[If you haven’t already, please view my disclosure statement here prior to reading Buy Now & Tomorrow, But Don’t Buy the Drop. All information is educational and is not financial advice.]
Buy the drop?
The S&P 500 recently hit an all-time high at the end of August 2021, capping a year of turbulent swings and rewarding the stalwarts buy & hold investing with an impressive 37% one-year return. And for those who didn’t sell during the Corona Crash, the S&P is up 50% since March 2020’s nethermost point.
That is why, just today, I invested $10,000 that I recently received into the stock market. Never mind the bears predicting an inevitable crash rivaling the dot-com burst. Take no notice of the buy-the-dip crowd. That is all static.
Why? Because investing in stocks is about the long term. I do not care what happens today nor tomorrow. For that matter, I don’t care what happens next year or the one thereafter, other than COVID dwindling, of course.
But what if my $10,000 turns into $7,000 or even $5,000? That certainly would be unfortunate, but if one cannot handle this risk, they are investing wrong.
I invest in stocks when my time horizon (i.e., when I need the money) is at least ten years or more out. Why? Because, between now and year ten, the chances of the market losing money are minimal. Over fifteen-year periods, they are essentially non-existent. Durations of five years or less, however, can lead to increased odds of loss of principal.
Sure, I could buy the dip if it ever comes. The problem with this mentality is that if I wait for a 10% dip, yet the market increases by 37% before it happens, I didn’t make out like a bandit. Instead, I cost myself money!
You see, $10,000 invested at the start would have grown to $13,700, then dropped to $12,330. Not investing had an opportunity cost in this example of $2,330! So, I still would have come out ahead.
Hence, I invest excess cash to keep my financial independence growing whenever I receive unexpected money that doesn’t have an immediate purpose. For all other funds that are plannable, I automatically invest these monthly through dollar-cost-averaging.
For those new to the concept, dollar-cost-averaging (DCA) is the act of buying the same dollar amount of a mutual fund on a reoccurring schedule, whether it be once a month or once a year. Because I cannot time the market consistently, which no one can, I automatically invest my extra cash flow through DCA. Whenever excess cash arises, and I don’t spend it on luxuries, I invest it immediately.
Thus, if you want to increase your odds of success, ignore the static and tune out the rest. Set up automatic investments and buy more when you have windfalls, but please, don’t buy the dip. That money is better spent today or tomorrow rather than at some unforeseen date in the future that no one can predict.
Have a great day!
Mile High Finance Guy
finance demystified, one mountain at a time