Should You Buy the Dip? Smart Strategies And Surprising Math (EP.201)

0:28We all need to make smart decisions with our money. Should you buy the dip? Now, if you're listening to a podcast like this, I would have to think that you know that the market is down. And you would have to know if you've been a longtime listener that I would say don't panic. This is a normal part of investing. In fact, market declines happen more often than people realize. You've probably heard me quote some stats like the fact that the S &P 500 experiences a 10 % correction about once every year or so, and a 20 % bear market about every five years, and a 30 % or greater drawdown about once a decade.

1:08So downturns, they're totally normal. But if you're someone who sees a decline and thinks, maybe this is a good time to buy, this is the episode for you. because that instinct can be productive if you approach it with discipline. Today, we'll talk about whether you should buy the dip, how to do it wisely, and what mistakes to avoid, whether you're still building your portfolio or drawing from it in retirement. And if you're trying to figure out where is money that I can find to put into the market, most people are really surprised when they start to track their cash flow. And I want to make you aware of a link that's in the episode description that goes directly to my cashflow worksheet, you can use it and see exactly where your money is going and how to make it work for you.

1:57Now, let's start with why this idea of buying the dip exists in the first place. Seasons investors know that volatility is a feature of the market, not a bug. When prices fall, expected returns rise. It's one of the simplest yet most overlooked dynamics in investing. But the opportunity in a downturn isn't just theoretical. It's backed by real world results. Historically, when you look at the S &P 500, at periods when it's dropped 10%, the average one-year return from that point forward is 11.7%. And after a 20 % drop, the average one-year return climbs to around 22 % per year. And when you look at what happens over the next three and five-year periods, you see that the returns tend to be strong.

2:45But here's what most people miss. You don't need perfect timing to benefit from a downturn. I mean, if you think about even when you invest partway through a bear market, weeks or even months before the ultimate bottom, it's important to realize that market recoveries often begin when things still feel terrible. The economy is going to still be weak, the headlines still scary, and many investors still sitting on the sidelines. But that's exactly when markets begin to turn. It's a process. And this is the hard part. When the future looks uncertain, it rarely feels like a good time to invest. But that disconnect is where opportunity lives.

3:25The biggest rebounds often start well before the coast is clear. And I think it's really interesting. I mean, no one rings a bell at the bottom of the market. And evidence shows that just being present during a downturn, rather than trying to time that exact low point, can be enough to dramatically improve long-term results. So if you've been sitting on cash and you're unsure whether to invest during a downturn, I'd like to point to an equation that Nick Majuli, author of the blog of Dollars and Data, shared a simple, but I feel like really powerful equation that reframes the idea of investing in a down market.

4:03He wrote about it during COVID in 2020, but it applies to any drawdown. Now, I'm going to put the equation in the show notes at thelongterminvestor.com because I don't know how I'm going to verbally describe this equation and have it make good sense to you. But think of it this way. If the market's down 33%, it needs to rise about 50 % to get back to its previous high. Now, we're not down nearly that much. But I think anytime you are trying to figure out, hey, how do we get back to our previous high and how long do I think that will take? you can back into an expected annual return based on that number.

4:40And so I'm not going to go into the details. This is going to be one of those things where I point you directly to the show notes at thelongterminvestor.com. You can see some of the shocking math behind this. And I think that's the beauty of framing it this way. It helps shift your thinking from how bad does this feel right now to how long am I willing to wait for a strong return? Now, there are two different groups of people, broadly speaking, who might be buying the dip. The first is a group that's typically still working and building wealth. And a market decline can be a great time to accelerate your investing, but only if you have the means and a plan to do so.

5:18And so I jotted down a few practical ways to buy the dip if you're still accumulating. The first is probably obvious. It's to invest idle cash. So if you have cash sitting in a checking or savings account that you don't need in the short term, a market dip could be a good time to put some of it to work. But be careful. Of course, this shouldn't come at the expense of completely depleting your emergency fund or totally ignoring your short-term goals. Another idea, and I actually personally did this myself, is to accelerate your contributions. So you might be putting money into a 401k or an IRA regularly, and you could consider that rather than continue to make equal contributions to that account throughout the whole year, you can accelerate or front load those contributions if you can afford to.

6:07So again, this kind of goes back. There's a common theme. Don't spend money that you don't have. Now, the third one is really, really going to emphasize that a lot because I do think that a third way that someone who's in the accumulation phase can be investing to buy the dip is to use a part of your emergency fund. And I've been thinking for years, and those of you who've listened to me for a long time know that I think that the emergency fund needs a rebrand to be some sort of, I don't know if it's an opportunity fund or maybe a cash reserve. I think it should be called a cash reserve because if you have a large cash reserve and you feel comfortable in your job security and in the expenses that are coming up, that cash reserve could be used opportunistically if you have a high risk tolerance and if you really feel like your job is secure and you won't need the money.

6:58A fourth more conservative way about going and buying the dip would be redirecting windfalls. So bonuses, tax refunds, unexpected income. Rather than spending it or let it sit idle, you could consider investing it during a downturn. And lastly, I think Roth conversions have to be discussed because if you've been thinking about converting a traditional IRA to a Roth IRA, a market decline can make this move very appealing. You'll pay taxes on a lower balance and any future rebound will happen inside the Roth completely tax-free. I had already mentioned this before, but before I transition, I have to again mention the common thread across all these strategies and it's pretty simple.

7:41Don't invest money you'll need soon and make sure you're staying consistent with your overall financial plan. Now, I want to talk about the other large segment of people, those who are in retirement or that decumulation phase. You may not be contributing to your accounts anymore, but that doesn't mean you can't take advantage of market dips. For example, you can use your cash reserves to avoid selling out of your portfolio. Now, I know a lot of people are fans of a bucket strategy. At PlanCorp, we are very commonly recommending that people put aside one to two years of spending needs in cash from the day they retire through their first bear market.

8:19So if you've already built this buffer, that cash gives you the freedom to avoid selling investments at depressed prices, which helps your portfolio recover faster. You can also use the excess cash to buy the dip. So if you felt that you've built up more cash than is necessary, you can consider putting a portion of it to work. I also think an underrated consideration, particularly for people in retirement or that decumulation phase, is to adjust your asset allocation. Now, this isn't to get more defensive. It's actually the complete opposite. Imagine you're at a mix of 50 % stocks and 50 % bonds, something that's generally pretty conservative.

8:58The market, look, it's not down that much as of this very recording. It's down a little bit more than 10%, but let's say we're down 30%. Maybe you'd consider moving up to a 70 % stock portfolio. If your financial plan supports those types of changes, I think getting aggressive when you know that your needs are well met, and it works with your financial plan, that is a great opportunity to buy the dip. And if you don't want to be that aggressive, then of course, there is always the classic rebalancing as a strategy. Because if your portfolio has drifted significantly, when stocks are down and bonds are up, rebalancing gives you that natural way to quote, buy the dip.

9:36It's disciplined, it's unemotional, it's often very effective. And in retirement, I think the key again, whether it's changing your allocation or using excess cash to buy the dip, or even rebalancing the real key, much like when you're in the accumulation phase, is you really should be doing it and buying the dip only if it enhances your ability to meet long-term goals. So there are some mistakes that I want to hit on before we end the episode. Things that I've referenced to a little bit here and there, but I'm just going to throw them in one quick list. I've been writing them down throughout the week.

10:09The first is trying to time the bottom. So again, nobody rings a bell at the bottom of the market. If you wait for the perfect moment, you will likely miss it. So focus on the process not precision. The second mistake to avoid is overcommitting. Don't put so much cash into the market that you feel left financially exposed. Whether it's your emergency fund or upcoming expenses, you have to always keep your safety net intact. Third mistake to avoid, reacting emotionally. Buying the dip should be a strategic decision, not an emotional reaction. If fear or a

10:48take a step back and revisit your plan. Fourth, ignoring your asset allocation. I don't think it makes sense to let dip buying throw off your target mix. Now that conflicts a little of what I said about making your allocation more aggressive. Again, that's all within the context of a plan working. But I also think that when you let the dip throw off your target mix, I mean choosing where you want to rebalance and where you don't want to rebalance. So it might be tempting to say, I want to put more money in international stocks or more in US stocks or more in one segment of the market. It's important to still maintain that basic asset allocation, even if you are changing the mix of stocks to bonds strategically to buy the dip.

11:33And lastly, really isn't a surprise that I might say you should try to make sure that you have a plan. Because if you don't have a framework for when and how to invest in downturns, You're just guessing. Pre-committing to a process like rebalancing thresholds or scheduled investments makes execution easier and more effective. So should you buy the dip? Maybe you should. Maybe you shouldn't. If you have the right plan in place, the right resources, the right mindset, buying the dip can be absolutely something that works in your favor. But don't confuse action with progress, I think the key isn't doing something flashy, it's doing something smart.

12:16And so for those who are in the accumulation phase, I think you should be focused on investing more consistently, more intentionally. And for those in retirement, I think you can remember that your cash cushion, your rebalancing strategy already put you in a strong position to weather the volatility. So above all else, I think no matter what you choose, you have to stay disciplined, stay diversified and stay invested. As always, thanks for listening. And if you found this episode helpful, please do share it with a friend or leave it a review. It really helps new people discover the show. Thanks for listening to the Long-Term Investor Podcast.

12:55To access free financial resources and submit questions to be answered on the show, visit thelongterminvestor.com.

13:30Thank you.