Back on the 12th of August I posted my thought that it might be a good time to buy some stocks for DS2. At that time the All Ords Index had dropped sharply to 5,965.2 - since then it has rebounded at today was at a new all time high of 6,808.2 (a gain of 14%). Goes to show that you never can tell which way the market will move in the future, but you can be 100% certain where it has been. Looking at a long term plot of the stock market accumulation index, buying when the market had dropped 15% below its recent long-term trend line would almost always turn out to be a good buying opportunity.
However, there are a few problems with this as an investment strategy:
1. When the market has rapidly dropped more than 10-15% you're always worried that it's the start of a bear market that could last several years. As in this case - I delayed buying any stocks for DS1, and could very well never get another opportunity to buy in at those prices.
2. You have to have some spare cash to invest when such opportunities arise - this generally would either mean that you've been sitting on a large cash allocation during a bull market (which would have cost you significant profits), or you'll need to borrow more to invest. And increasing your margin loans when the market has dropped is often very difficult, as it the time when you are most likely to be close to getting a margin call.
Looking at the chart the other thing that comes to mind is that I need to buy some more XAO put options when my current ones expire in December! Although the p/e of the Australian stock isn't out of line with historic averages, and company profits are continuing to grow, the chart does look remarkably similar to previous bubbles - and even just thinking "this time it's different" sends a shudder down my spine.
Copyright Enough Wealth 2007