Should You Buy The Dip?

I bumped into a neighbor at Starbucks last Saturday who quickly asked me if I thought he should move money within his IRA from bonds to stocks to take advantage of the stock sell-off that week. You know, buy low-hopefully sell high. Now, I don’t know this guy very well – I don’t even know his last name – so it’s impossible to provide him with personalized advice. So, I responded with a question: If you buy stocks now and the market drops another 20% over the next few months, will you still view your purchase as a wise one?

See, that’s the fundamental problem with trying to time the market – it’s impossible until after the fact to identify both the peak of the market and the trough. Sure, stocks look cheap now based on last week, but today may look expensive by the end of the year.

One of the great adages about investing I’ve seen is that the worst trait to have when investing is greed, a close second is fear. Emotions and investing don’t go together well – a well-developed plan for your individual circumstances and sticking to it is the right recipe.

First, know your investing horizon – when will you actually need the money you’re sinking into your 401(k)/403(b) or IRA/Roth IRA? Next, diversify your portfolio so that a portion of your investments can zig when the others zag. Here is some up-to-date data on various asset classes typically included in a well-diversified portfolio(as of Monday this week):

• S&P 500 stocks:
  • Year-to-Date Return: -8.27%;
  • 12-month Return: +8.18%
  • 5-Year Average Return: +9.21%
• International Stocks (MSCI World Index):
  • Year-to-Date: -9.01%
  • 12-month Return: +4.63%
  • 5-Year Average Return: +5.88%
• S&P Real Estate Index:
  • Year-to-Date Return: -5.01%
  • 12-month Return: +9.39%;
  • 5-Year Average Return: +5.80%
• U.S. Aggregate Bond Index:
  • Year-to-Date: +3.76%
  • 12-month Return: +11.61%
  • 5-Year Average Return: +3.69%

A couple of points stick out to me here. First, all the indices for these major asset classes have a positive return when viewed over the last 12 months and the last 5 years have been really good investing years. Second, while others are down so far in 2020, the bond index is still positive in 2020. In fact, the bond index is up more in 2020 than its 5-year average annual return. Maybe there is something to this diversifying strategy.

I will leave you with this: Sleeping well at night is a good financial goal. Developing a financial plan for your future, structuring your portfolio to support your plan and sticking with your plan through good times and bad are the keys to better shuteye.

Steve Byars, CFP®