Broker Check

When Is The Right Time to Buy Stocks?

March 15, 2024

KISS is an acronym for “keep it simple, stupid,” coined by the U.S. Navy in the 1960s. It is a design principle asserting that most systems work best when kept simple by avoiding needless complexity. Few industries have ignored simplicity more than financial services.

The myriad of overly complex investment strategies that aim to squeeze excess returns from timing entry points is overwhelming. Some rely on sentiment indicators, while others employ PhD-level mathematics to squeeze out fractions of a percent more every year.

But really, all most investors need here is a KISS. Let’s cherry-pick some extreme highs and lows this century to see why.

Beginning with the dot-com bubble, had you invested at the bottom on October 2, 2002, you’d be up 851%, or 11.1% annualized. If you invested at the peak on March 10, 2001, you’d be up 553%, or 8.5% annualized. Not too shabby, considering this return bakes in horrific timing and two of the worst recessions in history.

One of those was the Global Financial Crisis. Had you bought at the bottom on March 9, 2009, you’d be up over 10x (925%), with an annualized return of 16.7%1. What if you bought at the peak on October 9, 2007? Amazingly, you’re still up over 355%, or 9.7% annualized.

Had you found the courage to buy at the most recent low on October 12, 2022, you’d be up 48%, or 31.8% annualized. If you were late to the last bull market and bought at the top on January 3, 2022, you’d still be up 11.8%, or 5.7%, over a two-year stretch that dealt the most aggressive monetary tightening in four decades.

Rather than picking specific times to buy, what about dollar cost averaging? This is a popular timing strategy meant to ease an investor into the stock market by buying consistently at specific times, irrespective of where the market is trading.

For example, if you are uncomfortable investing a large sum at once, you could deploy capital in equal amounts on the last day of every quarter over a year. Or you could invest a portion of each paycheck at the end of every month.

Whether or not dollar cost averaging works is unclear. There’s ample evidence on both sides of the debate, depending on the timeframe, the reality of having the discipline to buy no matter what, etc.

However, the chart below shows that the longer you’re invested, the better the odds of success. If dollar cost averaging is what it takes to get you comfortable and in the stock market faster than sitting around and waiting for “just the right time,” then use it. Here, the ends justify the means.

Simply put, the “best” time to invest in stocks is when you have cash lying around that you won’t need for the next few years. No other factor, signal, metric, second derivative, astrological sign, pundit, or indicator is needed.

The bottom line

There’s an old saying that the biggest risk to a good plan is pursuing a perfect one. Bottom-ticking a buy and top-ticking a sell feel great, but they only happen a handful of times. Hence, focusing more effort on exceptions rather than norms risks leaving a lot of money on the table for no good reason.

The Pareto Principle can be applied here to emphasize this point further. It states that 80% of an outcome comes from 20% of the work (also known as the “80/20” rule). Within this context, 80% of your return is often explained by just being invested. Mess around with this too much, and the bulk of your return could be at risk.

To be clear, I’m not implying that wanting to do better is risky. There’s an obvious and direct correlation between practice and gains. Lift more weights, and you’ll get stronger. Read more books, and you’ll become a better writer. Try new investment strategies, and you’ll either become wealthier or wiser.

But if just being invested accounts for most of the return, focus the remaining 80% of that effort on what to buy, not when. Get better at analyzing a balance sheet because that will tell you if a company could have problems with its debt. Learn how to analyze cash flow to see which companies are better allocators. Study investing legends and past cycles to look for patterns that repeat. If you don’t want to do it, hire someone to do it for you.

The bottom line is that if your timing isn’t perfect, who cares? If you bought, then you’re in the game. Over the long run, that’s what matters most because this is one of the few facets of life where participation trophies mean something.


 


Sources

Bloomberg, as of 3/13/2024.


Disclosures

This material has been prepared for informational purposes only and should not be construed as a solicitation to effect, or attempt to effect, either transactions in securities or the rendering of personalized investment advice. This material is not intended to provide, and should not be relied on for tax, legal, investment, accounting, or other financial advice. You should consult your own tax, legal, financial, and accounting advisors before engaging in any transaction. Asset allocation and diversification do not guarantee a profit or protect against a loss. All references to potential future developments or outcomes are strictly the views and opinions of Richard W. Paul & Associates and in no way promise, guarantee, or seek to predict with any certainty what may or may not occur in various economies and investment markets. Past performance is not necessarily indicative of future performance.