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Should You Wait for a Market Pullback Before Investing?

Should you buy stocks after a 10% or 20% pullback? Should you ‘buy the dip’? Or should you just invest the money when you have some to spare?

Should you buy stocks after a 10% or 20% pullback (aka ‘buy the dip’)? Or should you just invest the money when you have some to spare?

Many professional investors often tell people to ‘buy on pullbacks’, but is this actually good advice? It’s a question too few ask.

First of all, investing when markets are falling is easier said than done. Fear often causes people to freeze and miss the dip. However, it turns out this might actually be a weak strategy anyway over the course of a 20-40 year investing horizon.

I don’t have a crystal ball. Instead, I can look at history to better understand what might happen in the future. So I looked during the period from 1980-2020 (using data from The Measure of a Plan) to compare the strategies.

Below I ran eight different scenarios varied by period in market, (1980-2020, 2000-2020 or 1980-2000), monthly account contributions ($250 or $10,000) and investment timing (whenever cash is added to the account, after a 10% pullback or after a 20% pullback).

Check out the outcomes of each scenario below.

Scenario 1: 1980-2020

$10,000 initial contribution / $250 monthly contributions / invest after 10% pullback

Outcome:

  • Investing whenever you have cash on hand: your portfolio would be worth $2,086,459
  • Market timing: your portfolio would be worth $1,877,150

Scenario 2: 1980-2020

$10,000 initial contribution / $250 monthly contributions / invest after 20% pullback

Outcome:

  • Investing whenever you have cash on hand: your portfolio would be worth $2,086,459
  • Market timing: your portfolio would be worth $1,561,538

Scenario 3: 2000-2020

$10,000 initial contribution / $250 monthly contributions / invest after 10% pullback

Outcome:

  • Investing whenever you have cash on hand: your portfolio would be worth $200,967
  • Market timing: your portfolio would be worth $203,039

Scenario 4: 2000-2020

$10,000 initial contribution / $250 monthly contributions / invest after 20% pullback

Outcome:

  • Investing whenever you have cash on hand: your portfolio would be worth $200,967
  • Market timing: your portfolio would be worth $206,677

Scenario 5: 1980-2000

$10,000 initial contribution / $250 monthly contributions / invest after 10% pullback

Outcome:

  • Investing whenever you have cash on hand: your portfolio would be worth $567,834
  • Market timing: your portfolio would be worth $507,104

Scenario 6: 1980-2000

$10,000 initial contribution / $250 monthly contributions / invest after 20% pullback

Outcome:

  • Investing whenever you have cash on hand: your portfolio would be worth $567,834
  • Market timing: your portfolio would be worth $405,611

Scenario 7: 1980-2020 (High Monthly Contributions)

$10,000 initial contribution / $10,000 monthly contributions / invest after 10% pullback

Outcome:

  • Investing whenever you have cash on hand: your portfolio would be worth $59,881,415
  • Market timing: your portfolio would be worth $53,281,817

Scenario 8: 1980-2020 (High Monthly Contributions)

$10,000 initial contribution / $10,000 monthly contributions / invest after 20% pullback

Outcome:

  • Investing whenever you have cash on hand: your portfolio would be worth $59,881,415
  • Market timing: your portfolio would be worth $44,882,739

Conclusion

The ‘buy the dip’ strategy has historically underperformed over long periods of time.

The only period in which the ‘buy the dip’ strategy actually paid off was 2000-2020. This is perhaps because the market effectively followed a W pattern throughout the first half of that period. Still, the outperformance was immaterial – not lifestyle changing.

Moreover, how is anyone to know whether the next 20 years will look like 2000-2020 or 1980-2000? (OK, I have my opinions but I also recognize the infallibility of my forecasts.) Finally, the cost of being wrong during the ‘invest when you have the money’ periods far outweighed the cost of being wrong during the ‘buy the dip’ periods.

Taking everything into consideration, the results are clear: you’re better off investing when you have the money.

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