When (If Ever) Has it Paid to Wait for a Stock Market Correction?
3 Pages Posted: 26 Sep 2017
Date Written: August 30, 2017
Investors are periodically challenged with this question: with funds ready to invest, but faced with a market that is generally perceived to be expensive, is it better to wait for a market correction before investing? Many investors are certain that a correction must be around the corner, and thus little downside exists to holding excess cash. We explore the question of whether the historical record supports their near-certainty by examining the past 115 years of US stock market history. We conclude that while there may be valid reasons to hold excess cash based on specific forward-looking return estimates, the historical record does not suggest that, conditioned on a variety of entry criteria, waiting for a correction has positive expected return.
Keywords: Decision Making under Uncertainty, Risk, Utility, Risk Aversion, Coin Flip, Heuristics, Rules of Thumb, Market Timing, Gambling, Betting, Manager Selection, Sharpe Ratio, Mutual Funds, Data Mining, Conditional Return
JEL Classification: B12, B16, B20, C00, C10, C11, C50, C57, C73, D03, D81, D83, E00, G00, G02, G11, G12, G14, G17, G23
Suggested Citation: Suggested Citation