With stock markets battered by the credit crunch and resulting recession many investors are trying to gauge the best time to re-enter the market and/or boost exiting positions. But is it really possible to determine the bottom before it becomes history?
Überinvestor Warren Buffett declared he was going bargain hunting last October (2008), but markets subsequently fell further. In Great Britain the real estate market bucked predictions by rising 1.9% in January (according to major mortgage lender, Halifax). Has longstanding pent-up demand caused the market to bottom early, or is it a mere aberration in the continuing downtrend predicted by economists?
Who knows? And that's the key point in attempting to time markets. Without the benefit of hindsight it really is impossible to determine optimal entry/exit points.
In his modern classic, The Black Swan, Nassim Taleb points out that in the 50 years prior to writing the 10 days with the biggest moves contributed 50% of the returns. You'd only need to be out the market 10 days out of 50 years to be down 50%!
The only rational conclusion is that you simply cannot afford to be out of the market, because there's no way of knowing when those most influential days are going to be. A 50% difference in capital represents a hell of a difference in the quality of your retirement.
Dollar cost averaging might be one of the oldest strategies in the investing handbook, but it's one that stands the test of time. Basically it means you invest a certain amount at frequent intervals, e.g. on a monthly basis. The idea is that when stocks are cheap your purchase buys more, and when they're expensive it buys less. The simplest way is through a low-cost tracker fund or ETF.
You can tinker with it if you like, e.g. investing more when you feel markets are cheap, and abstaining when they seem expensive. But whatever you do, don't withdraw from the markets altogether, lest you miss one of the 10 ultra-significant days of this half-century.
