‘Buy the Dip’: Why the Investing Strategy Is Making a Comeback
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Falling stock prices hardly ever seem like good news. But for investors who “buy the dip,” stock market plunges present an opportunity to load up with more assets on the cheap.
Though buying the dip was all the rage in 2021, the strategy fell out of favor last year, as the stock market struggled and investors embraced more conservative practices like buying bonds and CDs. However, data suggests that buying the dip could be a favorable play once again.
What the data says
New data from investment service group Bespoke shows that buying the dip is primed for a comeback. Bespoke’s Tuesday note to clients indicates that investors who have been buying the dip are seeing positive returns once again.
The report shows that since the beginning of 2023, SPY — the trading symbol for the popular S&P 500 index ETF — has been averaging a return of 0.30% on trading sessions following days with price declines. This rate of return is nearly as high as 2020, when buying the dip paid off especially well for investors.
“In 2020, SPY averaged a gain of 0.32% on the day after down days; the best 'day after down day' performance of any year in SPY's history,” Bespoke analysts wrote.
Meanwhile, after up days for SPY, it has been dropping by an average of just 0.04% in 2023. This is a smaller drop than in 2020, when up days for the index were followed by an average loss of about 0.1%.
By contrast in 2022, which was a poor year overall for stocks, the S&P saw declines on sessions following both up and down days. As the pattern of stock price gains after down days is reemerging, Bespoke researchers say that they've "seen the 'buy the dip' mentality return in a big way.”
What “buy the dip” means
Buying the dip is exactly what it sounds like: When an asset is declining in price, an investor buys it in anticipation of prices reversing course and rising.
The strategy is best taken up by those who plan to hold their investments for the long term and have reason to believe that prices will bounce back. It can be thought of as “buying at a discount.” If the investor’s prediction is correct and the stock's price does indeed rise again, scooping up shares at a lower price can pay off very nicely in the long run.
The strategy was especially popular in 2020 and 2021, when early pandemic market dips made stocks more affordable for retail investors. By the second half of 2021, the “buy the dip” investing style would see its peak for both retail and institutional investors.
Last year, however, the trend fell out of favor as the "dips" became extended drops and failed to reverse.
Bottom line
Bespoke's research provides an interesting set of data for investors to consider when investing.
First of all, buying the dip is proving very successful in 2023 — the gains are almost as good as 2020. Moreover, the research indicates that buying the dip is historically a better way to invest than buying on momentum, given that the S&P 500 sees more of its gains following down days than up days.
Most important of all, investors should remember to avoid selling when stocks are down, if at all possible. The goal, of course, is to buy low and sell high. Yet it's impossible to time the market consistently and always know the optimal time to buy or sell. So the smarter and safer move for investors is often to do nothing — simply keep your money in the market, ride out the ups and downs in volatile times, and stick to your long-term plan.
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