The Little Book of Market Myths: How to Profit by Avoiding the Investing Mistakes Everyone Else Makes

Chater Ten

Wait Until You’re Sure

“Stocks seem so uncertain now. I’ll just wait until they’re acting more normally—then I’ll make a move.”

Sound familiar? Have you said or thought that? Or heard someone say it? Plenty of investors think this way—whether it’s in the middle of a bear market, a correction or even during a normal bull market run when volatility kicks up a bit.

But what is this normalcy folks are waiting for? A big “GET IN NOW!” sign? Or are they waiting for stocks to stop being so darn volatile and start appreciating in neat, tidy, non-panicky gradual-but-steady steps?

Wait for that, and you’ll wait forever. The idea stocks will and should behave “normally” and give you an all-clear buy signal is pure myth. Stocks are normally volatile—sometimes more volatile, sometimes less, but volatile all the same. (Revisit Chapter 4.) And you want them to be. Sounds perverse, but it’s true. Finance theory is clear: You can’t get much return without risk (i.e., volatility). If stocks had lower shorter-term volatility characteristics, the returns would be lower over time. If you want better returns, you must accept a higher level of shorter-term volatility. If you want lower shorter-term volatility, you should expect lower returns.

But this idea investors should wait until things seem more clear tends to pop up more frequently in the steep, painful bottoming period of a bear market—those days when stocks can swing wildly—maybe 4%, 5%, 6% or more in a single day! Yikes.

Then, it ...