Should You Buy the Dip?

It’s a good instinct not to get carried away with the emotion of a falling market, but that doesn’t mean you should get aggressive instead

- Suzanne Woolley and Liz Capo McCormick

When equity markets fall, there’s always a chorus urging you to take advantage of the opportunity to buy stocks for less than they cost the day before. Everyone loves a bargain, and after 11 years of a bull market, the S&P 500’s 11% plunge during the week of Feb. 24 made for the worst-performing five-day stretch since the financial crisis more than a decade ago. Even Larry Kudlow, head of President Trump’s National Economic Council, said investors should heed the old advice to “think about buying the dip.”

Plenty did, for a moment at least. The S&P 500 rallied 4.6% on March 2. Then it wobbled again, dropping even after an emergency 50-basis-point cut to the Federal Reserve’s benchmark rate, before climbing the next day. It will likely rise and fall dramatically again and again while the markets grapple with the spread of Covid-19 and what it means for the global economy and the risk of a recession. Meanwhile, the bond market keeps flashing signs of economic anxiety: Traders are willing to pay so much for safe-haven bonds that the 10-year Treasury yield slid at one point to a record of below 1%. (Yields fall as bond prices rise.)

This is the trouble with buying the dip: It’s basically a form of market timing, which even professional traders can rarely do well for very long. Many investors planning for a long-term goal such as retirement do themselves no favors by letting market noise creep into their consciousness and narrow their vision. It doesn’t make sense to abandon a well-thought-out asset allocation because one part of a portfolio may suddenly appear cheaper than it was a few months ago.