I’ve been aggressively shopping for the dip since March 2020, after I wrote How To Predict A Stock Market Bottom Like Nostradamus. My daughter was born 4 months earlier, and one thing inside me clicked, pushing me to take a position aggressively for her future in an more and more troublesome world.
Since then, I’ve continued to purchase nearly each significant dip (2%+) as a result of I stay bullish on America, artificial intelligence, shoppers’ insatiable urge for food to spend as a substitute of save, and financial insurance policies designed to maintain voters glad so politicians can keep in energy.
On the similar time, expertise has taught me an vital lesson: you may be proper long run and nonetheless be flawed within the quick time period if you happen to purchase the dip too typically and too early.
When Shopping for the Dip Turns into a Senseless Behavior
Whereas updating an older put up from March 2022 about how your retirement withdrawal rate will decline during bear markets, I got here throughout a graphic that jumped out at me. The picture reveals how ceaselessly I used to be shopping for the dip throughout the first quarter of that 12 months. It was fascinating and just a little humbling.
2021 had been an outstanding 12 months +26%, after a +16% 2020 for the S&P 500. After two straight years of wholesome features, it felt unnatural for shares to begin correcting in 2022. It was as if traders had collectively forgotten that shares typically go down.
Because the market declined in early 2022, I started shopping for VTI repeatedly. February was notably powerful, each for the market and for my investing psyche. I stored shopping for, and the market stored falling. Trying again on the chart, I counted a minimum of 14 separate dip purchases in simply that one month.
The thrill of shopping for shares at two to 5 % reductions shortly light when the S&P 500 went on to fall one other 20+ % from peak-to-trough! Buying the dip felt good emotionally, as if I used to be doing one thing about dropping cash, however the timing was removed from preferrred.
Finally, I ought to have unfold out my dip shopping for in 2022 over an extended time period. That is vital context as a result of as we begin 2026, we’ve had three consecutive years of double digit features within the S&P 500. And the identical factor may occur once more with a lot nervousness round valuations and geopolitical uncertainty.
Don’t Purchase Too Aggressively Too Quickly
I’m pretty assured there might be one other 10 % plus correction in 2026. When that point comes, you need to have sufficient money to reap the benefits of it. The issue is that significant corrections typically take months to totally play out. In case you deploy an excessive amount of capital early, you could end up watching costs fall additional with out sufficient dry powder left.
In early 2022 alone, I purchased the dip greater than 35 instances within the first quarter. Regardless of that, the market continued to say no. The lesson was clear: preliminary pullbacks are sometimes just the start when valuations are elevated or when coverage uncertainty is rising.
As soon as markets determine valuations are too costly or that company revenue expectations should be reset, it may possibly take a number of quarters of earnings stories for sentiment to shift.
Administration groups want time to regulate steering and techniques. That course of doesn’t occur in a single day, which is why small three to 5 % pullbacks shouldn’t be handled as once-in-a-cycle alternatives.
How Lengthy Corrections and Bear Markets Often Final
Traditionally, a typical 10 % correction lasts about three to 4 months from peak to trough. Some resolve sooner, whereas others stretch out longer relying on financial situations and coverage responses.
Bear markets, outlined as declines of 20 % or extra, are extra extended. On common, bear markets final roughly 9 to 14 months. Some are quick and violent, whereas others grind decrease over a number of quarters.
This issues as a result of shopping for too aggressively early in a downturn can depart traders underprepared for later, extra enticing alternatives.
A easy strategy is to take your projected money movement and current money pile and divide it over three to 14 months to determine a baseline month-to-month funding quantity. In case you want to take a position weekly, you may divide the full by twelve months, or roughly fifty two weeks, to reach at a gentle weekly contribution.
Considering in quarters as a substitute of days helps. Quarterly earnings are when actual adjustments in sentiment, steering, and technique happen. In between, you’re principally reacting to noise.
And sure, that is technically market timing, which works in opposition to the same old recommendation of shopping for and holding for the long run. However the reality is, each funding choice includes some type of timing. Don’t idiot your self into considering you aren’t dollar-cost averaging or timing the market, since you are.
