Things are good, and the market is hitting fresh all-time highs. That makes it the perfect time to think ahead to the next dip and deploy some good ‘til canceled orders.
The S&P 500 is up about 9.7% this year. This is after a 25% gain last year. The index has rallied a staggering 79.7% since October 2022.
Over the past two years, the S&P 500 provided an average total return of over 22% per year. That’s more than double the long-term average annual return for the index. These are good times indeed. And why not?
Inflation is under control. Interest rates have likely peaked and should trend lower going forward. And the economy is still solid. Meanwhile, there is a massive growth catalyst from artificial intelligence for technology stocks, by far the market’s largest sector.
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Things have been good and maybe too good. It might be a good time to get nervous. Like that 94-year-old who everybody quotes says, “Be greedy when others are fearful, and fearful when others are greedy.”
Hopefully, the good times can continue. And they probably will. But exuberant markets don’t last forever. It’s prudent to at least prepare for some downside and consider ways to potentially exploit it.
And there are risks out there.
The market is pricing in likely falling interest rates with a solid economy. But inflation has been tricky. There are no guarantees. Even if we somehow waltz through the tariff situation without a recession, there is a chance of market turmoil from trade, or global conflict, or coming entirely out of the blue.
Things looked good six years ago, too, at the end of 2019. Indeed, the S&P has doubled since then. But there was a lot of trouble along the way. There was a global pandemic that crashed the U.S. and world economies for more than a year. It was followed by the worst inflation in forty years and the highest interest rates in twenty years. There was also the worst conflict in Europe since World War II and the worst Middle East conflict in decades.
The S&P 500 crashed 30% in record time at the onset of the pandemic in 2020. There was also a bear market in 2022 during which the S&P fell over 20% and the Nasdaq plunged well over 30%. Of course, most stocks were down a lot more than the indexes.
Sure, you could have just hung in there and stayed invested and been fine. But you could have been a lot better than fine. If you picked up some of the very best stocks at fire sale prices, you could have gotten amazing returns.
Needless to say, buying the Liberation Day dip would have led to some big returns this year, too.
The calm of a good market is the best time to plot a down-market strategy.
Unfortunately, buying market dips isn’t nearly as easy as it may seem. Sure, the market has clearly demonstrated an upward bias over time. Buying the dips makes perfect sense intellectually. You’d get it right on the test. But during a real market sell-off, few people are interested in buying. I’m guilty of that fear myself.
We have an instinct to avoid danger. When the market is crashing, we don’t want to go anywhere near it. Like with an earthquake, there’s always the fear that this crash is “the big one.” We tell ourselves that we will wait until the market finishes falling and then consider buying something. The problem is that we only know the market is done falling after the fact. And by then, it has rebounded, and much of the opportunity for big gains is gone.
How Good ‘Til Canceled Orders Can Help You Buy the Dip
Preparation is the remedy. Instead of relying on overcoming our natural emotions in the heat of the moment, we can calmly plan for a market drop ahead of time, safely away from the tumult of the moment. Specifically, you can target great stocks that you would love to own but are always too expensive, at bargain basement prices that may only be hit in the market overreactions during irrational selling. You can do this with a good ‘til canceled (GTC) order.
Good ‘til canceled means that you’ll buy the stock if it drops to your targeted price at any time, unless, of course, you cancel the order. It’s a way to be intellectual about investing. Of course, the order may never go off. But you don’t lose anything for trying.
You would have done fine investing and just hanging on over the last five years, as you probably will over the next five. But if you stepped up and purchased any of the best stocks at fire-sale prices during the low points over the last five years, you would have done a whole lot better than just fine. Preparation can make it happen going forward.
The world is a crazy place. It may be going to Hell in a handbag. You can’t fix that. But big profits can be very therapeutic.
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