Should Investors “Buy the Dip”?

Transcript

Ken Fisher:

So one of the things that is misguided conventional wisdom is that you should hold some cash—different people say different amounts—for unexpected "buy the dip" opportunities. A great example of that would have been, for example, if you had had cash last April. April 2025, as stocks crumbled under fear of the effects of Liberation Day, and then bounced back pretty quickly thereafter. It's really a bad idea. And let me explain to you why.

Always maintaining some cash for "buy the dip" opportunities misses a few presumptions. One, in history, thinking about it globally, or for the most part, domestically, in most major nations, not all—stocks rise about three periods for every one period they fall. And so, when you're holding that cash, you're—it worked perfectly, if that opportunity comes right after your first holding the cash, that worked perfectly—that's, that would be the example of pure perfect market timing, which almost no one could possibly have, and maybe no one could possibly have. But the fact of the matter is that if you have to wait through a long period of rising stocks before you get that "buy the dip" opportunity, you gain nothing. Secondarily, "buy the dip" never works in a bear market. Presumably, you would have spent your cash with the first dip going into a bear market. And what that means is you're the last great fool going into the great bear market.

When the bear market initiates. Because as it dipped, you bought it. You got 100% invested at that point in time, and then, the market stabilized for a little while and kept going down to the depths of a bear market. Think about it another way—if you're going to always hold cash for "buy the dip" opportunities, and you spend the cash in the dip, then you have no cash. So, how do you maintain the cash for a "buy the dip" opportunity at that point in time? What's the counter action that would be you then having the right time to raise the cash, because if you're going to always have cash to buy the dip opportunity, and you just spent the cash, how do you start over right there? It's a kind of a Catch-22 in the saga. "Buy the dip" kind of presumes you're in a bull market.

Now, I'm going to step back to 37,000 feet. If you think you're a great market timer— which again, not very many people are— you don't need to "buy the dip" because you can stay fully invested and figure out before the dip that it's happening because you're a great market timer. If you're like most everyone, and you're not a great market timer, the fact is, you then get frightened, commonly, most people do buy the dip, and as the dip starts and stocks start falling, you hold off to try to hit the bottom of the dip, which again, unless you're a really great, perfect market timer, nobody's very good at. And as you hold off and the stocks doing the dip like this, you miss the bottom and it starts rising, but by now you're afraid.

So, for example, I mentioned earlier that last April would have been a great time for someone to have had cash to deploy in the dip, but most of the people that had cash in the dip saw that period of the confirmation that they'd previously been right and held off and did not deploy it. Most people that use holding cash to buy the dip don't use the cash in a dip, because the dip itself almost always has a scary story, and the scary story scares them away from deploying it. The reality is, there is a time and a place where a bear market begins, and if you have a way to see that, that's a worthy thing to try to avoid.

But for the most part, holding cash just costs you money. Cash suffers inflation. Cash has very low returns pretty much always, and in that regard, at levels that cash, for example, now currently yields, you're paying a pretty heavy price compared to other things to be holding that cash, waiting for that dip that may not come until after you've already had opportunity cost suffering from having missed rising prices of things. And so, what I've been saying to you is one, two, three, four, five ways that buy the dip doesn't work. And therefore, it's not a strategy that's worthy of deployment.

Thank you. I hope you found this educational, useful and somewhat enjoyable. Hi, this is Ken Fisher. Subscribe to the Fisher Investment YouTube channel. If you like what you've seen. Click the bell to be notified as soon as we publish new videos.