Buying “on the dip”: Is it the right move?

As tumultuous as political events have been over the past few months, markets have maintained their quiet rally. Frequent, small downward blips (dips) in an otherwise positive trend line seem like the perfect opportunity for investors to make a little extra money. Investors wait for bad news, buy when the market stumbles, then sell when things go back to normal. It seems like a fool-proof strategy, but how sound is it really?

Buying “on the dip” has looked smart during the most recent round of political instabilities. Political noise is usually just that; it doesn’t impact markets heavily. Strong corporate balance sheets have been driving growth more than any sweeping political change. Fearful investors overreact to scandal or turmoil, producing small, short term losses. Stock prices recover because companies are making money.

Still, buying “on the dip” is a form of speculation. It’s a bet that markets will improve in the near-to-mid term. While it’s frequently been right over the past few months, it’s still a bet, and bets carry risks. “Remember, if you lose 50% on a stock, you have to double your money to get even.” This warning comes from economist A. Gary Shilling. Timing the market is still a dangerous endeavor, even for seasoned stock market experts. Trying to do so as an armchair trader can lead to some serious losses.

Despite the small actual impact of political agendas on markets, many investors are riding on what the Financial Times calls the “Trump Trade,” expectations about the impact of tax cuts, deregulation, and infrastructure spending.  It may have contributed to investor confidence. If the Trump administration encounters sufficient scandal to jeopardize that agenda, that confidence could collapse, resulting in market losses.

It’s also worth noting that the current run of strong market performance is at a historic long. At some point, a market contraction seems inevitable. One of these dips could turn into a chasm.

Rather than trying to time the market, savvy investors should build a long-term strategy to take advantage of the historic returns the market offers. Setting an appropriate asset allocation and regularly rebalancing to maintain that allocation remains a safe way to gain exposure to the long-term trends towards growth in the market. Gambling on dips and surges may produce some short-term gains, but it could just as easily result in big losses.

 

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