How to time the market when SPX drops 20% or more?

April 1, 2020

Introduction

It is creative world to explore as an investor. There are so many things to learn. Today I like to explore the topic like how to act and set up my own guidelines as an investor. 

Case study

I like to get some content from this article, and then look into topics I like to further explore. 

It's also helpful to implement some guidelines to help you know when to act. Two reasonable times I've identified to opportunistically invest your spare cash are at 20% and 30% market drops.

Why 20% and 30% drops? Because on average, the market falls 20% about once every four years, while we see a 30% drop about once a decade. That means they're both frequent and meaningful enough to make them worth setting some cash aside for.

For instance, the S&P 500 fell about 20% from early October to December 24, 2018, while the NASDAQ Composite fell even further:

during the Great Recession, the S&P 500 first fell 20% from October 2007 to July 2008. But unlike the more recent bounce-back in 2018-2019, the market fell another 45% before finally reaching bottom on March 9, 2009. In all, the S&P 500 lost almost 60% of its value from October 2007 to March 2009.

Keeping half of your market-crash money ready to deploy in a deeper market correction can serve two purposes. The first and most obvious is that it gives you the chance to take advantage of an even more deeply discounted stock market and enjoy bigger long-term gains when things inevitably improve. The second purpose may be even more important: It can help you manage your emotions and avoid falling into the trap of selling because you think you need to do something.

What should you do if the market falls more than 30%? Using history as our guide, we can predict that it probably will fall by 40% sometime in the next 30 or 40 years. At some point during the next century, it's likely going to once again lose half or more of its value, too. Personally, I don't keep extra cash set aside for these occurrences because they happen so rarely. You'll lose out more in opportunity cost -- how much the market goes up before it falls -- to make it worthwhile.

However, if your concern is managing your emotions and having a plan to help keep you from selling, it might be worth setting aside a small amount of cash to deploy at 40% or even 50% declines. Again, I wouldn't suggest it be a very large amount; the market will likely be triple in value from today's prices before we see another 50% decline.

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