https://www.wsj.com/articles/buy-the-dip-believers-are-tested-by-markets-downward-slide-11652197077
Small investors continue to pour money into stocks despite the grimmest outlook in years for interest rates and a possible recession; ‘When the market zigs, I zag’
This year’s stock market volatility has turbocharged a favorite strategy among individual investors: buying the dip. The dramatic plunge in major indexes will test their resolve.
On Thursday, when the stock market had one of its worst days of the year, individuals rushed in, setting a one-day buying record. In March, they invested the largest ever monthly sum, according to Vanda Research data beginning in 2014, and continued to pour money into the markets in April.
Individuals’ willingness to backstop markets throughout this year’s selloff demonstrates that the group—for now—has been more resilient than analysts and trading professionals anticipated. Few were surprised when individual investors pounced on small dips as the market churned higher last year, helping the S&P 500 cruise to 70 records and rewarding those who waded in.
This year, the S&P 500 has fallen 16%, its worst start to a year in nearly a century, and the Nasdaq Composite has dropped 26%. Inflation is at a 40-year high, and the Federal Reserve has embarked on an aggressive monetary tightening cycle, enacting this month its biggest rate increase since 2000. That has fanned worries about a recession—periods when stocks have on average fallen as much as 29%, according to Dow Jones Market Data.
Some of the wildly popular trades of the past two years have already crumbled. Many investors have soured on richly valued technology stocks. Newly minted public companies, which soared last year, have come back down to earth. Highly speculative corners of the market, such as Cathie Wood’s flagship ARK Innovation exchange-traded fund, have plummeted.
Despite the turning tides, many individual investors said they have relished the chance to buy stocks at a discount. Many said the calculation is simple: History has shown that stocks eventually go up.
Small investors plowed $114 billion into U.S. stock funds through March as the S&P 500 tumbled into a correction, falling at least 10% from its high, according to Goldman Sachs Group. That marks a sharp shift in the group’s strategy for much of the past two decades. Typically, individual investors have sold about $10 billion in the 12 weeks after a market peak when the S&P 500 has tumbled that much.
In the month of March alone, individual investors bought about $28 billion of U.S.-listed stocks and exchange-traded funds on a net basis—the total amount after subtracting the amount sold—the largest monthly sum on record, according to Vanda, and another net $24.4 billion in April. On Thursday, when the S&P 500 tumbled 3.6%, individual investors bought a net total of nearly $2.6 billion of stocks and ETFs, a one day record, according to Vanda.
John Case, a 71-year-old retired engineer in Las Vegas, said he has tried to follow famed investor Warren Buffett’s advice to be “greedy only when others are fearful” and to hold stocks for long periods of time.
He said he has often stepped into the market during times of volatility and learned this lesson the hard way when he sold some of his shares during the 2008 financial crisis. That plunge was followed by an 11-year bull market during which the S&P 500 surged roughly 400%. Now, he said he is more confident in his strategy.
“When the market zigs, I zag,” Mr. Case said.
Unlike the crash of early 2020, which lasted just 23 trading days, investors are weathering a more prolonged selloff that could worsen as recession risks grow. The Fed’s move to raise rates and shrink its $9 trillion asset portfolio has already triggered a selloff in the government-bond market, sending the yield on the benchmark 10-year U.S. Treasury note jumping past 3% to its highest level since 2018. Higher yields typically chip away at the stock market’s allure by giving investors another attractive place to park their cash.
Individual investors’ appetite for stocks diverges from the behavior of professional investors, who have collectively sold stocks during the turbulence. JPMorgan Chase & Co. estimates that institutional investors have pulled $199 billion out of the stock market this year, according to an analysis of public order flow data through Friday. Meanwhile, pros keep ramping up bearish bets against major U.S. equity indexes through the futures market, analysis from Citi Research shows.
That hasn’t stopped many individual investors from wading in. Their allocation of stocks in their portfolios crept up to nearly 70% last month, hovering around the highest levels since early 2018, according to a survey by the American Association of Individual Investors. Many individual investors whittled their exposure to bonds, sending fixed-income allocations to a 14-year low.
The strategy of picking up stocks and other investments on sale has grown so popular that the term “buy the dip” has mushroomed into an online sensation, garnering millions of mentions on social-media platforms. The growing entanglement of investing and social media means that even sharp plunges can bring on calls of FOMO—fear of missing out.
In January, when stocks suffered their worst month since the early days of the Covid-19 pandemic, and prices of assets including stocks, bonds and bitcoin slid, many investors turned to platforms such as Twitter and Reddit to tout the strategy, leading to more than 200,000 mentions across social media, according to social-media management company Hootsuite. That’s more than 30 times the figure three years ago.
Some strategists say buying the dip is a risky way to invest because it is so difficult to gauge whether the market is going to keep falling. Vanda estimates the average individual investor portfolio peaked late last year and has since tumbled, giving the average individual a paper loss of about 28%.
Online brokerages including Robinhood Markets Inc. have reported a slowdown in customer trading activity in recent weeks.
Chief Executive Vlad Tenev said on the firm’s April earnings call that it faced a “challenging macro environment, one most of our customers have never experienced in their lifetimes,” noting that for most of its history, “Robinhood has operated in a period of low interest rates, low inflation and rising markets.” He said that while larger customers are still remaining active, many other customers have become more cautious with their portfolios and are trading less frequently.
Just to be clear, this article is not critiquing a passive strategy of consistently buying index funds via DCA. They are instead referring to retail investors testing active strategies in a perceived downturn.
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