Buying When Things Look Scary
March 9, 2009 is a date I will always remember. It turns out that it was the date that the stock market closed at the lowest level it would see for the foreseeable future. In other words, it was the day the market hit bottom. The bottom of the market is a wonderful thing because it means that if you are fully invested, you will finally start making up the money you’ve lost, and then some (eventually, hopefully).
But March 9, 2009 was not a happy day. It was terrible. I was at home with a newborn, on maternity leave and fretfully watching the market drop, imagining what may happen if the market continued its brutal descent. Of course, the market (S&P 500) did not continue downward; rather, it went up for the next three years. Today the stock market is roughly 110% up from its 2009 low. It is just 4% below it’s 2007 high.
If you had the foresight to see this upward market climb in March of 2009 you would have begged, borrowed and stolen to find money to invest in the market. But approximately 1% of my clients had this inclination. Everyone was shuttered in, wondering how much worse it was going to get.
You always hear that you are supposed to buy low and sell high. March 2009 is exactly why this is easier said than done. By the time things look better, you’ve missed part of the rally. The Euro-region is a good example of this now. The best time to buy would have been late November last year, when things looked their bleakest. Since then the EAFE is up nearly 8%. There is still much uncertainty surrounding that area of the world and things could indeed get worse. Having the nerve to buy when things look terrible may mean getting in too early and suffering part of the decline. You have to take a big step back and see that even if when you are buying isn’t an absolute low, it still may be a low relative to intermediate-term future prices.
One way we manage this is by setting strategic target allocations. If we want a portfolio to have an international allocation of 20%, we will rebalance that portfolio to its target as the international markets fall. By necessity, we will sell from something that has done better in the portfolio (sell high) and use the proceeds to buy international funds (buy low). This fixed allocation takes the crystal-ball reading out of the equation and keeps us disciplined. It makes buying low less of an emotional decision, and more of a strategic one.
Harli Palme, CFP®, CFA