Bottom this, bottom that, the bottom is coming, the bottom was here, nobody knows where the bottom will be. If nobody knows where the market bottom will be, why is every obsessed with trying to figure it out?
On every financial news channel, in every investment website and publication and even on the front page of AP there is talk of the market bottom and where it will be. It seems like the beginning of every article are the compelling reasons why the bottom is coming and the second part is talking about how nobody knows where it is. So let’s take a look at what people are talking about when they talk about the market bottom.
As we have talked about before, the market has ups and downs. When the market goes up or down, even severely, that is by no means an indication that the financial is about to blow up. It means people lose their jobs and some of their wealth and those are very significant events but speaking purely of economics, these ups and downs are often results of economic factors such as supply and demand getting out of balance, trading bubbles, and others.
It’s important not to listen to the media. Remember that the media’s first job is to get people to tune in. They certainly want to be responsible in their reporting but paying the bills come from ratings so if they can get you and I a little alarmed by talking about the current meltdown, they will do it. If they can tell you that they have the secret answer to when the market will bottom or they can interview today’s expert who is willing to call the bottom, it may get you to tune in. They don’t know where the market bottom any more than you and I do.
Here is what I consider to be the most important part of this subject of the market bottom: Who cares? The stock market moves up and down as a result of humans with human emotions. Knowing that there is no scientific way known that will call a bottom, why do we care? The textbook answer to that question is that if you can call a bottom, that’s when you invest for maximum gains. That seems like a good system but the problem is that statistics show that people who try to invest at the bottom often end up losing money in the end.
The better way to invest is a form of dollar cost averaging where you invest in small amounts on the way down. This allows you to make money following the downturn without having to be in the business of telling the future.
Forget about the bottom and spend more time analyzing your positions and finding new ones. You’ll make more money in the end.