Recently, I was out to dinner with someone. Okay, it was a date. I was on a date. I didn’t sense any romantic sparks fly this time. However, it was a good time and we had a great conversation.
We were talking about current events and the craziness that is a post covid world, dating in your 40s, and most recently how the stock market is doing and the decline we are in these last few months.
As we were engaging in good conversation, she then references the market decline, and says, “Yeah, I gotta figure out what I’m going to do with my investments, like my 401k, or where I should put them because the market is down like 25%!”
I calmly stated, that I think this is actually the best time to leave your investments right where they were. I also mentioned if you were regularly contributing to these investment accounts, like through a payroll deduction, to just keep doing it.
My date looked at me rather puzzled, and didn’t quite understand why I would say such a thing. I then asked her when she was thinking of retiring and when she’d need to use those investment accounts. Realistically, she said she wouldn’t need that money until she was 65.
Being that she wouldn’t need this money until retirement over 20 years from now, most likely we’ll see the market recover, and she’ll realize all the gains she might have otherwise missed out on if she were to move her money to more stable bonds or other type investments. History has shown, the market had recovered following declines, and investors that have stayed invested for the long term may have benefited from the recovery.
I thought this would be a good reminder to talk through what it means when investors say to “Buy The Dip?”
I’ll try and explain how I understand it, and hopeful it will make sense. Keep in mind, I am not an investment professional, and this is for entertainment, and not investment advice.
Another thing we need to remember is that we have NOT Lost money when the market is in decline. So many people say, “I’ve lost so much money in the market!” Or “The stock market is down and I’ve lost this amount!” It helps to remember this: You only lose when you sell. Did you follow that? As long as you stay in the market, you have not lost. The value of your holdings may have decreased, but you have not lost money.
For this example we’ll pretend we are going to invest in a fictional index fund. And, for those that new here, and hear others talking about individual stocks. Yeah, “I get it! Single stocks can be sexy, and what you hear about in the news and on TikTok!” But, once I understood that an index fund is a portfolio of stocks or bonds designed to follow the make up and performance of a financial market index.
For instance an Index fund can includes a blend of 100s or even 1000s of individual stocks. And, even cooler, they typically are across a variety of business Sectors such as Technology, Healthcare, Energy etc. This can include companies such as Apple, Microsoft, Amazon, Facebook, and Johnson & Johnson.
These types of funds can be good for those people that are seeking capital growth as the main focus, and have what we call a long-term investment horizon. The investment horizon is how long you’d typically hold these investments. In this case, a long-term investment horizon is about 10 years or longer.
Because we have a long-term investment horizon, we are typically prepared to endure the market declines that may occur in the stock market.
But let’s get to why I should leave my money alone and keep continuing investment in a down market! I’m getting there. Why we’d want to keep contributing to our investment accounts is because we elect to do what’s called dollar-cost averaging. This is the concept that involves investing the same amount of money in an investment account at regular intervals, let’s say every pay period, over a certain period of time, regardless of price, or how the market is performing.
To make the math easy, Let’s pretend our fictional index fund was $100 per share last December. Now, in October it’s at $75 per share. This is a difference of $25. In other words a drop of 25%. Now, If you were going to buy lunch, a new jacket, or pair of shoes wouldn’t you be stoked to score a 25% discount? The way I look at it, if I’ll be contributing to my 401k, or other investment account, you now are buying shares at a discount. This is what it means when people say, “Buy the dip.” You are essentially buying your stocks “on sale!”
I totally understand that it may be difficult to keep doing this as we see things decline. It’s our instinct, or a natural reaction to act upon this. It’s an emotional thing to want to move our money out of these funds that may have declined. However, we are strong. We are determined. We are the ones that are investing for the long-term, and are focusing years in the future. We’ll keep our investments where they are, we’ll continue to invest just as we have been. Keep in mind, over time, markets have shown an ability to recover from decline.