Authors: Victor Hagani and James White, Elm Partners

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Download the research paper HERE

Does it pay to wait for a correction before investing in the stock market? No. On average, the returns forgone by being out of the market are greater than the losses avoided by not investing until after a correction.

Hagani and White examine 115 years of US stock market data using the following assumptions:

  • A “correction” is a stock market fall of 10%
  • An “expensive” stock market is one where the market’s long-term valuation-level[1] is one standard deviation above its long-term average
  • An investment horizon of three years

The authors found that:

  • There was a 56% probability that the market would experience a correction within three years
  • Being out-of-the-market (instead of investing right away) meant that investors avoided about -10% in losses
  • During the 44% of three-year periods with no correction, being out-of-the-market cost investors about 30% in missed gains
  • The mean expected loss cost of waiting for a correction (instead of investing right away) was -8%

The authors also tested different combinations of correction size (between -1% and -10%) and investment horizons (one, three and five years). They found that, in all cases, investors were worse off waiting for a correction before investing.

Expected Costs

 Author’s Conclusion

It’s true that the lower one’s expectation of the stock market return, the lower the expected cost of waiting for a correction. So, if you happen to believe the stock market has a negative expected return to a particular horizon, then waiting for a correction to invest makes sense. However, at least as far as the historical record for the US stock market goes, higher market valuations are consistent with lower prospective long-term returns, but not negative returns.

We’re not suggesting that looking at the historical record closes the book on the question of whether or not to wait for a correction. We firmly believe in the axiom that past returns are not indicative of future returns. However, we have the impression that some investors are waiting for a correction specifically because they think that history shows that waiting pays. We hope it’s been useful to show that history, for what it’s worth, is singing a different tune.


Investors should base their decision to hold less in stocks on reasonable estimates of risk-adjusted, expected returns. This includes considering valuation, market fundamentals and investor sentiment or behaviour. Simply waiting for a pull-back to buy in is a losing strategy.

Download a PDF COPY of this research summary 

Download the research paper HERE

[1] Measured using the Cyclically Adjusted Price-to-Earnings Ratio (CAPE) developed by Prof. Robert Shiller.


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