Statistics: buying stocks just before a recession pays better than buying stocks every month
raylopez99
it's been found that buying "month to month" is actually not as good
as simply buying all at once (if you have the cash). Of course buying
the NASDAQ in March 2000 was probably not a good idea, but that's the
exception (that proves the rule).
RL
From Morningstar.com
Recession Coming?
Economic crunch time has arrived. Block and tackle with these four
picks.
By Bill Bergman | 12-06-07 | 01:30 PM | E-mail Article | Print Article
| Permissions/Reprints | Bill's Monthly Newsletter
Several indicators suggest that a recession is likely getting under
way. Even if we don't have a recession, weaker economic activity has
certainly been weighing on a lot of companies, not to mention the
minds and buying habits of investors.
But does that mean it's a bad time to buy stocks? Not necessarily.
We've had nine recessions since 1950. If you had put $1 on the S&P 500
every month since 1950, your $695 would be worth roughly $11,192
today. But if you had the discipline, foresight, or luck to have
broken up the $695 into nine equal chunks--buying the S&P 500 at the
outset of those nine recessions--you would have about $13,750 today,
or 22% more. Inflation would have taken a large chunk of that change,
but putting your money to work in the market sure would have beaten
stuffing it under a mattress.
Granted, past performance does not guarantee future success. In turn,
it is also true that if you had waited for a few months after those
recessions had started before buying into the S&P 500, you would have
even done a little bit better. But buying stocks at the beginning of
recessions can make sense. The S&P 500 is in the index of leading
economic indicators for a good reason. Stock prices tend to go down
before recessions begin, and appreciate before recoveries get under
way. The signal is clearer on recoveries than on recessions, but that
is part of the point.
JOSE BAILEN
discounted by the markets. Also, another reason could be that a
recession usually implies a looser monetary policy -lower interest
rates- that make alternative investments (bonds) less attractive.
raylopez99
inference ("if you had...luck") is that the stocks were bought just
*before* the recession. Unless the stock market can forsee a
recession (i.e. be down because of a perceived recession coming) then
the inference is that the recession is not yet underway when the
stocks were bought, so the market was still "high". Once a recession
hits, the stock market initially tanks, so of course that is a long-
term buying opportunity.
So I think the real reason for this phenomena is simply a variant of
the theme I pointed out in the OP--the "buy on dips" stock buying plan
is inferior to "buy all at once" in terms of rate of return, at least
when the overall market is concerned (individual stocks may be
different).
RL
JOSE BAILEN
"But buying stocks at the beginning of
recessions can make sense. The S&P 500 is in the index of leading
economic indicators for a good reason. Stock prices tend to go down
before recessions begin, and appreciate before recoveries get under
way. The signal is clearer on recoveries than on recessions, but that
is part of the point."
They say "buying stocks AT THE BEGINNING of recessions", not before
recessions. My guess (and the article's) is that this is because the
recession has been already discounted by the market: the stock prices
already have gone down before the recession actually takes place.
Another reason could be that, during recessions, usually the yield of
alternative investments (fixed income, real estate) goes down. This is
usually the case unless the recession has been caused by the crash of
the stock market itself, as it happened in the early 2000s: during
that period, the yield of both real interest rates and the stock
market went down, so people re-allocated wealth to other assets
-houses, mostly- with the results we all know (a house market price
bubble which is now being corrected).
raylopez99
> The article says:
>
> "But buying stocks at the beginning of
> recessions can make sense. The S&P 500 is in the index of leading
> economic indicators for a good reason. Stock prices tend to go down
> before recessions begin,
correctly predicted 10 out of the last 5 recessions (meaning it
doesn't do a good job of prediction).
> They say "buying stocks AT THE BEGINNING of recessions", not before
> recessions. My guess (and the article's) is that this is because the
> recession has been already discounted by the market: the stock prices
> already have gone down before the recession actually takes place.
perhaps the author is confusing when a recession is "officially
declared" and when it really begins (the two are different--you need
two consecutive down quarters before a recession is "officially
declared").
>
> Another reason could be that, during recessions, usually the yield of
> alternative investments (fixed income, real estate) goes down. This is
> usually the case unless the recession has been caused by the crash of
> the stock market itself, as it happened in the early 2000s: during
> that period, the yield of both real interest rates and the stock
> market went down, so people re-allocated wealth to other assets
> -houses, mostly- with the results we all know (a house market price
> bubble which is now being corrected).
>
prices never fall. Hope you sold your Barcelona apartment at an
acceptible price. Then again, a prime piece of real estate tends not
to decline as much as junk out in the swampland during a slump.
Barcelona has a good reputation (I think it's made the top 20 best
places to live list at least once, as DC does, and of course
Australia, the Nordic countries and Switzerland).
RL
JOSE BAILEN
the following periods in which stocks went down (full year):
1/ 2000-2002 ==> recession;
21994 ==> no recession
3/ 1990 ==> recession
4/ 1987==> no recession
5/ 1981 ==> recession
6/1977 ==> no recession
7/ 1973-74 ==> recession
8/ 1969 ==> no recession
So at least for the last 4 decades it has been true that stock market
declines have predicted 8 of the last 4 recessions. This could be
because stock markets are more volatile than the economic cycle, this
means that the likelihood of a stock market decline is greater than
the probability of a recession.
On 12/16/07, raylopez99 <raylo...@yahoo.com> wrote:
>