Wednesday, February 18, 2009

Maximum Pessimism may not be here yet

Some say that the best time to invest is at the point of maximum pessimism. The theory is that just at the point when the most people are sure that the world of stocks is collapsing, prices should be lowest, and this makes it the best time to buy stocks.

Money usually flows into mutual funds during RRSP season, and so far this year is no different. January saw $1.17 billion more money flow into mutual funds than was withdrawn. However, this applies to all types of mutual funds collectively. It turns out that money market funds and bond funds were popular. Equity funds had net withdrawals of $376 million.

So, despite the fact that this is RRSP season, money is still flowing out of stock funds. Even though stock prices are low, there continue to be more pessimists than optimists. If you’re waiting for a sign that the point of maximum pessimism has been reached, this data suggests that we haven’t reached it.

However, I’m no fan of trying to predict the perfect time to jump into stocks. No bell will ring to let you know when the bottom has been reached. Many who try to time their entry will wait well past the bottom and buy at higher prices.

1 comment:

  1. The problem with predicting maximum pessimism is a real one - which bungee cord is one talking about? Is it the severe recession and then bounce back bungee, which means one magnitude of decline in real economic activity and consequently of markets. Or is it an end of an empire (American) bungee, which can entail a many orders of magnitude greater lower and duration bungee?

    Some well-argued blogs like Mish's
    seem to feel it's the latter, in which case the pessimism we see today is of the optimistic sort. Gotta say I'm starting to look into gold!