop yourself from making poor financial decisions.

While these strategies help us to get out when we should get out, we delude ourselves into thinking we can time into the market at the bottom. The falling knife plainly reminds us, we don’t know how far down the rabbit hole goes.

Re-evaluating our intentions

Before we can attempt buy back into the market, we have to come to terms with the fact that we are not perfect, and we can never be when it comes to timing the market. Our fear and regrets can wreak havoc on our emotions. And this emotional roller coaster ride is the primary reason we shouldn’t be addressing this question in the first place.

Now I can tell you that the probability of selling off further from the large recent record crash, considering we started from a high of 14,200, is statistically pretty low. But I can also debate the fact that we have recently defined new records, and by just looking at statistics only tells of past events. By making your decision by the numbers doesn’t provide consolation either way.

So we are back to where we started, right?

Not exactly! You know you can’t accurately time the market and you know that you will most likely get it wrong. But you also may not realize that any stock market returns that you may achieve now will be achieved in a slowing economy, so where will that lead you? Buying for returns doesn’t serve a purpose unless what you’re buying will produce growth. Put it simply, are you buying because what you are buying is going to grow?

If you don’t know, you are just betting that this is right point in time. But this is not to say we will never see light again, either. Companies are in business to do business. As time passes, they will become more incentivized to make things happen, like making more loans to homeowners to bring profits in the door.

While you may be tempted to see this as the right time to get into the stock market, you also find is hard to justify an investment if the economy continues to slow down. Only the very bold will see this as a move to buy, and buy meagerly. The rest of us should question whether buying now is really worth the risk versus waiting for a safer entry point where we have more certainty with the economy, as well as seeing market volatility recede. We can still have a profitable portfolio for our future and not have to time it perfectly.

• Tired of stock market losses? 3 tips to know when to get out of the market
• Is this the stock market bottom?
• 5 Golden Rules to help you avoid a stock market crash
• The Basics of Stop Orders and other conditional orders
• Government Bailouts Gone Wild!