Friday, 10 March 2017

Corrections and Crashes

James commented on my CFD post, writing:

I agree that market timing is as fruitful as using 99.9% of tipsters but I still wouldn't want to start an index tracker with a one shot CFD at market top.
If you are drip feeding capital into an index tracker then that is okay because in the long run you can do harm. If buying a single contract CFD then market top is not a good idea as you will no doubt need a lot of margin in the short term.
I can understand this attitude from a psychological perspective, but when it comes to stock market trends, when they go on a bull run, the run can last quite a while. 

The conventional wisdom is that a bull market ends with a 20% or greater "correction", but there is no rule that says once this level is reached, it won't carry on falling. 
Indeed this happened relatively recently with the FTSE100, when such a drop was seen on 22nd January 2008 (5,338.70, down 21% from its high of 6,754.10). New lows were then recorded in July, September (now -30.8%), October (-45.7%), and finally (we hope) March 2009 at which point the index was a massive 48.8% down from its all-time high.

It's not until January 2010 that the markets recovers to within 20% of its all-time high, and another 42 months until a new high was recorded.

I guess my point is that even if you wait for a pull back, the only thing you can be sure of is that you are not buying at the top. 

A purchase can be value at the top, just as much as it can be after a drop of 20% or whatever as you can never know for sure where the market will go, at least not short-term. 

Long-term the trend is up unless, as one person cheerfully put it:
The only things that would prevent this from continuing, over the long-term, are things like global thermonuclear war, devastating pandemics that wipe out 50%+ of the population, or the zombie apocalypse
And if any of those events come to fruition, we have bigger problems than our investments!

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