My plan is to wait for the crash and when things start looking better get back into the market to ride the rebound. Do you think this is a good idea? –Tim H.
If I thought you were able to predict when stocks will crash, when the market will hit bottom and when it will actually recover, then I’d say your plan is masterful, a sure-fire way to avoid losses, capitalize on gains and boost your long-term return. Unfortunately, your chances of doing all that range between zero and none. So I consider your idea a fantasy, not a bona fide plan.
The problem is that while it’s easy to identify market peaks in retrospect, it’s virtually impossible to call market tops in real time.
Back in late 1996, for example, when former Federal Reserve chairman Alan Greenspan delivered his famous “irrational exuberance” speech in the midst of the dot-com bubble, some investors interpreted his remarks as a not-so-veiled warning that stock valuations were stretched so thin that the market must be headed for a crash. And it was. Except that the crash didn’t come until more than three years later, a stretch during which stock prices more than doubled.
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