Financial Market

Don’t buy the dip during market slides, says financial psychologist

Stocks suffered their biggest one-day loss since June 2020 on Wednesday, pushing the S&P 500 18% below its early January peak. After getting off to an up and down start Thursday, the index now sits on the brink of bear territory, defined as a 20% decline from recent highs.

If you’re a younger investor, it’s understandable that seeing this kind of market news in headlines bums you out. After all, on the scale of stress-inducing phrases, “bear market” ranks somewhere between “ingrown hair” and “engine failure.”

But if you can put your emotions to the side and stay focused on your long-term goals, marked drops in stock prices can actually be good news, says Brad Klontz, a financial psychologist and professor at Creighton University.

If you’re a younger investor, “this is the best thing that could have happened to you,” says Klontz. “You should be super excited. You’re buying at a discount.”

That’s not to say you want to throw all of your savings into the market right now, either. “A lot of people say ‘buy the dip,’ which is bad advice. You don’t know if it’s a dip or a cliff,” says Klontz, who is also a certified financial planner. “The key to long-term investing is to always be buying.”

‘That’s your financial freedom money’

Whether you’re theoretically happy about a market slide has to do with your time horizon, as known as “when you’re going to need the money.” If you’re investing for a goal that’s decades away, you have a long time horizon, which means you have a greater ability to withstand and ultimately recover from down periods in the stock market.

If a market selloff is quick and drastic, it can feel like a short-term concern, Klontz acknowledges. “The irony is that Gen Z and Millennial investors should be thrilled about the prospect of a bear market,” he says. “They may be thinking, ‘That was my $100,000 and now it’s $70,000.’ But that’s your financial freedom money. You weren’t going to touch it for decades anyway.”

Video by Courtney Stith

Indeed, if the prospect of the market going down further wouldn’t do major damage to your finances (as would be the case if you had money tied up in the stock market that you were hoping to use to buy a house in the next two years), you’d be wise to look at a down market as a great time to add to your holdings, says Scott Nations, president of investment volatility analytics firm NationsShares and author of “The Anxious Investor.”

“If you have a reasonably long timeframe, say, more than 10 years, why on Earth would you stop buying now?” he says. “If I have to fill up my car with gasoline, I don’t stop buying because prices at the pump are lower. I go fill up my car.”

Don’t try to time the market

Making moves in your portfolio in response to short-term moves in the market is unlikely to yield the kinds of results you want, says Klontz.

“Never trust your instincts around money or investing, because you’re wired to do it all wrong,” he says. “Don’t trust your emotional response. Understand that you’re vulnerable to being affected by the panic going on around you. It’s going to sway you to do exactly the wrong thing.”

Whether you’re buying or selling in response to moves in the market, you’re trying to hit a moving target. Selling while stocks are headed down means you could miss out on gains when the market bounces back, while making a tactical buy could lead to regrets that you didn’t hold off longer if markets continue to skid. “I wouldn’t suggest ‘buying the dip’ and trying to time the market,” Klontz says.

Video by Helen Zhao

Instead, when markets get volatile, Klontz says you’re likely better off having a long-term plan you can stick to and that’s appropriate for your investing goals. And for young investors, that likely means employing a strategy known as dollar-cost averaging.

Investors making this move contribute a set amount of money to their portfolios at fixed intervals, meaning that they buy more shares when stock prices are lower and fewer when they’re high. Until recently, prices have been as high as they’ve ever been, points out Klontz.

Don’t trust your emotional response. Understand that you’re vulnerable to being affected by the panic.

“You’ve been buying into the highest market ever. Now you can buy into the market at a discount,” he says.

And while bear markets don’t tend to last much more than a year, on average, Klontz says younger investors could even hope things stay down for longer.

“If I were a Millennial or Gen Z investor, I’d want the market to stay down for 20 years,” he says. “Imagine spending the next 20 years buying on the cheap.”

The views expressed are generalized and may not be appropriate for all investors. The information contained in this article should not be construed as, and may not be used in connection with, an offer to sell, or a solicitation of an offer to buy or hold, an interest in any security or investment product. Carefully consider your financial situation, including investment objective, time horizon, risk tolerance, and fees prior to making any investment decisions. No level of diversification or asset allocation can ensure profits or guarantee against losses.

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