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Is “Buy the Dip” dead? Investors are avoiding the popular strategy this year

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A very popular investment strategy is having a bad year.

“Buying the dip” has become a go-to decision for many investors over the past few years, especially those investing in trendy investments like cryptocurrency and meme stocks. The strategy is to buy an asset like a stock or crypto after its price has experienced a temporary decline and, in theory, benefit when the price rises.

Although the move has recently inspired memes and TikToks, this is nothing new. The strategy has long caught the eye of investors who don’t necessarily pay attention to the latest stocks or hot trends, even those who invest more broadly in the market.

But many dip buyers appear to have disappeared this year as the market performed poorly after big one-day moves, according to analysts at Bespoke Investment Group.

“One-day rallies no longer saw any upward momentum, while ‘buying the dip’ after days of steep declines was replaced by ‘selling the dip,'” Bespoke analysts wrote in a note to customers on Thursday.

How stocks perform after declines

It’s been a volatile year for stocks, with the S&P 500 starting 2022 on a high, entering a bear market in June, rallying over the summer, and then recently giving up much of those gains. The index – which is commonly used as a benchmark to measure the overall performance of US equities – has seen 42 one-day declines of at least 1% and 40 one-day gains of at least 1% this year, according to Bespoke.

But for the most part, investors aren’t buying the dip after these one-day lows. So far, the index has averaged another 0.45% decline the day after falling at least 1% – overnight weakness it hasn’t seen after steep declines in a day since 1987 (which is skewed by a crash in stocks in October of that year), the analysts wrote.

From the 1990s through 2021, the S&P 500 tended to average overnight gains after single-day declines of at least 1%, “which fueled the ‘buy the dip’ mentality that reached its climax after the COVID Crash in 2020,” they added. In fact, the three years to 2022 averaged some of the largest gains in the aftermath of declines of 1% or more in the past 70 years, the data shows.

“From 2019 to 2021, you can set your clock to bounce back from more than 1% decline,” the analysts wrote. “The opposite has been the case this year.”

They also note that it’s not just bottom buyers who aren’t making their usual moves this year. Momentum buyers – who buy stocks or other assets when they are up and hope to sell when they peak – also seemed to disappear. The index has so far posted an average decline of 0.33% a day after gains of at least 1%.

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Buy the Dip vs. Buy and Hold

Buying the dip has been a popular strategy that has paid off for many over the past few years. But that doesn’t mean it was necessarily a smart move.

“Just because a stock is cheap doesn’t mean you should buy a stock. In fact, it can be one of the worst reasons,” Kimberly Woody, senior portfolio manager at Globalt Investments, told Money last year “Sometimes things are cheap for a reason.”

Additionally, timing the market is extremely difficult – even for professionals – and attempting to buy the dip can turn into “catching a falling knife” (buying an asset while its price is falling). The strategy also requires you to hold cash in margin while you wait for the downside, meaning you could miss the best market days if your timing isn’t perfect.

Financial advisors tend to recommend a buy-and-hold strategy instead, which will help you build long-term wealth and not force you to pay attention to short-term market movements. They also suggest employing a strategy like dollar cost averaging, which involves regularly investing a fixed amount, like $100 per month.

Buying the average sometimes involves buying the dip. You just don’t have to worry about trying to get the timing right.