'Buying the dip' does NOT work: here's why

Everyone tries to buy the dip but it makes no logical or mathematical sense. Here are the reasons, as explained by three experts.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Common investment wisdom dictates that share investors should not try to time the market.

No one has a crystal ball and there is no way of knowing if there has been a trough until well after prices have risen back.

Yet almost every stock investor tries to buy the dip. 

After all, it's human nature to try to pay a cheap price — and not just for shares, right?

So why do we have to avoid trying to time the dips?

'Good deals don't stay around forever'

Frazis Capital Partners portfolio manager Michael Frazis explained the reason in a very simple way to his investors last month.

Let's say you think the market is overvalued now and that it will crash in the near future. So you've prepared a cash pile to swoop on the bargains when the dip comes along.

Frazis said it's nearly impossible to execute this plan because no one knows the market has bottomed until after everyone has moved on.

"If you move to cash based on (whatever) macro fear, you usually have only the briefest of periods to enter at lower prices before the crisis passes," he said.

"Good deals don't stay around forever."

The other scenario is that your prediction was completely incorrect and the share markets continue to rally. Then you're underinvested and missing out on returns.

"You are stuck: you have to buy back in at higher prices and risk losing twice, or stay out of the market forever," Frazis said.

So the best way is to just invest without regard to timing.

"We are doing what we did at the lows: staying invested."

Frazis is optimistic about equities anyway.

"This is somewhat justified as US$1.9 trillion of US government spending is about to wash through markets and central bankers seem determined to keep interest rates at lower bounds," he told investors.

"Those caught under-invested mid last year have had to buy in at higher levels or miss out completely."

Mathematical proof that 'buying the dip' doesn't work

Ritholtz Wealth Management director of research Michael Batnick and finance blogger Nick Maggiulli crunched some numbers in February last year as the COVID-19 market crash started happening.

If you invested $1 every day since 1990 in the S&P 500 (INDEXSP: .INX) since 1990 but put in an extra dollar on days when it fell by 2% or more, you'd end up with $41,079.

If you invested the same amount of money evenly each day over the same time period, you'd actually end up with a better return of $41,348.

It feels counterintuitive, but it's a mathematical lesson not to try to buy the dip.

But you say $2 on dips is not enough. Let's ramp that up to $100!

Well, would you believe it? According to Maggiulli and Batnick's numbers, 'buying the dip' lost even more money! Evenly timed investments would have returned $176,732 while putting in $100 during the dips would have only ended up with $149,913.

Incredible.

"This is one of those rare pieces of analysis that might have an affect [sic] on how I invest," said Batnick.

"The message is clear. Don't wait to buy the dip — just keep investing, because the earlier you start, the better off you'll be."

Wondering where you should invest $1,000 right now?

When investing expert Scott Phillips has a stock tip, it can pay to listen. After all, the flagship Motley Fool Share Advisor newsletter he has run for over ten years has provided thousands of paying members with stock picks that have doubled, tripled or even more.*

Scott just revealed what he believes could be the 'five best ASX stocks' for investors to buy right now. We believe these stocks are trading at attractive prices and Scott thinks they could be great buys right now...

See The 5 Stocks *Returns as of 6 March 2025

Motley Fool contributor Tony Yoo has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

More on How to invest

A little girl fills her jar up with coins with a smile on her face.
How to invest

I'm fully invested. How can I take advantage of lower ASX share prices?

You've always got options with a well-diversified portfolio.

Read more »

Two red sneakers on the start line, indicating a new investor learning about share price movement and how to invest
How to invest

Here's a starter portfolio of ASX 200 shares to consider for growth, dividends, and value!

Starting your journey? Here's a quick hack to get you going.

Read more »

A man walks up three brick pillars to a dollar sign.
How to invest

5 easy steps to build a $100,000 ASX share portfolio

It may not be as hard as you expect to build wealth in the share market.

Read more »

A group of young people lined up on a wall are happy looking at their laptops and devices as they invest in the latest trendy stock.
How to invest

Why last week's market selloff is a gift for beginner ASX investors

Starting your journey? Here's why it could be the perfect time to do so.

Read more »

A young woman sits with her hand to her chin staring off to the side thinking about her investments.
How to invest

Buying in the dip: Lessons from Warren Buffett's 'acts of omission'

When it comes to investing, what you didn't do can be just as damaging as what you did do.

Read more »

A woman sits in her home with chin resting on her hand and looking at her laptop computer with some reflection with an assortment of books and documents on her table.
How to invest

A trip down memory lane: How buying stocks in the Covid pandemic made me a better investor today

It might be a prudent time to remember 2020...

Read more »

How to invest

How I position my portfolio for downside protection

Here are two ways you can hedge against a market crash.

Read more »

A man with a wide, eager smile on his face holds up three fingers.
How to invest

The top 3 qualities I look for when picking an ASX stock

These are non-negotiables for me when it comes to making investments.

Read more »