There is a dangerous mind-set that infects many investors concerning the nature of stock market prices.
It goes something like this: stocks have suffered a big loss (or gain), so it is a good time to buy (or sell).
On the surface, this makes sense since it seems to follow the buy low, sell high strategy.
However, there is a problem.
While it is true that stocks rise and fall, the market doesn’t do so with any regular pattern.
For example, if you decided mid-way through the disastrous 2008 market that stocks were set to go up, you would have been terribly wrong.
The Dow experienced a swing from its high for the year to its low of more that 5,500 points. It dropped another 1,000 points from the low in 2009.
If you had jumped when the Dow dropped below 10,000, thinking this was the bottom, you would have seen the Dow fall to a low of 6,547 in 2009.
The Dow eventually recovered, but it would have been hard to see that when your investment was down some 40 percent from where you thought the bottom was.
The lesson: Betting on when the market will reverse direction is just that – betting. You’ll have better odds in the casino, so do your betting there and not with your portfolio.