I know of a professional trader who foresaw the Great Recession, went to cash in the summer of 2008 before things got crazy and came up with a wonderful plan to put his money back to work at the lows.

He planned on putting his cash into a simple S&P 500 index fund in 25% chunks when the S&P hit 650, 600, 550, and finally 500. It was a generational buying opportunity and I was jealous he had such a wonderful plan of attack.

The only problem with this plan is the S&P never got to those levels, even though plenty of people were predicting it at the time.

The S&P hit an intraday low of 666, he put his cash to work and ended up never getting back in. He assumed the initial bounce was of the dead cat variety and a double-dip recession would give him another opportunity to buy but stocks never looked back.

I’m not sure many investors sitting in cash or bonds at the moment are worried about being too late. Those with dry powder left are far more concerned with being too early, as most assume things will only get worse.

We’ll see.

But what if you do buy too early and stocks continued to get hammered?

Would it really be such a bad thing?

If you would have bought stocks the day the S&P 500 bottomed following the Great Financial Crisis on March 9, 2009, you would now be up 345% or so, even after living through the current 30% plunge.

The problem with this analysis is it assumes you bought at the exact bottom. The only people who nail the bottom are liars and lottery winners.

Most people end up buying too early, too late or not at all.

Let’s say you decided to buy when there was blood in the streets following the Lehman Brothers bankruptcy. They went under on Monday, September 15, 2008. So let’s say you figured that was the right time to step in so you bought an S&P 500 index fund the day after.

At that point, stocks were down around 25%. Unfortunately, they still had another 40%+ to go before finally bottoming in early-March 2009.

One year later you would be down roughly 10% on that day-after-Lehman purchase.

Three years later you would be up 7%.

Five years later you would be sitting on gains of 56%.

Ten years later you would be up a cool 200%.

As of right now you’d be up more than 150% on that purchase.

What about the 1987 crash? Stocks fell nearly 21% on Black Monday in October of that year.

Many people forget that stocks had already fallen 16% in the nine days leading up to that fateful day. Let’s say you decided to buy after a quick 16% downturn in stocks, thus becoming the most unlucky of investors who bought the day before the worst day crash in market history.

You’re now in a one-day bear market from that purchase. Stocks bounced nearly 15% over the next two days but by early-December you were still down more than 20% as those gains quickly faded away.

A year later you would have been up 23% from there.

Three years later was a gain of 55%.

Five and ten year returns were 122% and 426%, respectively.

How about the absolute worst-case scenario, which has to be the Great Depression.

This massacre began in September 1929. A little more than a year later stocks were down 50%. Let’s say you had the intestinal fortitude to stick it out in bonds until stocks were down 60%, which came in September 1931, a full two years after that debacle began.

If you backed up the truck in stocks at that point you would have seen them fall an additional 65% by the time stocks bottomed 9 months later in June 1932. Ouch.

But one year later from your September 1931 buying opportunity you were down less than 10% after a vicious late-1932 rally.

Three years later you were up 13%.

Five and ten years hence you were up 118% and 84%, respectively.

So even being very early in some of history’s great market crashes has led to pretty decent returns over time.

As always, patience is typically rewarded in the stock market if you’re able to extend your time horizon.

Does it always work?

Nothing is ever guaranteed or there would be no such thing as risk.

Now could you also buy late and get similar results?

Yes. Just make sure you don’t become addicted to your dry powder. Cash on the sidelines does you no good if it always stays on the sidelines.

Just remember that you’ll never buy at the exact bottom. That’s not how these things work. You’ll either be early or late but trying to pick when that bottom will come is a fool’s errand.

There are no all-clear signals during a market crash. Perfect is the enemy of good when putting money to work during a sell-off.

I would rather be kicking myself in the short-run for jumping in too early than kicking myself in the long-run for never putting my money to work in the first place.

Regardless of when you buy or rebalance into the pain of a falling market, time is your friend and patience is the ultimate equalizer.

Further Reading:

Returns From the Bottom of Bear Markets