“I’ll buy the dip,” said the rational, reasonable investor.
Okay, but keep in mind that dips and corrections rarely occur in a vacuum. They are usually accompanied by fresh fears or even caused by a news item that hijacks the headline cycle out of nowhere. Prices are more attractive, but taking advantage of them is harder to do because the new narrative accompanying those better prices is that something is wrong.
Further, lower prices can beget lower prices for no reason. Investors instinctually know this, and thus we get a feedback loop. “He’s selling and she’s selling, perhaps I ought to be selling too.”
It is for this reason that a majority of investors find that it’s easier to buy the rally than the dip. The rally offers confirmation, it demonstrates the rightness of buying in the moment and enables the perception of future higher prices most importantly. The dip offers no such confirmation, only uncertainty. And uncertainty paralyzes the otherwise well-meaning fellow who, days earlier, was absolutely sure that he’d be a buyer the moment the market “let him get in.”
The S&P 500 is down 1.5% from the close of the last day of 2013. It’s off to the worst start since 2005. This might be that dip the reasonable investor had been looking for all this time, or at least the start of it. It’s going to let our rational investor in, perhaps.
Is he every bit as eager for this opportunity as he was just before it actually materialized?
History says he is not.