Take the Low Road

Jonathan Clements

“BUYING THE DIP.” It’s a phrase often uttered with contempt by Wall Street strategists and money managers, who look down their nose at everyday investors who instinctively shovel more money into stocks simply because share prices have fallen.

Commentators “caution against” it, dismiss it as “not an investment strategy,” predict it’s going to “die,” argue it could get “very, very nasty” and contend that—when everyday investors buy on dips—it’s a “contrarian signal.” And I got all that based on a quick internet search.

Guess what? I love buying the dip.

It’s been a huge contributor to my financial success—to a degree that’s almost embarrassing, because buying the dip can seem perilously close to market timing. But it really isn’t. Market timing is about predicting which way the stock market is headed and then making major portfolio shifts from stocks to cash, or vice versa. It’s a strategy that’s rightfully frowned upon, because there’s no surefire way to forecast what will happen next in the stock market.

By contrast, when you invest more in stocks during a market dip, you aren’t guessing the market’s direction. Instead, you’re reacting to what the market has already done. In that sense, it’s similar to rebalancing. When you rebalance, your goal is to bring your portfolio back into line with your target asset allocation. When you buy the dip, you’re helping that goal along—and, if it means you’re adding new savings to your overall portfolio, that’s all the better.

But isn’t it naïve to buy stocks simply because they’ve fallen in price? It may indeed be naïve to sink more money into any one stock, because there’s every chance that the stock will fall and then keep on falling. But that’s never happened with the broad market. After every global stock market swoon, the overall market has always recovered and gone higher, even as many companies—and sometimes entire countries—are left behind.

Among strategists and money managers, it would no doubt be deemed more sophisticated to consider market valuations before buying the dip. But here’s the problem: If you’d avoided stocks because valuations were rich, you would likely have spent much—and perhaps all—of the past three decades sitting on the market’s sidelines, while the S&P 500-stock index soared almost 1,500%.

If valuations shouldn’t guide your buying, what should? If you’re sinking more money into a globally diversified stock portfolio, I don’t think there’s anything wrong with taking your cues from recent market action. If prices are down today, it’s probably a decent time to buy a little more of your total stock market index fund—and, if prices are down sharply, it’s likely a great time to do so.

No, price isn’t the same as value. But given that traditional valuation metrics don’t seem to tell us anything about short-term performance and relatively little about long-run returns, price may be the most reliable guide to value that we have—and falling prices may be as good a buy signal as we’re going to get.

I’ve always preferred to add to my stock funds on down days. Why wouldn’t I? And during big market downdrafts, including both 2007-09 and this year’s bear market, I moved hefty sums from bonds to stocks, while also scrounging up new savings to add to my stock portfolio. What if the market rally of recent months turns into another rapid retreat? You’ll find me buying yet again.

The Wall Street crowd may sniff at this knee-jerk reaction to market declines. But if we shouldn’t buy on dips, what’s the alternative? Buy on market rallies instead? Would that make more sense?

The truth is, belittling those who buy the dip is yet another instance of Wall Street’s ongoing and unjustified denigration of everyday investors. Wall Street’s hope: Investors will be bullied into paying up for the Street’s “sophisticated” investment services, which just happen to have a long and sorry history of market-lagging performance. Maybe all those “professionals” would post better results if they, too, bought on dips.

What they’d discover is that it takes mental fortitude. When stock prices fall, many investors—amateurs and professionals—are scared off. It requires a certain temperament, along with years of investment experience, to ignore the crowd and the prophets of doom. Want to make good money? Next time the broad market is worth less, do yourself a favor: Step up to the plate and buy more.

Follow Jonathan on Twitter @ClementsMoney and on Facebook. His most recent articles include Just Another DayAlmost Zero and My Four Goals.

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