As tempting as it may be to catch a market bottom, don’t. It’s like to trying to catch a falling knife – risky and dangerous. Yes, I know it’s thrilling to buy stock when it goes on sale. If you have a long-term investing horizon, a massive “mis-pricing” could lead to huge gains. But it’s still a big risk.
Resist the temptation to catch a market bottom
When the global economy collapsed in 2008, many banks looked like they were headed to the graveyard. Bank of America and Citigroup were among them. Citigroup was teetering on the edge of bankruptcy until the government provided an injection of liquidity. Bank of America (BAC) was reeling from a fractured mortgage market and impending recession.
BAC tumbled nearly 95% in value and ended up at $3 per share. This was a great time to snap up the stock if you believed the world was not ending. Today the stock is 800% higher than it was at the true bottom.
And therein lies the lesson about trying to catch a market bottom. BAC fell from the mid $40’s in 2007 to $3 over the course of a year. When was the opportune time to snap up some stock? In the moment, you don’t know. It’s impossible to time a market bottom. Instead, you need to be patient and wait. The market will always give you chances to buy (and sell).
If you take a chance and try to time that bottom, you might get lucky. But here’s the thing: you don’t need to be the first mover.
You didn’t need to scoop up bargains immediately. By waiting for a trend to take hold in April or May, you could still have made some tidy profits without taking on so much risk.
Remember, opportunity will always be there. Let the others catch the market bottom while you catch the trends.