The S&P 500 swooned briefly this week, falling around 2.5% on July 19, before recovering through Friday.
During that brief time, scores of retail investors trained by the mantra “buy the dip” did just that.
So what happened? DataTrek’s Nicholas Colas hypothesized that the retail investor behavior we’ve seen play out over the past 18 months likely recurred.
Searches for “Dow Jones” spiked during Monday’s market dip, Colas pointed out, and a note from Goldman Sachs indicated institutional investors weren’t really buying the rebound. With the public paying attention to the market and big players standing back, it’s a fair bet regular retail investors were the ones who rushed to their brokerage sites.
“The same thing happened in January, and the Google data looked about the same,” Colas told Yahoo Finance. “It’s an imperfect analysis, but it does seem to tie together.”
Is this going to keep happening? There’s a good chance.
At the beginning of the pandemic in the U.S. stock indexes plummeted, losing over 30% in March 2020.
But while institutional and big money investors ran for the hills, retail investors — in it for the long term — saw an opportunity to gobble up stocks at lower prices. Vanguard, Fidelity, and other brokerages reported this behavior.
However, there are only so many times you can deploy reserves; you have to have cash on the sidelines to buy. The federal stimulus payments and increased household savings amid business shutdowns meant some investors had extra cash to put in the market. But these pandemic-era conditions are temporary.
Colas reckons that it’s not over.
“They still have a lot of cash on the sidelines,” he wrote in a note from DataTrek. Cash balances in brokerage accounts, he explained, “still stand at $1.0 trillion versus $643 billion in 2015. These balances tend to ebb and flow across market cycles, peaking as stocks trough and declining as equity markets recover.”
Colas, a hedge fund veteran, calculates there’s around $400 billion in cash still on the sidelines, ready to “buy the dip” when the market pulls back.
Two personal finance philosophies
Buying the dip is based on one of the foundational directives of long-term investing, and typically favored by financial advisors and famous investors like Warren Buffett. You’re investing for the future, so it’s okay if stocks will be down for a while, because you’re going to sell when the present is a distant memory.
Buying the dip because you happen to have money when the market swoons may be good, but actually waiting to buy the dip isn’t necessarily beneficial — it’s falling into the trap of trying to time the market. In many instances in the recent past (the Global Financial Crisis of 2008-09 and even the short-lived 2020 bear market) some people stayed on the sidelines and missed big gains because they were waiting for the S&P 500 to sink back down – which it never did.
Timing the market is a fool’s game. Even when you happen to get it right with one great bit of dip buying, you’re going to do better if you just invest a chunk of money in the market at regular intervals.
In 2019, Ritholtz Wealth Management COO Nick Maggiulli calculated that investing $100 each month for any 40-year period between 1920 and 1979 would have produced better returns than saving $100 each month and buying every dip during that same period. Maggiuli ran the numbers with historical data and found that buying the dip underperforms regular buying (“dollar-cost averaging“) more than 70% of the time.
And if you’re not omniscient — and you’re not, to be clear — you’re probably going to underperform even more.
Ethan Wolff-Mann is a writer at Yahoo Finance focusing on consumer issues, personal finance, retail, airlines, and more. Follow him on Twitter @ewolffmann.
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