Is ‘Buying the Dip’ a Good Play in a Bear Market?
“Buying the dip” is an age-old Wall Street axiom that has served many long-term investors well. However, like much oft-quoted investment wisdom, this doesn’t mean that it’s always a wise strategy. In a bear market, for example, “buying the dip” can actually accelerate your losses, at least over the short run. Done properly, however, it can also potentially generate great wealth.
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Oftentimes, these opposing potential outcomes leave investors in a state of inaction. For example, in a survey of 1,001 investors conducted by GOBankingRates in late May, 56% indicated that they were simply holding on to what they had, with just over 19% responding that they were “planning” on buying more but hadn’t acted yet.
So, is “buying the dip” a good play or a bad one in the bear market of 2022? Here are the questions you should ask yourself before you risk any money in today’s uncertain market.
What Is Your Time Horizon?
Your investment time horizon is probably the most important factor in determining whether you should buy into the bear market of 2022. If you have the luxury of riding out any additional potential downside, then yes, buying the dip is likely a good play.
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No matter how vicious the bear markets of the past have been, the U.S. stock market has never once failed to come back and make a new all-time high. Sometimes, this process can take a matter of years; but, in 2020, for example, investors learned that a bear market can sometimes last only a few months. Although past performance cannot predict future results, the 100% record of stock market recoveries bodes well for long-term investors.
On the other hand, if you’re just a trader looking to make a quick buck, buying the dip in the current bear market may only lead to pain. While 2020 was an impressive aberration, the reality is that the average bear market recovery, from bottom to new peak, takes 1,483 trading days.
According to the New York Stock Exchange, there will be 252 trading days in 2022, and experts expect this bear market to last into early 2023. While you may get lucky and catch a short-term bounce as a trader, the averages say it will take a while for the market to rebound to a new high.
What Is Your Risk Tolerance?
Your investment risk tolerance is another factor that may even outweigh the profit potential of the current bear market.
If you’ve already lost money in this market and can’t sleep at night because you fear losing even more, then buying more may not be a successful strategy for you. Although you’re likely to win over the long run if you are a patient investor, there’s no telling if this market will drop an additional 20% or more before it eventually stops falling.
If you’re a completely risk-averse investor, this might be enough pain to scare you out of the markets forever, which could cause serious damage to your long-term investment plans. If you simply can’t bear the thought of additional losses, then just ride out the current bear market until it is clear that it has begun a new uptrend.
Best Investment Strategies
If you’ve completely avoided the bear market of 2022, congratulations. You are one of the few long-term investors who has avoided a major drop. At this point, if you’re a long-term investor, you’ll likely be well-served by dipping a toe into the market right away, with plans to add more if prices continue to fall.
Even if the market is facing another 20% of downside, you’re already far ahead of the game if you avoided the first 20%. The bigger risk for this type of investor is likely waiting too long, rather than getting in too early.
If you’ve already suffered through the big market losses this year, it’s time to let go of any negative emotions you may be feeling and start a dollar cost averaging program. First, prune your portfolio of any stocks that you no longer have confidence in for the long term, perhaps because their investment thesis has changed. Then, when you are left with the absolute best stocks you’ve selected as long-time winners, start averaging down your cost basis.
If the stock markets recover, as most experts predict over the long run, buying more shares while prices are low is a way to get back in the plus column more rapidly. For example, if you bought a stock at $100 and it now trades at $50, you’ll need a 100% gain just to break even. But if you invest an equal amount now, your average price will be just $75 per share, not $100. This means a 50% bounce in the stock is all that is needed to break you even.
Methodology: GOBankingRates surveyed 1,001 Americans aged 18 and older from across the country between May 24 and May 25, 2022, asking 10 questions: (1) Have you ever followed money advice from a well-known expert?; (2) When do you believe you will be able to retire?; (3) What account(s) are you currently utilizing for your retirement? (Select all that apply); (4) Do you plan on funding your retirement with Social Security?; (5) How much monthly Social Security income do you believe you will receive when you are retired?; (6) Given the recent performance of overall Stock Market indicators (S&P 500, Dow Jones Industrial average, etc.) how are you currently adjusting your investing behavior?; (7) What items do you purchase most frequently at Walmart?; and (8) What items do you purchase most frequently at Costco? GOBankingRates used PureSpectrum’s survey platform to conduct the poll.
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This article originally appeared on GOBankingRates.com: Is ‘Buying the Dip’ a Good Play in a Bear Market?
