Waiting for stocks to drop? You may be waiting awhile
‘Buying the dip’ has caused many to miss market gains of 10%
Main Street investors who’ve been waiting for stock prices to go “on sale” before buying have a problem: The market hasn’t suffered a decline of 3% or more since the days before the U.S. presidential election.
It’s been an uncharacteristically calm year on Wall Street. There have been no “Clearance” type investment opportunities. That’s created a dilemma for anyone hoping for much cheaper prices before getting in the stock market — a strategy known as “buying the dips.”
In fact, waiting for a drop has caused many investors to miss out on market gains of around 10% this year.
Tuesday’s action on Wall Street was a perfect example, as the Dow Jones industrial average surged nearly 200 points, its biggest one-day jump since April 25, and the Standard & Poor’s 500 stock index rebounded 1% after both indexes suffered mini-dips last week.
The S&P 500 has notched 29 record highs this year with little turbulence. Not even the unsettling headlines recently about North Korea’s nuclear ambitions or chaos at the White House have caused a big market decline.
The S&P 500 has gone 199 days without suffering a 3% drop — the second-longest stretch since 1950 and longest since
1995-96, according to LPL Financial. The large-company stock index hasn’t suffered a “pullback,” or decline of 5% or more, since last June, when Britain surprised investors by voting to exit the European Union. You have to go back to the early-year sell-off in
2016 for the market’s last official correction, or 10%-plus plunge.
While this type of steadily rising market is good news for investors already in the market, it has caused hesitation for investors that are looking to get in but fear buying at a top.
“A lot of my clients keep coming to me expressing concern because the market keeps powering to all-time highs, and we have not had a correction in a long time,” says Jeff Kravetz, a Phoenixbased regional manager at U.S. Bank Private Wealth Management.
In a report, Burt White, chief investment officer at LPL Financial, framed the challenge facing investors this way: “Buy the dip? What dip?”
The “absence of pullbacks is perhaps the biggest story” of the year, he says. Stock market downdrafts, history shows, are normally common occurrences. Since
1950, the S&P 500 has suffered declines of 3% or more 4.3 times per year, on average, and 5% drops 2.5 times per year, White says.
The market’s steady ascent in
2017 has been driven by a U.S. economy that continues to chug along at a slow but sustainable pace and the fact that stocks remain the investment of choice due to the smaller returns of lowyielding bonds, says Nick Sargen, chief economist and senior investment strategist at Fort Washington Investment Advisors.
Still, Wall Street pros say it makes little financial sense for investors to stay out of the market forever.
“Too many people wait for the perfect time to invest, but there is no perfect time,” says JJ Kinahan, chief strategist at TD Ameritrade.
Here are some strategies that investors can employ: uDon’t invest all your cash
at once. A big mistake investors make is viewing their decision as “all or nothing,” Kinahan says. If you have $20,000 to invest, for example, start with 20% of that.
Kravetz refers to this strategy as “staging into the market” and says that’s what he’s now recommending to his clients. “Phase your money in over three or four months,” he says. “That way your likelihood of investing at the top is reduced.”
uBuy the mini-dips. You don’t have to wait for the market to crack before buying. In other words, waiting for a 5% to 10% drop might keep you out of the market for too long. “Use the smaller dips to dip your toes back into the market,” Kravetz says.
For investors already fully invested in stocks, a rising market trading near record highs is a good time to review your portfolio and make sure that the rising prices haven’t left it with too large a helping of stocks, Kravetz adds.
Investors who wait for a pullback or a correction that never comes risk having to buy into the market at even higher prices if the rally continues, warns Hank Smith, chief investment officer at Haverford Trust in Radnor, Pa. Another risk is waiting for a drop of 10% before getting in, as many investors are too scared to rush into the market when the market is down that much.
“It’s human nature; very few people have the ability that Warren Buffett has emotionally to buy when people are fearful,” Smith says. “If Home Depot puts on a clearance sale, you are motivated as a buyer, but when the market puts stocks on sale, most investors are scared out of their minds” and end up not buying.
Investors who wait for a pullback risk having to buy at even higher prices.