Stocks are on sale this year. Should you buy the dip? While generally I would say yes, there are some important caveats.
- Buy the dip is more reliable when you’re buying a diversified portfolio. Individual companies go out of business or fall into
long-term slumps all the time. I can only think of one major stock market that has done that in my lifetime (Japan). In general, broad stock markets tend to recover. - Buy the dip only works if stocks are trading at a discount to fair value. If an overpriced stock falls, but it’s still overpriced, it can fall further. Need a possible example? Snap Inc. hit a high of $83 last year. It’s trading at $15. Don’t buy it today thinking it has to get back to $83 someday. It doesn’t. The company has never turned a profit…ever. How do you think it will do if we hit a recession?
- Be prepared for further drops. If your only bear market experience was 2020, you must understand that rapid recovery was unusual. During the great recession (2007-2009), stocks fell for 17 months before they hit bottom. There were rallies in between that turned out to be head fakes. It took much longer than expected to get your money back.
As I apply those caveats, I would caution against buying the dip in U.S. tech (growth) stocks. They may still be expensive and don’t qualify as a diversified portfolio.
What does qualify? A global portfolio with thousands of stocks would be best.
About the Author: John O’Connor
John has more than ten years experience as an Investment Advisor. He focuses on devising and maintaining portfolios that meet individuals’ needs, investment research, and investment strategy. John has been recognized as a “FIVE STAR wealth manager” by Twin Cities Business Magazine 2016-2022. He is a CFA charterholder and CERTIFIED FINANCIAL PLANNER™ Professional.
Legal Disclaimer: These posts do not constitute an offer or recommendation to buy or sell any securities or instruments or to participate in any particular investment or trading strategy. They are for informational purposes only. CTW gathers its data from sources it considers reliable. However, CTW makes no express or implied warranties regarding the accuracy of this information or any opinions expressed by the author and may update or change them without prior notification.