"Buy the dip!" That drum is beat soooo often on social media. Sounds simple enough. The market drops half a percent or even a percent or even more, you buy more, and eventually the market recovers. EASY right? There's one little problem though. You actually have to know WHEN to buy. Look at the chart I'm sharing. The market experiences declines of 1% or more VERY often. These aren't extraordinary events. They're part of normal market behaviour. Yet every time they happen, investors start talking about buying opportunities, waiting for a bigger correction or keeping cash on the sidelines until the market drops further. But is buying the dip actually a better strategy than staying invested? A 2024 study published in the European Financial Management journal by Stefano Bonini and two other academics examined exactly this question. Their research compared holding cash and waiting for market declines against investing in a stock market ETF... so it was pretty relatable for the average DIYer. What did they find??? Buying the dip does NOT necessarily maximize your real ending wealth. The results are HIGHLY SENSITIVE to market conditions when you begin investing. Something else to note, under certain conditions, buying the dip can improve risk adjusted performance compared with passive investing or traditional dollar cost averaging. BUT there's a MASSIVE catch..... the strategy is subject to estimation risk. In other words, you have to make assumptions about when the market offers an attractive buying opportunity and getting those assumptions WRONG can undermine the strategy. This is why I don't actively "buy the dip" or suggest other too. I don't want to sit on cash waiting for a correction that may take months or years to arrive. And I don't want to turn investing into a guessing game where I have to decide whether a 1, 2, 3, 4, 5% decline is enough, whether I should wait for 10% or whether the next 20% drop is just around the corner. My strategy is to stay invested, maintain my asset allocation, and rebalance when necessary. Does that mean you shouldn't invest when the market is down???? Absolutely not!!!! If you have new money to invest, a market decline doesn't need to scare you away. There's a difference between investing consistently when markets are down and holding cash specifically because you're trying to time the next dip. In my October Portfolio update, I share what I did during the tech sell off and what saved my portfolio. If you don't know my investment style, you'll be surprised what did! https://youtu.be/H5JMG8Z_okg What about you? Do you actively buy the dip or do you prefer staying invested and letting the market do its thing?
52 views
24 Comments
Michael Conroy
@conroy119 · 49m
Fully invested at all times! Cash is trash!
Arizona AZ
@arizona85 · 48m
S&P 5% or more loss only 21 times? We just witnessed one of those last week!!
Marsia @gnomishness · 49m
I am a new investor, and I am experimenting with keeping core defensive holdings where I DCA into them, but I did just get freaked out by the 5.5% NASDAQ dip, and I sold the remaining high beta stocks I owned. I viewed this as a plausible long term strategy. Trade the high betas and cyclical stocks while keeping the defensives and adding to them unless their fundamentals change. But it’s exhausting, and like you said, may not be the best strategy. I really like this post and it is very timely for me. Do I really want this much stress, and how do I guess when to hold or not hold high beta stocks? I am re-thinking to maybe just pick a few very high quality high betas and not try to avoid the massive dips and just hold.
Arizona AZ
@arizona85 · 50m
With new money, do you deploy all at once? Or do you divide it out over a month? Two? Or several months?
See the full comment section 👀Sign up for the full Blossom experience!
