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When Stocks Are On Sale

This caught my eye as I tend to look at stocks when they near a significant, long-term support such as a 100 month or 200 month EMA or SMA.  Of course I'm buying with a long term perspective in this approach but it got me wondering: Is is better to hold your breath and simply buy stocks when they've sold off 20%? The downside still terrifies me but looking at historical returns is intriguing.   From Awelathofcommonsense:

Large cap U.S. equities continue to hold up well with the S&P 500 down roughly 12% from its all-time highs reached last spring. To some degree, this performance has masked the global bear market going on in the rest of the world. Take a look at this list of country ETFs from Bespoke Investment Group:

 

Screen Shot 2016-02-10 at 10.21.57 AM

The average drop from the 52-week high on this list is just shy of 30%. Not too pretty. But beauty is in the eye of the beholder in these situations. Historically, buying global stocks after they have fallen into bear market territory has been rewarding for investors.

I went back and looked at the MSCI World Index bear markets going back to 1970. In more than 45 years there have been ten of them or one every 4.5 years or so. Here they are using monthly returns (so some of these drawdowns were actually larger than they appear because he tops and bottoms occurred intra-month, but this is close enough):

Screen Shot 2016-02-10 at 10.42.48 AM

I looked at each of these bear markets to see what would happen if an investor bought stocks the month after they fell into a bear market (down 20%). This means that there were a number of cases in which stocks continued to fall in the short-to-intermediate term well past the 20% mark.

There were only two times out of the ten bear markets where stocks weren’t higher one year later. Only once were stocks down three years later. And there was never a period where stocks weren’t higher five years after initially falling 20%. The paradox of investing is that the best times to put your money to work are often when things seem like they’re never going to get better.

Of course, things could always get worse before they get better. Central banking policies could wreak havoc on people’s confidence in the system. We could see a global recession. The U.S. could join the party and continue to fall even further. But investors and savers alike have to remember that falling prices are a good thing for future returns. I looked at the dividend yields for each of the country ETFs listed above. The average yield is now around 3.3%. That’s more than one percent higher than the current yield on the S&P 500.

Using the past as our guide, it’s clear that bear markets tend to be a great time to put money to work for those who can look past short-term volatility. Long-term savers and investors should see this as an opportunity, not a crisis.

Global stocks are on sale.  Are you buying?

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