The phrase “buy the dip” is famous in a down market. But it’s important not to get so caught up with timing that you attempt to do so—which can be dangerous and costly for investors.
Here are three reasons why trying to time the market can be challenging:
- The Future of the stock market is unpredictable
- You might get caught up in stock picking (which is only good if you have a system that works, not just random thoughts)
- Please don’t change your strategy for a dip; it will most likely recover.
- Stay on your goal, and don’t be swayed by the market.
The Future of the stock market is unpredictable.
No one can say for sure what direction the market will take next. Speculating about when a bottom might be approaching is fine, but you won’t know exactly where it was until after it’s passed and stocks are again on their way up.
So, while it might make sense to include some lower-risk assets in your portfolio, massive changes aren’t necessary.
The unpredictability of the market is one of its greatest perils: it’s possible to look at underlying fundamentals and figure that they won’t support a bull run forever, but you can never know precisely what will trigger a downturn—or when it will happen. Even if you’re sure that a market correction is coming, it’s not always appropriate to speculate on when it will happen.
If your portfolio is primarily composed of stocks or corporate bonds, it makes sense to consider moving some money into cash or other safer investments as soon as possible. But if you have a significant amount invested in real estate or private equity, trying to time these types of assets might not be worth the effort—unless they’re your only holdings.
Buying during a dip in the market is one way to ensure you profit from your investments. If you try to time the market by waiting for some sign that it already reaches the bottom, or if you hold off investing until stocks sink even lower, you might miss your chance.
It’s impossible to say, in the short term, what impact will be most significant on the market. Investor sentiment can be fickle, swinging from one extreme to another. One day investors may place a greater emphasis on production cuts, and the next day they might worry more about falling consumer sentiment.
While short-term predictions are practically impossible, the long-term trends of the stock market tend to be upward. If you’re looking at 20-year cycles—a reasonably standard benchmark for investment planning and retirement savings plans in this country—then it’s much easier to predict where stocks will go.
You Might Get Hooked Up In Stock Picking
The danger of buying the dip and potentially straying into market timing is that you might find a diamond in the rough.
Although value investing tends to perform better during market declines, you can’t depend on it—you risk missing opportunities if you wait for the perfect investment. During a market downturn, you might be able to take advantage of good opportunities and get a great deal.
However, it would be best if you were wary of thinking that the “right” time to buy an investment is when its price has reached the bottom. As long as there’s value in an asset, whether or not it’s at rock-bottom prices will make very little difference over time.
Making an effort to enter a market at just the right time can be risky because there’s no guarantee that your timing will be correct. And if you’re wrong about when investment demand is high, you’ll also lose out on potential gains.
Don’t Change Your Strategy for a Dip
When buying the dip, changing your overall investing strategy is tempting. However, those changes may negatively affect your long-term financial goals. Stay the course if you’ve set aside money to buy value when it presents itself. If your strategy involves maintaining a particular asset allocation—as most do—don’t overthrow that in pursuit of market bottoms. If you’re unfamiliar with the process, don’t change it now. And if you have an investment plan that’s working for your goals, stick with it.
You may buy stocks or other low-price investments because of temptation, but it’s important not to lose sight of your long-term goals. If you change your investment strategy because of declining market conditions, likely, the changes won’t help and could hurt you.
Consider whether you’re taking away from your investing strategy to take advantage of the dip. If it’s because you think there will be another crash, that might indicate that right now isn’t a good time for investment in stocks—or at least not this kind of investment!
Stick to Your Goals
It’s okay to have money available for buying opportunities, but the danger of trying to time markets—making decisions based on when you think it will reach the bottom —is that you can mess up your overall plan. For example, if you’re holding for a down payment on a house and try to time the market so that you can buy low and sell high, you could miss out on getting into a home before prices rise again. If you’re saving for retirement and taking more risk than is appropriate for your goals because stocks are cheap right now, that could hurt your long-term financial well-being.
Consider keeping your usual investing plan during this time, and only use excess cash flow to make extra purchases if you can afford the risk. Instead of waiting for a market bottom, consider buying when you feel that prices have hit “your number.” After all, if you can get something for less than expected—even if it briefly falls further in the following weeks—it’s still worth buying.