Is 'Buy the Dip' Dead? Investors Are Avoiding the Popular Strategy This Year
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A super popular investing strategy is having a bad year.
"Buy the dip" has become a go-to move for many investors over the last few years, especially those into trendy investments like cryptocurrency and meme stocks. The strategy entails buying an asset like a stock or crypto after its price experiences a temporary drop and, in theory, benefiting when the price rises.
While the move has recently inspired memes and TikToks, it's not new. The strategy has long attracted attention from investors who aren't necessarily paying attention to the latest hot stocks or trends — even those who invest in the market more broadly.
But many of the dip-buyers appear to have disappeared this year as the market has performed poorly after big one-day moves, according to analysts at Bespoke Investment Group.
"One-day rallies have seen no further upside momentum, while 'buy the dip' after big down days has been replaced with 'sell the dip,'" the Bespoke analysts wrote in a note to clients Thursday.
How stocks are performing after dips
This has 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, then recently giving up much of those gains. The index — which is commonly used as a benchmark to measure how U.S. stocks are doing overall — has experienced 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 those one-day drops. So far, the index has averaged a further decline of 0.45% on the day after a dip of at least 1% — next-day weakness that it hasn't experienced following big one-day drops since 1987 (which is skewed by a crash in stocks in October of that year), the analysts wrote.
From the 1990s up through 2021, the S&P 500 tended to average next day gains after one-day drops of at least 1%, "which fueled the 'buy-the-dip' mentality that reached a fever pitch after the COVID Crash in 2020," they added. In fact, the three years leading up to 2022 averaged some of the strongest gains the day after 1%-or-more drops of the last 70 years, according to the data.
"From 2019 to 2021, you could basically set your clock to bounce backs after 1%+ drops," the analysts wrote. "The opposite has been the case this year."
They also note that it's not just dip-buyers who aren't making their usual moves this year. Momentum buyers — who buy stocks or other assets when they're on the rise and hope to sell when they peak — have also seemed to disappear. The index has so far averaged a decline of 0.33% on the day after gains of at least 1%.
Buy the dip vs. buy and hold
Buying the dip has been a popular strategy that's paid off for many in the last few years. But that doesn't mean it's necessarily been a smart move.
“Just because a stock is cheap is no reason to 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.”
Plus, 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 dropping). The strategy also requires holding cash on the sidelines while you wait for the dip, meaning you could miss out on the market's best days if your timing isn't perfect.
Financial advisors tend to recommend instead a buy-and-hold strategy, which will help you build wealth over the long term and doesn't require you to pay attention to short-term market moves. They also suggest employing a strategy like dollar-cost averaging, which entails investing a fixed amount regularly, like $100 each month.
Dollar-cost averaging does involve buying the dip sometimes. You just don't have to deal with trying to get the timing exactly right.
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Does 'Buy the Dip' Actually Work? What Experts Think of the Internet's Favorite Investing Strategy