Buy the Dip? It’s Not as Easy as You Might Think

Buy the Dip? It’s Not as Easy as You Might Think

February 08, 2022

What’s the right time to invest? Do you wait and see what the market is doing? What if it’s only going up? We’ve all thought it before…“I’m just waiting for the market to go down so I can buy stocks on sale”… “I’m going to buy the dip”… “Let’s wait for a pullback before we dive in.”

Intuitively, this makes sense. The stock market is just like any other asset or item that we purchase in the idea that we want to buy it at the lowest price we can get, and when it comes time to sell we want to make the largest profit. So, why shouldn’t we wait to ‘Buy the dip?’

Human Behavior

It’s easy to say we’re going to do something when the market is growing. Stocks are performing well, companies are paying dividends and the economy looks strong. The problem is when things take a turn for the worst. What happens when we see a meaningful pullback? When the S&P 500 drops by 10% and enters correction territory? We start to think about 2008 and the housing bubble. If you’ve lived through it, you think back to the Great Depression, how difficult that was and how some people never recovered. Thoughts immediately go to “Let’s sell everything now and avoid even more loss.”

To buy in a down market is to go against the grain. It takes an incredible amount of discipline and trust in the economy and in those moments, that thought process can be difficult to execute.

So, what happens if you change your mind in a moment of uncertainty? You may have missed out on months or even years of growth. Someone who invested $100,000 in a bull market and experienced double digit growth, say 22%, is still up 12% even if we saw a 10% drawback. Conversely, someone who chose to stay in cash has likely lost money due to the exponential rise in inflation.

Timing is Difficult

But it’s not just about our behavior as humans, it’s also about predicting the market. As advisors we’re asked when the market is going to go down or up, how certain stocks will perform, and when the best time to get in and out is. But unfortunately, while we can make educated recommendations based on fundamentals and history, we don’t have all of the answers. We can’t predict market movement. This makes finding the perfect time to put our money to work incredibly difficult. What we do know is, the market ends positively year over year over 70% of the time.* In addition to this, we know inflation exists, and the cost of living continues to increase each and every year. This means that waiting to invest can actually do more harm than good.

All of this comes down to, if you’re ready to start investing the best time to start is now. If you’re uncomfortable putting all of your money in at once, talk to your wealth advisor about strategies like dollar cost averaging or laddering but the sooner you have your money working for you, the better.

 

*Source: https://www.icmarc.org/prebuilt/apps/downloadDoc.asp

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.