When is the right time to buy stocks?

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Global stock markets, and the US markets in particular, have displayed a large degree of volatility since the middle of last year and daily fluctuations are now back at levels last seen in 2003. This is shown clearly by the following graph of the daily change in the value of the S&P 500 Index.


Source: StockCharts.com

In the nature of stock markets, some investors seem ready to turn tail at the first sign of bad news. On the other hand, there are those who are only interested in knowing whether the current bear phase has bottomed so that they can buy stocks again.

This begs the question: When is the right time to buy stocks? Unfortunately there is no straightforward answer, irrespective of the amount of analysis thrown at the issue. But let’s step aside from trying to time the market by simply considering what the chances would be of losing/making money on the stock market over different holding periods.

I have asked the research team of my investment firm, Plexus Asset Management, to conduct an analysis of the returns of the S&P 500 Index for different holding periods over the past 51 years (i.e. from the inception of the “new-look” S&P 500 Index in 1957 through 2008). Both price movements and dividends were included in the return calculations.

The following graph and table summarize the research results:


The analysis of the one-month holding periods indicated that 36.3% of all the periods resulted in a negative return and that 63.7% of all the periods therefore recorded a positive return. The best one-month period (September 1982) showed a return of 12.1% and the worst month (October 1987) a return of -21.6%, while the average monthly return was 0.9%.

It therefore seems as if the likelihood of a profit over the one-month period is better than the likelihood of a loss, but in view of a probability of 36% investors will still have a tough time knowing how the situation will play itself out.

Unless you have the proverbial crystal ball, why take the risk of investing in the stock market? It is for the simple reason that the situation looks significantly different over longer periods – the longer the investment term, the less chance of ending up in the red.

By increasing the investment term to one year, the picture already starts improving. 76.9% of all the one-year periods showed a positive return, i.e. 23.1% of these periods registered negative returns. Furthermore, the best one-year period (August 1982 to July 1983) showed a return of 60.2% and the worst (November 1973 to October 1974) a return of -34.2%. The average return was 11.9%.

As can be expected, investors fared much better over the five-year holding periods. A loss was made in only 8.0% of the periods, while the average return amounted to 10.8% per annum. The best period (September 1982 to August 1987) showed a return of 29.7% per annum, whereas the worst period (April 1998 to March 2003) recorded a return of -3.8% per annum.

Stretching the holding period even longer, not a single one of the 493 rolling ten-year periods produced a negative return. The average return for staying invested for ten years was 11.1% per annum.

The research results are not offered as an alternative to sound fundamental and technical models (or perhaps an experienced “gut”) with a track record of having accurately identified entry or exit levels over time. It merely serves the purpose of alerting investors to the stock market’s return profile over different holding periods in order to (1) know what they are “up against”, and (2) properly match their investment personalities with investment periods that are optimal for allowing them a good night’s sleep en route to an improved lifestyle.

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15 comments to When is the right time to buy stocks?

  • When is the right time to buy stocks?…

    When is the right time to buy stocks? Unfortunately there is no straightforward answer, irrespective of the amount of analysis thrown at the question. This blog post steps aside from the timing issue by simply considering what the chances would be of l…

  • Dave Marck

    Thanks for the post.

    Really appreciate the printable format.

  • but…did you discount for inflation?…without discounting for inflation, a positive return over a longer term is almost guaranteed. But if you discount for inflation (even leaving out tax impact) – I have to guess the results w/b significantly reduced. 10 years gets you 11.1% but I bet inflation ate up 100% of that gain.

  • Great stuff!!! I always make the comment that often times it isn’t how much you make but how was the trip on the way to your destination. For example, say I promised you a 100% return but to earn that you were guaranteed to lose 50% of your capital along the way; despite a guaranteed 100% return I still don’t think most investors could sit through a period where they lost 50% of their capital. How does this apply to your comments here? Despite longer holding periods producing more reliable returns you are still better off buying low and selling high. Say you bought the S&P500 in 1999; not only would you have suffered a 44% drawdown from 2000 to 2002, your position is now underwater (again) after 9 years. Not pleasant.

    In any case, an investment approach that offers diversification with proper risk management and is active (as opposed to passive buy and hold) should win out in the end.

    I do like the analysis.

  • songstarter71

    readers would gain a much truer picture of the risks/rewards if you provided post-inflation stock returns using government reported inflation data vs. john williams Shadow Government Statistics inflation data vs. gold vs. m3

  • Dimitry P.

    Great analysis, Prieur!

    These results, though obvious, provide another great measure to differentiate the speculation and investment in a very straight and logical way.


    Could you perhaps do the following excersise? What if one sifted out all periods/points over the last 50 years where the market has lost say 10% or more during the previous 3 months. (More or less the situation all markets are in now)Then determine what the chances are to lose money for different holding periods if you bought at such points?

  • David and songstarter: I did a study in May 2007 that focused on the components of the S&P’s total return. The total nominal return from 1871 to 2006 was 9.2% p.a. of which real capital growth contributed 2.2% p.a., dividends 4.8% and inflation 2.2%.

    Here is the link: http://www.investmentpostcards.com/2007/05/18/compounding-its-a-kind-of-magic/

    There are many refinements that one could incorporate in a study of this nature, but I doubt that the broad conclusion would be different.

  • Johan: One could certainly do that or, alternatively, consider valuation levels that are regarded cheap by certain standards as the yardstick.

  • Anker

    Useful, but perhaps a refinement could be added (which may be what you implied by the “cheap by certain standards” comment) in which the holding periods were sorted or grouped by the p/e or the dividend yield at the start. Intuitively, holding from 1999, a time of high p/e’s in certain indexes, until now would seem likely to have a lower return than the historic norm.

  • Anker: Yes that is what I was referring to. I did a study along valuation lines in June 2007 that you will find of interest.

    Here is the link: http://www.investmentpostcards.com/2007/06/05/us-equity-returns-what-to-expect/

  • Great posting. However, I am not sure if the result is applicable to “stocks” (as the title of the post) as the test was on the S&P 500 and not on a basket of stocks.

    Unless you are building a basket of stocks to match the makeup of the S&P 500, you are likely to get much more variance in your result and things like survivorship bias can easily spoil the veracity of your result.

    The result does demonstrate the benefit of index funds over the long term though.

  • The market volatility has left many investor with a dilemma … To keep investing or to stay on the sideline with the speculation of a major recession.

    The volatility has created a playground for Traders. I believe a Trader will be better off with ROI in this kind of market. Anyone who wish to invest needs to define Investment and Trading accordingly.

  • Dan Modricker

    It really doesn’t make any difference what the markets return, if one always lives within his means. It’s moot!

    Never draw down on your savings. Invest them for the long term, and enjoy watching the pile grow. Inflation and taxes wear the pile down, but so what … if one lives on a cash basis?

    My wife and I have been living within our means since we married in 1957;i.e. never buying anything that depreciates on credit. We have accumulated significant assets .. because we never draw down on what we set aside?

    It doesn’t take a rocket scientist to figure out that you don’t gain if you sell your house and try to buy another equivalent one! Nor does it take a brain surgeon to realize if one always adjusts his budget to live within his means, it really makes no difference what the markets do!

  • Ellie Chizmarova

    This is a great study? Is it available for distribution to clients?

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