- After the coronavirus-crash, many investors want to buy cheap stocks.
- Nobody can know if we reached the bottom. Be cautious.
- Timing is mostly ineffective.
- A good old tactic is cost averaging.
Better Buy Cheap Stocks Than Expensive Ones
Now, after the coronavirus stock market crash in March, investors can read dozens of opinions and prognosis in the world press every day. All about whether stocks should be bought at these post-coronavirus levels or not. Half of the opinions say yes, the other half, not yet. Some are talking about a “once-in-a-lifetime buying opportunity”. Others say “the worst is not over yet” or “real bottoms come far lower than that”. It can embarrass, especially inexperienced investors, not to be able to determine which expert to trust. Now, in March, April, changes are so fast.
It seems to be impossible to make a reliable prognosis. But many old stock market wolves believe we should buy. Now, “when there’s blood in the streets”. When everyone sells. This is the essence of the so-called contrarian thinking. (There are other schools, like technical analysis with different approaches.) Many fundamental analysts also think so, for example, the guru, Warren Buffett. He bought many stocks in 2009. Older investors may be bored with this sentence, but the quote fits very well here:
Be Fearful When Others Are Greedy and Greedy When Others Are Fearful – Warren Buffett.
Hard to Keep Calm in the Crash
Although we can’t be sure, buying cheap stocks after big falls will likely be a good investment in the long run. This is also supported by my private calculations. (Read here: Should You Buy This Crazy Coronavirus Crash?) But it does matter at what price we buy. It’s very depressing when you buy stocks and they still fall other 20 to 30 percent. Investing is often a psychic challenge, especially in a crash. It’s hard to keep calm and avoid panic. For example, look at the chart of the S&P 500 index in 2008-2009:
It is important whether somebody bought the S&P 500 index at 670 or 930 points, for example. (Marked with arrows.) The difference is huge, 28 or 38 percent (670/930 or 930/670).
Ageless Advice with Common Sense
When someone asks me if to buy or sell at a certain price, I never give a straight answer. Usually, I can’t know anything for sure either. And I don’t want to cause the losses of others. Good advice in a situation like this might be: Buy (or sell) the half now, the other half later. So if prices improve, the person is glad he still has a half. And if they get worse, he’s glad he’s sold half of it. The risk is lower, and the mental burden is also minor.
A more serious method, the Dollar Cost Averaging, is based on a similar principle. Investors divide their cash into various packages, and spend them periodically, in equal parts. At regular intervals, such as at the beginning of each month. For example, if you have ten thousand dollars, you can spend two thousand dollars each time for five months. Or $1,000-$1,000 each for ten months. More purchases, or more selling points, mean more price levels, and less volatility. Less dependency from the incalculable waves of the market, from one special event of buying or selling.
Dollar-cost averaging (DCA) is an investment strategy in which an investor divides up the total amount to be invested across periodic purchases of a target asset in an effort to reduce the impact of volatility on the overall purchase. The purchases occur regardless of the asset’s price and at regular intervals; in effect, this strategy removes much of the detailed work of attempting to time the market in order to make purchases of equities at the best prices. (Investopedia)
Timing the Stock Market Is a Nightmare
Because, “timing the market” – catch the lowest bottom or the highest top – is impossible and the process is risky. Several studies show small investors used to be at the unfortunate end of the trades. Their timing is mostly horrible.
A multi-year stock growth ends and a big crash begins, when also the taxi drivers and the cleaning ladies begin to be interested in stocks. But only a few taxi drivers were so clever that they were interested in stocks at the lowest prices in the year 2002, 2003 and 2009. (Source: Stocks and Exchange: The only Book you need)
Dollar-cost Averaging doesn’t protect you from losses in the stock market. It defends you from making only one wrong investment at the wrong time, at the wrong price. (Or get out of something at wrong conditions.) It prevents terrible timing.
Risks can be managed in many other ways, here you are some in the following list. (Not complete.) Each method has its advantages, disadvantages, opportunities, dangers.
Buy Cheap Stocks like Eggs
The conclusion about cheap stock buys is another idiom with common sense. “Don’t put all your eggs in one basket”. Don’t concentrate all resources on one investment as you could lose everything. And don’t buy all your stock portfolio at the same price as this price can result as too high. Diversify, not only your investment classes, stocks. But also diversify in time.
More Important Readings for You About Your Money
- Crude Oil Buy Is an Extremely Dangerous Play
- Should You Buy This Crazy Coronavirus Crash?
- To Buy Or Not to Buy? Was This All the Stock Market Coronavirus Crash?
- Can You, Indeed, Build a Decent Passive Income with Stocks?
- 6 Effective and Proven Ways to Lose Your Money
- Is It A Myth? – The Genuine Truth About Passive Income
I’m not a certified financial advisor nor a certified financial analyst, accountant nor lawyer. The contents on my site and in my posts are for informational and entertainment purposes and reflecting my collection of data, ideas, opinions. Please, make your proper research or consult your advisors before making any investment or financial or legal decisions.
I have open positions in global energy stocks (long) at the time of writing.
(Cover photo: Pixabay.com.)