Valuations Matter Extra Than Most Traders Admit
From the start of 2023 to the tip of 2025, the market rose near 80 %. After a run like that, a significant correction shouldn’t be stunning.
In the present day, the S&P 500 continues to be buying and selling round 22.5 instances ahead earnings. Traditionally, when the ahead worth to earnings ratio has exceeded 23 instances (or 30 instances trailing), the following 10 12 months annualized returns have ranged from roughly minus 2 % to plus 2 % per 12 months. That could be a far cry from the double digit returns many traders have come to count on.
If valuations had been to revert towards a long run common nearer to 18 instances earnings, a 20 % or better correction wouldn’t be unreasonable. For this reason valuation context issues when deciding how aggressively to purchase dips.
The excellent news is that many people had been considering this at first of 2025, when the ahead P/E was additionally round 22X. But we nonetheless loved a double digit return as S&P 500 earnings grew by about 16.5 % earlier than dividends. The dangerous information is that the percentages of one other double digit return going ahead are decrease.
Make Positive You Have Ongoing Money
Trying forward, 2026 is a midterm election 12 months. Traditionally, midterm years are likely to expertise greater volatility on account of coverage uncertainty. Now there’s heightened geopolitical uncertainty as nicely.
Given this backdrop, traders ought to preserve a minimum of 5% of their portfolio in money, and presumably nearer to 10%. With money yields nonetheless north of 4 %, the chance price of holding money is comparatively low, particularly in comparison with the pliability it offers throughout market corrections.
Shopping for the dip has labored extremely nicely over the previous decade, particularly in periods of aggressive financial assist and speedy technological progress. I stay optimistic about the long run trajectory of the U.S. economic system and fairness markets. Nevertheless, optimism doesn’t remove the necessity for self-discipline when valuations are stretched and markets have delivered years of outsized features.
The secret’s to not cease shopping for the dip altogether, however to tempo your self. Corrections and bear markets are likely to unfold over months, not days. By considering in quarters, respecting valuations, and maintaining sufficient money readily available, you give your self flexibility. Flexibility is what permits you to keep calm and opportunistic.
Construct wealth steadily with out working out of ammunition too early.
Reader Questions
- How a lot money do you at the moment preserve in your funding portfolio, and has that proportion modified as valuations have risen?
- Do you purchase each dip robotically, or do you scale in primarily based on valuation, time, or market sentiment?
- How do you consider shopping for dips on your youngsters’s funding accounts throughout lengthy bull markets?
Diversify Your Wealth Past Shares and Bonds
One technique to keep away from shopping for the dip too early or too typically is to broaden the place you make investments. Shares and bonds are foundational, however when valuations are excessive and volatility rises, relying solely on equities could make timing errors expensive.
That’s why I spend money on actual property, which affords revenue potential and diversification with out forcing you to react to each market pullback. Fundrise permits passive funding in residential and industrial properties throughout the Sunbelt, the place valuations are typically decrease and rental yields greater.
Fundrise additionally offers publicity to personal AI corporations like OpenAI, Anthropic, Anduril, and Databricks, serving to steadiness a portfolio with out chasing short-term strikes.
I’ve personally invested over $500,000 with Fundrise. With a $10 minimal, it’s a straightforward technique to diversify whereas staying disciplined throughout unstable markets. Fundrise is a long-time sponsor as our funding philosophies are aligned.
Be part of over 60,000 readers and subscribe to my free Financial Samurai newsletter to remain knowledgeable and disciplined. Since 2009, I’ve shared insights to assist readers develop wealth, achieve freedom, and make smarter long-term monetary choices.
Background: I’ve been investing in equities since 1996, together with 13 years within the business at Goldman Sachs and Credit score Suisse. In the present day, I handle an eight-figure funding portfolio that helps present for my household. I maintain a BA from William & Mary and an MBA from Berkeley. In 2009, I helped kickstart the modern-day FIRE motion with the launch of this website.
