Close Close
Popular Financial Topics Discover relevant content from across the suite of ALM legal publications From the Industry More content from ThinkAdvisor and select sponsors Investment Advisor Issue Gallery Read digital editions of Investment Advisor Magazine Tax Facts Get clear, current, and reliable answers to pressing tax questions
Luminaries Awards
Stock market bull and bear

Portfolio > Economy & Markets

Don’t Buy the Dip Too Early in a Bear Market, Analysis Warns

Your article was successfully shared with the contacts you provided.

What You Need to Know

  • Bear markets signal a leadership change, but few investors are listening, Suzuki said.
  • Rather than shifting from “bubble assets,” investors see initial price drops as a chance to buy them cheap, he wrote.
  • Investing later in a bear market tends to improve results and allows more time to assess fundamental data.

Investors who wait several months after a bear-market bottom to move their cash into stocks generally fare better than those trying to buy on the trough, an analysis from Richard Bernstein Advisors suggests.

“Many investors insist on buying early so that they ‘can be there at the bottom.’ Yet history suggests that it’s better to be late than early,” Dan Suzuki, deputy chief investment officer at RBA, said in a recent post.

The firm analyzed returns for the full 18-month period encompassing the six months before and the 12 months after each market bottom, then compared the hypothetical returns of an investor who owned 100% stocks for the entire period, or “6 months early,” with one who held 100% cash until six months after the market bottom, then shifted to 100% stocks, or “6 months late.”

“In seven of the last ten bear markets, it has been better to be late than early,” Suzuki wrote. “Not only does this tend to improve returns while drastically reducing downside potential, but this approach also gives one more time to assess incoming fundamental data. Because if it’s not based on fundamentals, it’s just guessing.”

In four of those bear markets, the “early” investors saw negative returns over the 18-month period, according to an RBA chart.

(RBA used S&P 500 returns for the full 18 months for the hypothetical “6 months early” investors, and based the “6 months late” investor results on three-month Treasury bill performance as a proxy for cash returns for the first 12 months and on S&P 500 performance for the last six months.)

In the past seven decades, early investors saw better results only in 1982, 1990 and 2020 all times in which the Federal Reserve had already been cutting interest rates, Suzuki noted. Given that the Fed is likely to keep raising rates at the same time earnings are starting to slow, “it seems premature to be significantly increasing equity exposure today,” Suzuki said in the post, published Aug. 16.

The article pre-dated Friday’s drop of more than 1,000 points in the Dow Jones Industrial Average, which followed Fed Chairman Jerome Powell’s hawkish comments at the Fed’s economic conference in Jackson Hole, Wyoming. The stock sell-off continued Monday morning, with the Dow down more than 300 points, or nearly 1%, at one point.

Two market rules remain steadfast, Suzuki wrote: Future cycle leadership always differs from previous market leadership, and bear markets always signal a leadership change. The sell-off this year “has been the market’s way of trying to hit investors over the head with the idea that they should avoid clinging to yesterday’s winners, but few seem to be listening,” he said.

“Rather than rotating portfolios away from bubble assets, investors tend to view the initial price declines as attractive opportunities to buy secular growth at huge discounts,” he said, adding that the history of bubbles suggests assets don’t quickly return to being great investments.

In the 2½-year bear market associated with the 2000-2002 tech crash, the Nasdaq 100 Index had 16 bear market rallies exceeding 10% during its 83% decline; three of those rallies surpassed 30%, Suzuki noted.


© 2024 ALM Global, LLC, All Rights Reserved. Request academic re-use from All other uses, submit a request to [email protected]. For more information visit Asset & Logo Licensing.