Should You Buy The Dip?

In theory, anytime there is a pullback in the market like we’ve been experiencing, it can be a good time to buy. This is because equities are selling “on sale” or “at a discount”. While it never feels like a smart time to buy with all of the fear and bad news going on in the market, it is important to look back at history and the evidenced based data.
​
Going back to 1928 (94 years), 59% of those years, the SP 500 had a double-digit drawdown at some point during the year. That means that roughly two thirds of the time, you’re going to be down at least 10% at some point in the S&P 500.
 
-58% of those years, when we’ve experienced a double digit drawdown, the S&P 500 has still finished the year with a POSITIVE return.

-40% of those years, you would have still finished the year UP DOUBLE DIGITS.

​Just as we’re seeing now with the current environment (Fed raising rates, inflation, etc) all of these other corrections in the past, didn’t happen for no reason. There was the same pessimistic and worrisome view of the market.

But things eventually get better.

​So is the S&P 500 going to finish down -30% this year, or up +5%.....???

NO ONE has a crystal ball.

But if you’re looking at the data, the odds are more likely to finish up. I know stocks could fall even further from here. Things could always get worse. But if you are a long term investor, stocks are on sale.

HOW TO DO IT
 
It is important however to differentiate if you are buying individual companies, or the market/ index as a whole. There is a big difference between buying an individual company that has declined a lot and buying an index that has declined a lot.

There is no guarantee that the individual company will ever recover. Individual stocks come and go.

​As Nick Maguilli points out, since 1950, 28,853 companies had traded on US Markets, but by 2009, 78% of them had died out. It is estimated that roughly half of all public U.S. companies in existence today won’t be in existence in 10 years from now. They will either merge, be acquired, go bankrupt, or find some other way out of the market.
 
Take Netflix for instance – it is currently down -70% YTD. While there is a chance Netflix can reach new high’s, there is also a chance that it will never get back to that level- or even worse, that it slowly declines and dies out.
 
However with an index fund, assuming the world is not coming to an end, the probability of the S&P 500 never recovering from a crash is quite low.
 
Since January of 1995, 728 tickers have been added to the SP 500 while 724 have been removed. This is why the stock market is hard to beat. Indexes can seem very plain and vanilla, but they are tax efficient, low cost, and they hold the winners and let go of the losers.

For example, if you own an S&P 500 index fund, your underlying holdings will change based on the work done by Standard and Poor’s research teams. If they decide to add or remove a company from the index, you will automatically add or remove that company from your holdings as well. This is much different than owning a lineup of individual stocks.

STICKING IT OUT
 
If you build your portfolio the right way, you know it is built to withstand market corrections and crashes. It is also smart to build these corrections into your expectations so they don't sting quite as bad. You can’t expect everything to go up all the time- this is how risk & return works. 

​While times like this with high market volatility can be unnerving, it is important to stick to your plan and remember why you’re investing in the first place… To build long term wealth. 
 
For an investor, when markets pull back, it is an opportunity to buy at lower valuations, higher dividend yields, and lower prices.

Ray Dalio said it best in his book Principles – ‘Making a handful of good uncorrelated bets that are balanced and leveraged well is the surest way of having a lot of upside without being exposed to unacceptable downside.’
 
​​