Stocktake: Is buying stocks on a dip a profitable strategy?

Stocks have tumbled this year, so market bulls were wrong — right? Not necessarily, according to a recent note from JPMorgan’s high-profile market bull Marko Kolanovic. The perception is bears were vindicated this year, says Kolanovic. However, he countered that at August’s peak, the S&P 500 traded around 4,300 — roughly two standard deviations above the most common bearish price target of 3,500.

In contrast, the S&P 500 was less than one standard deviation away from his year-end target of 4,800.

A self-serving take? Perhaps. Indeed, stocks have since fallen heavily, so Kolanovic’s year-end target looks increasingly ambitious. Still, he has a point. He notes a buy-the-dip strategy that bought the index every time it had fallen from a one-week high would have returned 3 per cent this year. Buying 3 per cent dips would produce a 5 per cent return. In other words, buying on weakness has been profitable.

In contrast, investors who heeded suggestions to stay out of stocks and start “nibbling” at 3,500 or 3,300 would still be waiting. Again, sceptics might say this is cherry-picking data. However, it’s also true that it’s easy to stay bearish for too long. You can be right for a long time, only to miss the eventual turnaround and see indices take off without you. In contrast, most ordinary investors unintentionally practise a buy-the-dip strategy — that is, they invest into their pension every month, buying more shares when stocks have fallen and fewer when equities have rallied. It’s a simple but good strategy — even in a bad year.