The Best Time to Buy Stocks
Over the past thirty-five years (dating back to March 7, 1980), there have been twenty-nine (29) instances where the market has corrected five percent or more in a single week. Just recently, in late August 2015, the markets did just that — dropped by more than 5%, the first time since 2011.
While most retail investors panicked, the smart ones picked up the phone and had conversations with their advisors. Why? Because their advisors provided them with tangible evidence that such a wild drop presented a tremendous opportunity. Here are some talking points that address why, when the markets drop five percent or more in a single week, it should trigger your buy instincts rather than your sell instincts.
Stock chart
Keep in mind; these tips are based on empirical data compiled in the twenty nine instances since 1980 where the S&P 500 dropped by more than 5%.
- In the weeks that followed the initial 5% drop, eleven of twenty nine (or 38% of the time) markets continued to drop. That means in nearly 2/3 of the weeks that follow a 5% drop, the markets increased.
- In those eleven instances, the markets dropped by another 10% or more only twice. This compares four instances where it gained more than 10% in that weeks immediately following a 5% drop.
- Looking out even farther, in the four weeks that follow a 5% (or more) drop, the markets continued to drop by 10% or more in three instances; this compares to five instances where they gained more than 10%.
- Even farther out, in the twelve weeks that followed, eight periods showed negative numbers. Half of those reported losses greater than 10%. In comparison, eight of those twenty-one “gaining” periods showed increases of 10% or more.
From these four bullet points, it’s clear that the odds are in your favor if you were to buy a basket of stocks following a 5% weekly drop in the S&P500. What’s even more interesting is that the longer you hold this position, the greater your potential loss… likewise, the greater your potential gain.
Ultimately, short-term gains are most likely in the week immediately following the 5% drop. While those gains are less likely to be greater than 10%, they are more likely to be positive in the first place.
For readers paying really close attention, it may be of added interest to learn that in only four of those twenty-nine periods were the markets down in each of those post-correction time frames (e.g. down after a week, after four weeks and again after twelve weeks).
Ultimately, your best bet is to connect with your financial advisor. They’ll know the best “spots” and strategies to match your goals.
Note: The points made in this article were built using Bloomberg’s public data.