Buying the dips -- and the highs
Well, that was quick. Did anyone actually notice the nearly 9% decline in stock prices, as gauged by the S&P 500 index, which bottomed on March 27? I guess the answer could be "maybe," as I believe this was the day a lot of first-quarter investment account statements were generated, and it's likely most statements were down 4% to 8% from the beginning of the year.
By the time the statement was delivered in the mail, digested and any potential concerns were contemplated, however, the stock market had already recovered, and the decline was ancient history. Three weeks later, and new highs are being experienced.
It seems American investors have been well conditioned to "buy the dip," as the recent corrections and even bear markets have been brief over the past five or six years. This buy-the-dip mentality has enabled retail investors -- aka the little guys -- to give institutional investors a run for their money during the current bull market. According to a recent study by JP Morgan, during periods of intense financial market volatility, small retail investors can be more nimble and less constrained by risk management protocols than some institutions, which can lead to the little guys winning here and there. I love it.
My personal opinions and observations in this regard are that as the internet has made information more accessible, technology has made trading and portfolio management more efficient, and smaller advice firms have moved from transactional business models involving inefficient client decision-making processes to potentially more nimble fiduciary relationships with clients -- enabling investment strategies and allocations to be managed and adjusted on an advisory discretionary trading basis. The playing field has been leveled.
It's also important to remember, however, that while Wall Street and the mutual fund industry presents investing as a game to be won, constantly evaluating against benchmarks, indexes and each other, the American families I work with mostly want to simply use investing as a tool to achieve security, prosperity and life goals over time. Call it a cognitive disconnect in the profession.
The new market highs experienced this week do present another question, however. If buying the dip has enabled nimble small investors to capture gains over the past few years, what do we do when the market hits new highs?
As it turns out, there's history and data indicating investing new money during periods of new market highs can be an effective strategy as well. According to research from Fidelity, the 12-month period following brand new market highs (S&P 500 Index) has shown average returns of 12-14%, with positive outcomes about 80% of the time. Not bad.
My personal investing experience tells me buying dips can certainly be profitable, but can also be difficult, especially when dips are sharp and brief, such as the ones experienced over the past couple years. New highs, however, in my experience tend to linger a bit longer, as markets will often retrench a bit before moving consistently higher on a daily basis. This retrenchment can give investors time to formulate a strategy and allocate funds accordingly. I like investing during periods of new highs and will often annoy my teammates with one of my favorite idioms: "new highs beget new highs."
At this point, I would be a bit surprised if some of you weren't rolling your eyes thinking, "OK, Marc, buy at dips, buy at highs -- when don't you say buy?" The eye roll is indeed legitimate. The answer, though, isn't in the buying -- it's actually in the selling. Or, in investment-speak, the "rebalance."
The rebalance occurs when an investor's total investment allocation (stocks, bonds, cash) is considered and managed for aggregate risk level, not just the opportunity to make gains. Buying dips and buying new highs both have the effect of adding investment risk to a portfolio; how that risk is ultimately managed is the art form, in my opinion.
Buying dips, in my mind, tends to be more strategic in nature. This means the overall risk level in a portfolio may have self-adjusted (declined) during the dip, enabling the investor to rebuild stock market exposure back to desired target levels. The positions are more likely to be sticky as risk levels are rebuilt rather than extended.
Buying the new high, however, can be more tactical. Whereas positions bought during the dips are designed to rebalance reduced stock market exposure, positions added during the new high can actually be used to increase stock market exposure for a more limited period of time, in an attempt to harness the bull market for a while until gains are harvested and portfolio risk is systematically reduced. Buying high to sell higher.
Regardless of approach during a new market high, this type of market offers investors the opportunity to evaluate and adjust a portfolio's aggregate risk level, knowing that given all the information available at the time, it was both a good time to sell and potentially buy. Enjoy.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. Stock investing includes risks, including fluctuating prices and loss of principal. No investment strategy can guarantee a profit or preserve against loss. Past performance is not a guarantee of future results. All indices are unmanaged and may not be invested into directly. Rebalancing a portfolio may cause investors to incur tax liabilities and/or transaction costs and does not assure a profit or protect against a loss. Marc Ruiz is a wealth advisor and partner with Oak Partners and registered representative of LPL Financial. Contact Marc at marc.ruiz@oakpartners.com. Securities offered through LPL Financial, member FINRA/SIPC.
