During my doomscrolling, I’ve noticed that financial social media keeps telling me to “buy the dip”.
By social media, I obviously mean the hucksters and charlatans on Twitter and Reddit because “buying the dip” is way harder than they make it sound. In a bull market like we are experiencing, it is so easy to make money that any drawdown of 5% or 10% is seen as an opportunity to purchase.
I agree with the theory, but it doesn’t work so well in practice. Of course no one wants to overpay for shares in any company, but trying to determine what is overpriced is way harder than just looking at a company’s P/E ratio and balance sheet these days. Check out Josh Brown’s recent article about Paypal to see what I’m talking about.
The problem is that if you keep buying these small dips in an overpriced market, you may run out of cash for when an actual dip occurs. God forbid you need any of those funds in the short-term because then you will be selling during a down market too.
Let’s practice a little bit of negative visualization using a recent example:
COVID-19 tore through the American psyche like wildfire in late February and early March last year. For those of us that weren’t alive for the 1918 Spanish Flu or the 14th century Bubonic Plague, it’s safe to assume this was the first real pandemic we’d experienced. It showed.
- Grocery stores picked clean
- Hospitals overflowing with corpses
- Government mandated shutdowns
- Supply chains disrupted
- Mask shortages
- Experts arguing over what to do next
- Zero leadership from the White House
- Me using old socks as toilet paper (okay, not really, but ALMOST!)
This was the fastest 30% drawdown in stock market history for good reason. There were very few people clamoring to fund their stock accounts with the cash they had in their savings. They were more focused on barricading themselves inside and treating their friends and family with suspicion.
Not a single person could have told me in March 2020 that by the end of the year, we would have crushed through multiple all time highs (ATHs) for stocks. But this is precisely the “dip” social media would have you believe you need to be taking advantage of. Unfortunately, it’s simply not practical for the average investor (or the professionals for that matter).
So what do you do about it?
Don’t play their game.
Instead, put money towards buying a small, regular amount of stocks or funds, preferably in a tax-sheltered account such as an IRA or 401(k). This way you both “buy the dip” and protect yourself from being taken advantage of by your emotions, herd mentality, or poor advice.
Automate your investing through your company or open a brokerage account yourself if your company doesn’t offer one. Check out my three-part series on how to buy stocks by yourself.
Keep more cash on hand than you think you need. The market can remain irrational longer than you can remain solvent.
Don’t try to time the market. It’s not worth your “time”.
By taking the fear out of the equation, you will more likely achieve your financial goals in life and be able to spend your limited time focusing on things that actually matter such as your relationships, lifelong learning, and your fantasy football league.