“Buying the dip” may sound like a slogan for an ice cream treat to those who don’t spend a lot of time with the NASDAQ, but it actually refers to buying stocks in bulk during major sell-offs. As the markets continue to ebb and flow based on investor reaction, there will always be speculation and opinion given on the best way to handle the changes.
On May 17, the dip strategy was brought back into sharper focus when investors and watchers alike saw a sell-off that was more dramatic than any other time this year. While this strategy is by no means new, it’s effectiveness still seems to garner some controversy among even the top experts.
Find out more about what they have to say about it, and whether or not you should be taking advantage of the next sell-off.
Advice from Convergex
Nicholas Colas, a stock brokerage firm’s chief marketing strategist, told hungry investors that it was best to buy when the market dips — at least until there’s a steep drop at 2% or more. There are a few warnings he gives though to his advice. The fear index (AKA CBOE Volatility) should be below 20, and the stock market should be outperforming its predictions on the whole.
Considering the CBOE has been low since the election, and the market hasn’t plunged enough to cause a panic, this should be easy enough to hit for at least the foreseeable future. Colas also recommends you only buy as long as the top tech names continue to stay at the top of their game. This also shouldn’t pose a problem anytime soon, considering the swing back the following Monday in the market was intense in the tech sector.
With these conditions in place, he states that eventually (probably sooner rather than later) the market will take a turn and you won’t regret that you bought the dip.
Is This Really Wise?
Like all practices that involve trying to predict the future, buying the dip is not a guaranteed strategy. While there’s nothing wrong with buying low, it may not net you as much as holding onto what you’ve got.
Samuel Lee at SVRN Asset Management conducted a study on this to really test its efficacy for those who played this game. He found that investors only received about a third of the return compared to those who held onto what they had — neither buying nor selling, despite market volatility.
Lee used data to run simulations over the last 9 decades or so to determine his findings. He had a few theories as to why this might be occurring, one of the main ones he put down to the sheer irrationality that seems to govern the market. Despite his research though, Lee is careful not to give concrete advice to investors based his findings. He says it would be wise to rethink buying the dip as the soundest possible strategy.
Essentially, whether or not you buy low all boils down to what your goals are in the market. If you’re a long-term investor, you’re already used to the virtue of patience. Having faith the market will pick up is a game that can be played by those who know where their money is, and have no intention of touching it anytime soon.
But for those who don’t have that kind of time on their hands, buying the dip may seem the only possible option. Thankfully, both strategies are known to yield returns, though you may gain an edge when you play the long game rather than the short game.
The Gamut of Emotions
There’s little doubt the market is trying harder and harder to stop emotions from getting in the way of valuations. While this is somewhat futile to achieve completely (considering markets will always be influenced by feelings to some extent), that doesn’t mean there isn’t some progress happening either.
Right now, there’s a general ambivalence when it comes to the strength of the market, though it’s worth noting that neutral feelings tend to turn negative pretty quickly rather than the other way around.
Doug Roberts at Channel Capital Experts says investors should be watching the news with a sharp eye right now. Real, practical threats like nuclear or trade war may have more impact than general volatility.
Regards,
Ethan Warrick
Editor
Wealth Authority
