You've probably heard the saying,
- Are you buying the dip?
- Buy the dip.
- Buying the dip.
- Stock to dip buy.
But what if I told you it's
time to put that strategy to bed?
Research shows there's a better way.
At the beginning of this month, close to
$10 billion was poured into stocks, signaling that
enthusiasm for investing think hasn't gone anywhere.
But if you were to look at price trends, it
isn't obvious what the markets really want to do.
The S&P 500 has just started to recover,
and if you're like me, you're probably giving it the
suspicious side eye because I've been hurt before.
The last thing you want to do is buy
in heavy right before a dead cat bounce.
It's not clear whether the brave
investors entering the market, including crypto,
will be rewarded for their trouble.
But then again, sometimes it works.
Anyone who bought in on a 10% dip in
stocks for the last 80 years has seen an
81% return twelve months later on average.
I was one of those people.
I did a ton of analysis and dumped my
entire bank account into three stocks on March 20th 2020.
Thanks to some luck, that was probably the
single best day I could have done that.
By the way, if you want access to all
of my future stock and crypto buys, free coaching
and a ton of additional content, make sure to
join my Patreon, linked down below.
Members will tell you there is really
nothing like it on the Internet.
Now, it stands to reason that people bullish on the
markets would see red days as discount buying opportunities.
But what if I told you there's a
whole lot more that you must consider here?
Whether you have positions in crypto, stocks or other traditional
finance products, it's important that you see this period for
what it is, a time of financial stress that will
come to define the next five years.
This means strategies that worked when the markets
were trending up aren't going to work the
same today and will likely have different results
depending on your investment timeframe.
War, supply chain shortages, labor shortages and interest rate
concerns all paint a picture with about as much
clarity as an age restricted Twitter page, that this
isn't 2020 part twelve, because if the Fed isn't
careful, this could be the return of 2008.
If you're watching this video, you're probably one of
the investors that decided to buy in November 2021,
when the S&P 500 dipped like 2%.
Records were set that month with a
reported $2 billion of securities purchased.
However, based on the losses we've seen
this year, I have some questions.
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First, let's look at the strategy that degens
love to yell about, buying the dip.
It's a respectable rally cry for investors who might
be thinking of selling to prevent further losses.
I mean, it's better than the alternative of smashing
the panic sell button at the worst time possible.
Instead of freaking out, investors train themselves to bite
the bullet and treat the dip as an opportunity.
You can actually kind of twist your brain
to be somewhat excited for red days because
it means it's time to go shopping.
It's possible I've kind of done it myself.
- Do you smell that? What is that?
- Opportunity.
And this study seems to back this up, at first.
It acknowledges that people who time the market right,
buying right at the bottom make big money.
But it doesn't stop there, because failing to buy
at the bottom would have netted you greater losses
than any other strategies in this study.
See, the odds of anyone buying
the lowest day possible is unlikely.
I mentioned my lucky pandemic by a minute ago.
If I'd purchased that just one week earlier, my returns
today would be 50% lower and I would have seen
my position drop 30% before seeing any gains whatsoever.
Eventually, I would have ended up in the green, but
not after a bit of heartache and wallet ache.
This study offers a solution, they recommend buying
in 25 days after the market drops 10%.
The average gains here are about 61%
twelve months later, not as great as
that 81% figure we mentioned earlier.
However, the average loss in the first
month is only about 3.6%.
This dramatically lowers the risk of you buying in and
then having your heart and wallet broken a week later.
These insights are backed up further
through research done by MarketWatch.
Your results really depend on how well you can time
the bottom, leaving a lot up to luck and your
mental fortitude to weather any dips in price. Data says
following that 25 day rule is a safer way to
hedge against further volatility following big market crashes.
Now, this isn't financial advice, and while most financial advisers
would urge you to never try to time the market,
there are tools that you can use to help figure
out where the market may be headed.
We shouldn't act like buying the dip
is a hopeless cause completely.
For this, Keith Learner has some indicators.
The first is looking for spikes, big, dramatic upshots
in the put/call ratio of stocks.
This helps us tell the general mood of the market.
A lower ratio tends to mean sentiment is expecting the
market to upswing, which in turn means it's more likely
that there's an uptick in investors buying in.
Of course, we could also
look directly at trading volumes.
Learner points out that a big spike in volume
while the market is in decline could mean that
the market is set to swing back upwards.
I'll link an article below that explains further
how to use volume, but it's important to
note that while an indicator may provide additional
insights, they are far from fortune tellers.
Any effort to try to time the market
comes with a substantial amount of risk.
But let's look at the bigger picture here.
For many, buying the dip isn't
just a one off buying opportunity.
It's a lifestyle.
It makes up their entire strategy.
It's when we compare this strategy to others used by
long term investors that we see some surprising insights.
This study compared lump sum investing
with dollar-cost averaging. With DCA,
you set regular intervals to buy into the market,
actually ignoring the price and maximizing your returns.
By holding long term, you purchase the same in
all markets, whether they're trending up or down.
You aren't waiting for "discount prices".
Lump sum investing, on the other hand, is piling
up cash and buying in all at once.
The experiment analyzed the performance of several
$1 million portfolios, comparing their profits over
a rolling ten year period.
The portfolios were split into three categories: 100% equities,
a 60-40 split of equities and fixed income,
and 100% fixed income or bonds.
The results were surprising.
The lump sum portfolios buying all at once did
better than DCA equivalents 75% of the time.
But why is that?
It makes sense when you consider one
key dimension to this study: cash positions.
For dollar cost average portfolios,
the investor was sitting on stacks of cash
for longer while spreading out their buys, hoping
to smooth out the price of their investment.
Cash doesn't pay, thanks to inflation
it actually goes down in value.
This also means
The issue comes when your cash isn't working for you.
If you really want to grow your wealth long
term, the best thing seems to be to just
get your money working as soon as possible.
Doug Ramsey's 25 day rule has its merits.
If you're looking at buying into a market at
record low prices, you now know about how long
you could wait for a safe zone.
All of this research really told me two things.
First: Time. With a long enough time horizon,
none of the strategies we discussed lost money.
So really, we're debating between good and better.
That's a good problem to have.
Time in the market is what matters most
and investing sooner than later is generally a good idea
because most years have positive returns in the market.
Second: Psychology. Ask yourself what you can mentally handle like
seriously, ask yourself, maybe dollar cost averaging doesn't offer the
highest possible return if you have cash sitting on the
side but if DCA is the difference between you getting
good sleep at night or not because you're not worrying
about your investments then it still might be a superior
investment strategy for you.
So take this information and use it
to be a more confident investor.
I'd like to thank you for watching.
I'm Max Mahar and I hope you have a profitable day! 😊