- I cringe every time I hear people say,
when the stock market is down, you gotta buy the dip.
"Stocks are on fail, so you gotta buy the dip."
No, you don't have to buy the dip
and I'll show you why it's bad advice
for not only individual stock investors
but index fund investors as well.
Buying the dip kind of makes sense on the surface
from a psychological standpoint.
All you're trying to do is buy an investment
when it declines in price,
so that you can get it for a cheaper price
than it was in the past,
in hopes that it'll rise back to its original level.
Unfortunately, the stock market isn't the grocery store.
If a bag of chips is normally $4 per bag
and it goes on sale for $3,
then buying that dip of course makes sense.
I'm sure there's a chip dip joke there somewhere
but my brain just cannot think of one right now.
The human brain is constantly trying to detect patterns
between what we already know to be true
buying something on sale at the grocery store,
with things that might be a little more complicated
like buying the dip in the stock market
to come to a closely related conclusion.
But this concept in the stock market isn't as cut and dry
as something like a sale of the grocery store.
Saying to buy the dip gives off this foregone conclusion
that anytime the price of a stock decreases,
you should blindly buy more of it
because the price is lower today
than it was a week, month or a year ago.
Just because a stock is down 80%
doesn't mean that it's automatically on sale.
All it means is that the price is 80% lower
than it was back in October of 2020 at the all time high.
For it to be on sale, the stock price would've had
to have been valued correctly to begin with.
So was it? It's normal for a stock to fluctuate up and down.
But if it draws by a large amount like 80%
and the financials didn't really change by an amount
to warrant that drastic drop in price,
then it must have been wildly overvalued to begin with.
In the case of visual stock investors
reevaluating your holdings every month or quarter
is the best thing to do to decide
with any level of intelligence,
whether or not you should quote unquote, buy the dip.
Another problem is that not many people
have even defined for themselves
what an actual dip is in terms of percentage amounts
and even time periods.
Is it a 1%, 5%, 15%, 40% drop?
If it keeps dropping, do you continue to buy the dip?
Does that dip need to happen within one day,
two weeks, one month or two months?
At what point do you stop buying the dip?
Because if you like the stock at $500 per share,
then surely you like it even more at $98 per share, right?
And if you like your S&P 500 ETF at $437 per share,
then surely you like it at $380 per share.
Having certain investing rules put in place for yourself
is a good way to mitigate risk
and avoid catching a falling knife, if that stock is tanking
and most likely never getting back to those all time highs.
We'll cover a better investing strategy
later in the video, so hang tight.
I don't wanna totally beat up on stock pickers though
because my fellow index fund investing friends
are just as guilty if not more guilty of that
buy the dip mentality,
and it's not good advice for them either.
Traditional index fund investors
aren't really evaluating the price of an index fund
to decide whether or not it's fairly priced.
Which is fine because they're generally investing
for very long periods of time.
By nature, an index fund holds hundreds
if not thousands of stocks,
so it's basically impossible to properly analyze
like you would in individual stock.
Technically you could compare the current price per share
to the traditional index funds
or ETF index funds and net asset value
to figure out if it rating at a premium or discount,
but they're usually close enough
to where it's not an issue at all.
Because of this, us index fund investors
are pretty lazy people because we just blindly buy whenever.
It makes it easier to convince ourselves to buy the dip,
when the price is lower than it has been in the recent past.
No matter which type of investor you are,
all buying the dip is, is another form of time in the market
because you were sitting on the sideline with cash
trying to time when to actually deploy the money.
I'll show you how unreliable timing the market is
in just a minute.
Do my dog Molly, a huge favor
and hit that thumbs up button, just because.
Let me be clear because
I can feel the Cheetos fingered viewers
typing a response about
how they've timed the market perfectly before.
Yes, it's possible to time the market once,
twice, even three times, but it's not very probable
that you'll be able to continue to successfully do it
over a long period of time.
And if you've been successful up until this point,
put that ego in that bag and run away as quickly as you can
'cause you've already won the game.
All you end up doing is sitting there
with a bunch of cash on the sideline,
waiting for the market to hopefully dip,
so that you can deploy just a little bit of it.
Because let's be honest, no buy the dipper
is really going to deploy all of that money
into the market if it drops 12%.
I know, because I used to be one of those people.
We always think that it can drop just a little bit more.
So if we leave some extra cash to buy the next dip
then we'll be in an even better position.
When it doesn't come, you's stuck holding the bag
while the market continues to go up and up and up.
Then when the next dip happens,
it's at an even higher price than before,
so you end up paying a higher price for that next dip.
Let's say that you can be successful
at timing the bottom of the market every single time.
To do that properly, you have to be staring at stock screens
all day ready to click that buy button at the perfect time.
Who in the world
really wants to spend their time doing this?
The most valuable thing you have,
time is being spent trying to time the market.
Instead of trying to buy the dip,
just using a simple dollar cost everage investing method
is the best solution by the same time every month,
no matter what the market is doing.
Yes, sometimes you'll overpay
and sometimes you'll under pay,
but you'll end up with the market average
which is shown to be successful over time.
Michael Batnick ran a scenario on his blog
to find out what happens when you buy the dip
versus dollar cost average into the market
to find out what the results would be.
From 1990 through 2020, for the dollar cost averaging side,
he contributed $4 and 42 cents every trading day.
For the buy the dip side, he contributed $1
every trading day and an additional $100 every day
where the S&P 500, dropped more than 2%.
Both sides contributed $33,598 each,
but the buy the dip person sat on extra cash
and invested it when the market was quote unquote, on sale.
The buy the dipper ended up with a portfolio worth $149,913,
while the dollar cost average person
ended with a portfolio worth $176,732.
The buy the dipper most likely spent way more hours
tracking the market, while the dollar cost averaging person
was out there living his or her life not getting caught up
in why the stock market was up or down every single day.
Now you might be thinking to yourself,
well, what if you bought the dip
when it dropped by more than 2%?
Because in my eyes, a dip is more than 2%.
2%, that's not enough.
I would only buy if it dropped by 10% or more.
Nick Maggiulli ran the numbers on that for us.
At a 10% dip, the buy the dipper
outperformed dollar cost averaging 26% of the time.
Buying at a 20% dip,
outperformed dollar cost averaging 26% of the time.
Buying at a 30% dip,
outperformed dollar cost averaging 27% of the time.
Let's go even further, buying at a 40% dip,
outperformed dollar cost averaging 33% of the time,
and finally buying at a 50% dip,
outperformed dollar cost averaging 38% of the time.
38% of the time might sound good,
but if we flip it around and say that
if you dollar cost average, then there's a 62% chance
that you will outperform buying the dip,
then how would you invest your money?
It goes back to what I said at the very beginning,
is it possible to time the market and come out ahead
by buying the dip?
Yes, of course it is.
Is it probably or likely that it will actually work?
No, not at all.
What it comes down to is that you are just sitting
on the sideline with way too much cash for way too long
waiting for the next dip.
Just like the older and wiser investors always say,
time in the market is better than timing the market.
We also have to be honest with ourselves
and the fact that the odds of you buying
every time when the market hits its lowest point
is nearly impossible to do.
To your left, check out my top five Vanguard ETFs
to dollar cost averaging to.
Make sure to hit that thumbs up button before you go
and check out the description
for a lot more goodies and free stuff.
I'll see you in the next one, friends done.