When is a Dip a Depression?

When I read news about the stock market, I can’t help but be confused. Just a week or two ago the stock market was up, up, up–now it’s down, down, down (and maybe a little up, too?). I understand markets can move in both directions, but what’s weird to me is how little anyone seems to understand how this works. Sometimes I read that I should expect the market to keep going down, but other times I see that it’s supposed to rebound. How can I tell when a depression or recession is coming–and protect my investments in time?

 

There are a lot of techniques that experts use to try to predict economic downturns. It makes sense that investment firms want to know how to accurately predict downturns, of course. Missing the clues can be devastating, as we saw in the recession that began in 2007–in that downturn, the stock market lost about half of its value. But that same year, experts who saw the crash coming pulled off what is now known as the “big short,” and made a fortune.

 

So how can we tell is a recession is coming? Some experts point to the market cycle, and look for indicators that suggest whether we’re early or late in that cycle (the later we are, the closer we are to a recession, these pros argue).

 

This works as a decent way to try to time the market, but the operative word there is “try”–when it comes to timing the market, even the pros often get it wrong. In fact, this is true more generally about beating the market in good times and bad. Advanced investors, including dedicated day traders and institutional investors, can use clever tactics like this Trading Strategy Guides RSI trading strategy to try to do better than the market as a whole, but this isn’t necessarily something that individual investors can do in their spare time. It takes dedication–and a willingness to accept the risks.

 

That’s why many pros suggest a simpler strategy for us average-Joe investors: buy and hold. In this view, the long-term investor should simply steadily invest in the market, through good times and bad. The investor should then hold his or her investments during downturns, with the trust that the market will go up overall during the period of investment. Studies bear this strategy out, even proving it to be better financially than “playing it safe” and selling stocks in an attempt to minimize losses–a plan that, it turns out, isn’t really “safe” at all.

 

So try not to worry about predicting the market–nobody can, at least not reliably. Instead, focus on saving, investing, and holding for the long term.

 

“I’m involved in the stock market, which is fun and, sometimes, very painful.” — Regis Philbin