So if there are no 20% market drops for you to buy in at but then the market doubles, you’ve missed a chance to profit off those gains. Even if the market then immediately dips 20%, prices would still be 60% above where they were when you started investing, he adds.
If you had a 50% dip threshold, between 1980 and 2000 you would have sat out of the market with your cash for 20 years while the market soared, Maggiulli adds. So while the strategy can win by a little, it can also lose by a lot.
What should you do instead?
If you’re looking to build wealth over time, a more appropriate strategy may be dollar-cost averaging, which entails regularly investing a fixed amount into the market. The strategy is similar to buying the dip in that some of your cash will be held in reserve — but instead of waiting for a dip, you invest that cash into the market regularly, like once a month or once a quarter.
For example, you could invest $100 each month for the long term, instead of saving up that $100 each month in a bank account and investing hundreds when you think the market will drop. If a percentage of your paycheck is invested in a 401(k) each month, you’re already dollar-cost averaging.