When buying the dip doesn’t work this time.
Often when the stock market sells off aggressively in a day or two, it’s because traders have overreacted. Stocks typically re-adjust soon after with a bounce. This pattern had been the norm for decades. But 2022 is special. Maybe this time really is different.
Here’s how the S&P 500 index performed the week after a 1% or greater daily decline, courtesy of the WSJ.
Between 1980 and 2021 investors were rewarded for “buying the dip.”
Whenever the market fell, it was very likely that stock prices would be higher the following week.
But notice the far right red bar representing this year.
Instead of a rebound after a 1% or more decline, investors who stepped in to buy the dip saw a decrease in value of their new investments.
The average weekly drop has been 1.2% so far in 2022. The only time the decline had been worse was during the great depression in the 1930s.
My new buys
I have certainly bought stocks this year on dips, only to see their prices continue to tumble. 😅
Just last week I bought 100 shares of GOOGL for $104 and 300 shares of SHOP for $29.
Yes, I got back into Shopify after selling for a loss earlier this year.
It’s very possible my decision to invest a lump sum will look like a mistake in the coming weeks or months.
But my investment time horizon is measured in decades. As I have often said in my videos, I believe long term investors have to be a buyer in the markets right now.
Maybe stocks will continue to go lower and buying the dip doesn’t work this year.
But a few years from now most investors will be happy they used dollar cost averaging to ease into the markets in 2022. 🙂
Random Useless Fact: