Buying The Dip Is Market Timing With Better PR
Chapter 24 of The Rational Investor
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Common advice when the stock market drops is to “buy the dip.”
Buying the dip is when an investor invests even more than they normally would after the market has declined in value. It taps into the idea of “buy low, sell high.”
While buying the dip is an infinitely better choice than selling the dip, if you’re a long-term investor looking to maximize your wealth, you’ll never allow yourself to be in a position to buy the dip.
Buying the dip is market timing with better PR
The rational investor does not “buy the dip” because they do not have investible cash lying around to buy when the market dips.
By “investible cash,” I mean money that does not have a specific purpose in your financial plan. Cash in an emergency fund is not investible cash because the entire purpose of that money is not to be invested. Investible cash means leaving money aside as part of an intentional strategy to invest it after a market crash in hopes of higher returns.
Buying the dip is simply market timing by another name. Rational investors don’t buy the dip because they don’t time the market.
Let’s say you had $10,000 in cash you could invest at the beginning of the year. You choose not to invest it because you feel the markets are overvalued, and a correction will come soon. Once the market drops, you will invest your extra cash.
Here’s how that would have played out in 2021.