Should you have bought stocks on the dip? Experts disagree
“Buy the dip” — the idea that you should buy stocks when the markets plunge — has worked like a charm over the last decade, thanks to market-friendly policies from central banks around the world that ensured quick recoveries.
But the 10% selloff two weeks ago and 4.3% recovery last week happened so fast that many investors wondered whether they should stick with the age-old adage and keep loading up on stocks when they slump. There are fundamentals, such as robust global growth, that suggest the strategy will remain a money-making one; there are other developments, like central banks’ gradual withdrawal of monetary stimulus, that indicate the trade’s petering out.
Here’s how some investment professionals see it.
“There’s sort of, ‘Everybody should buy a dip,’ which has become folklore in the markets now. I would say history doesn’t tell you buying dips is always the right answer,” Man Group Chief Executive Officer Luke Ellis said in an interview with Bloomberg Television. “When volatility increases you should run less positions, when volatility is low you can run bigger positions. It’s basically about taking the same amount of risk all the time.”
The 10% correction two weeks ago was “a buying opportunity,” said Christian Hille, global head of multi-asset at Deutsche Bank AG’s asset-management unit. “Macro and micro fundamentals remain strong with a Goldilocks-like environment — not too hot, not too cold — and moderate economic growth with low inflation, rising corporate earnings and low-yield environment.”
Volatility can be scary, but long-term investors should see it as a friend that creates opportunity, said Rob Arnott, CEO of Newport Beach-based Research Affiliates. Still, a 10% swing isn’t huge, said Arnott. “Buying the dip makes sense if you are bullish and wish you had more in stocks,” he said. “But if you have a cautious view you don’t want to buy the dip because you better have a sell discipline that tells you how to sell things.”
Arnott recalled Robert Kirby, the legendary trader and longtime Capital Group executive who died in 2005, often saying “portfolio managers like to take profits faster than Wyatt Earp in a gunfight. That’s the mindset of people who want to buy the dips or who want to take profits on a 10% or 20% rally.”
“We are in the buy camp,” said Michael Mullaney, director of global market research at Boston Partners, which managed $99.2 billion as of Dec. 31. Nothing about the economy fundamentally changed over when prices dropped, “except for the fact that stock prices are lower and we are able to buy good companies that were too pricey before.” Mullaney said recent signs of wage growth “are not a bad thing as long as economic growth comes with it. The bull market can continue to go on for an extended period.”
“While there will still probably be scope to profit from ‘buying the dips’ until rates have been pushed higher, we believe that for many investors, who already have money invested in these markets, the better strategy will be selling the rallies in both equities and bonds,” said Ian Harnett, chief investment strategist at Absolute Strategy Research Ltd. in London. Indeed, stocks last week recovered to have their best five-day trading period in five years.
“After a period of benign economic activity when inflation has been subdued and growth healthy, we worry that 2018 will see signs of more inflation as we get close to the end of the cycle and potentially slower growth if global activity falters,” Harnett said. “Having a more defensive mindset, therefore, is of the essence.”
Julie Edde, Bei Hu and Suzanne Woolley write for Bloomberg.