Buying the Dip Isn't As Easy As You Think

Buy the dips...

Your friend, your college professor, even your mom has probably given you this advice. Buying the dip is what every investor wants to do.

But buying a market dip is more challenging than you might think...

It seems simple. When stocks pull back in a bull market – like the one we're in today – you seize the opportunity and buy quality stocks at a discount. Naturally, these quality names don't remain cheap for long. You make money as they shoot right back up to new highs. Obvious, right?

But think back to the end of last February... Did you buy the dip as stocks fell their first 12%? If you did, you probably felt pretty good as stocks quickly climbed 6% in the following days. You probably thought you outsmarted everyone else who was panicking...

But as we all know now, that wasn't the dip you wanted to buy. After the market briefly rallied, stocks plunged 28%.

Now, this is an extreme example. No one knew what to make of the market last February and March. The pandemic was truly a black swan event.

But even looking at a somewhat "normal" market correction... did you buy the dip at the end of 2018?

Stocks fell 10% – the standard definition of a market correction – before they rallied 6.5%... and it looked like the market was back on track to hit new highs. But stocks weren't done falling yet. By the end, stocks had fallen nearly 20%.

If you bought either of those dips and were patient, then your strategy paid off. Stocks eventually went on to make new highs. But you needed nerves of steel to hang tight through all the volatility.

And think about this... What if you were waiting to buy a big dip any time after March?

You told yourself that when stocks fell 10%, you'd jump back into the market. You'd empty your bank account into Amazon (AMZN), Apple (AAPL), Berkshire Hathaway (BRK-B)... all the high-quality stocks you want to own.

If this was your approach, you would have never moved your money out of your account. The market hasn't dropped more than 10% since the end of March. Your cash would still be collecting less than 1% interest. And you would have missed all of the incredible gains over the past few months.

Plus, when there are dips in the market, there's typically very little time to get the prices you want. Stocks usually recover quickly. You may miss your opportunity to buy if you don't act fast enough.

The point is that buying dips isn't as easy as folks make it out to be. Timing the market never is.

That's why you shouldn't play that game...

Instead focus on what you can control. Use proper position sizing. Follow your stop losses. Diversify across different sectors, assets, and countries. And most important, especially for today, own quality stocks.

The truth is that a market crash is coming. I don't know when. But it's clear the market is in a state of euphoria.

Stocks are up 75% since March, and it has been a one-way ticket up. There are plenty of other signs like the speculative action with retail investors driving up lousy stocks like GameStop (GME) and AMC Entertainment (AMC)... to today's record stock valuations... to an environment of extremely bullish option activity... to all the money being thrown at specialty acquisition companies, or SPACs. (By the way, my team and I think the majority of SPACs will tank.)

Now, you can think about this euphoric behavior in two ways...

First, you could say this means we're long overdue for a correction. Pullbacks are a normal part of the market cycle. During the last great market Melt Up in 1999 and 2000, there were plenty of times where the market fell about 10%...

Nothing goes up in a straight line forever. Today, many investors are predicting that a 10% or so drop should be coming soon – and I tend to agree with that. Stocks need a breather, especially since we're not out of the woods with COVID-19 yet.

The other way to think about today's speculative market is that it can keep stocks going much higher... for much longer than you might anticipate.

If you only focus on buying the dips like I talked about earlier, you could miss out on some enormous gains to come... as giddy investors keep throwing money at stocks.

Today's market environment is tricky. You don't want to take out a second mortgage to invest only to end up homeless a few months down the road... and you don't want to sit on the sidelines and miss out.

Stay in the game but be realistic about the market we're in today. Use the risk management tools I talked about earlier. And take a hard look at your portfolio and be sure that your holding quality companies.

Longtime readers know I love investing in super-safe investments that allow you to sleep well at night.

But everyone could use a little smart speculation in their portfolios. If you make a few small bets that can double or triple your money, and do that a few times a year, it can seriously boost your returns.

The key is smart.

I know lots of folks like to speculate on cryptocurrencies.

The crypto world is full of life-changing gains, but it's also filled with shady characters and dubious cryptocurrency tokens. There's speculating... and then there's setting your money on fire.

If you want to speculate on cryptos without losing your shirt, you first need to find someone trustworthy who knows the industry. And when it comes to cryptos, there's no one I'd trust more than my colleague Eric Wade, Stansberry Research's in-house cryptocurrency expert...

Eric just released a video where he walks you through his cryptocurrency strategy. If you've ever thought of investing in cryptos, start here.

What We're Reading...

Here's to our health, wealth, and a great retirement,

Dr. David Eifrig and the Health & Wealth Bulletin Research Team
February 10, 2021