When the stock market has a bad day or week, say down 5%, it is common to hear people saying “buy the dip”.
I love my kiwi onion dip as much as the next person, but I am not a fan of this vernacular that has crept into investor lingo.
What does buy the dip mean?
First things first, what are people referring to when they say ‘buy the dip’? It basically means that the price of an asset is down in value and they are recommending buying more of that asset.
How much in value does a stock or asset have to drop before being considered a ‘dip’? Well, that is the question that makes me cringe every time I hear it used.
I often see people using the phrase after just a 5% drop from all time highs. Sometimes, this could be going back just one week in time to previous highs where we were all giving each other high fives.
There is nothing wrong with buying stocks that have gone down in value if that is your strategy, but I just want to say today that many of us could do with a wider perspective. Zooming out a bit.
Once we do that, we may realise that most dips aren’t really dips at all.
Why buy the dip can be a dangerous short term market timing strategy
The NZ property media do this all the time. Some properties have been going up over 20% a year for the last few years, yet when there is a month where prices are down 1% it makes headline news. A 1% drop on its own may sound bad, but when compared against a year on year increase of 20%, it’s not really a drop.
Likewise with the stock market. A 5% decrease in one day, after a 20% increase over the year is not really a drop when you zoom out and focus on the long term.
I probably wouldn’t consider a dip in asset value unless the particular asset is lower cost than it was a year ago. If it’s for a period of less than that, then chances are any drop have been on the back of some good gains and any so called ‘dip’, is not really worth the effort of timing the market.
As an investor I expect frequent years where the market is down. It is just by chance, that these down years have been few and far between over the last decade or so. This is why I am not enticed by short term drops in the market. Besides, I don’t have any spare cash anyway. I’m not interested in trying to time the market. All my spare money has a use already. There’s nothing left on the table.
If you think that these short term drops are good value, this means you expect markets to recover very soon after you buy the dip. This is a sign that you may have never experienced large and extended periods of poor returns or be emotionally unprepared for when a real dip occurs.
So there you have it. If you want to get me worked up, then mention the phrase ‘buy the dip’ when values have dropped to less than values of one year ago.
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