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 speculate aggressively for her future in an more and more tough world.
Since then, I’ve continued to purchase nearly each significant dip (2%+) as a result of I stay bullish on America, artificial intelligence, customers’ insatiable urge for food to spend as a substitute of save, and financial insurance policies designed to maintain voters blissful so politicians can keep in energy.
On the identical time, expertise has taught me an essential lesson: you may be proper long run and nonetheless be improper within the quick time period when you purchase the dip too typically and too early.
When Shopping for the Dip Turns into a Senseless Behavior
Whereas updating an older submit 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 exhibits how ceaselessly I used to be shopping for the dip throughout the first quarter of that yr. It was fascinating and just a little humbling.
2021 had been an exceptional yr +26%, after a +16% 2020 for the S&P 500. After two straight years of wholesome good points, 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 robust, each for the market and for my investing psyche. I stored shopping for, and the market stored falling. Wanting again on the chart, I counted a minimum of 14 separate dip purchases in simply that one month.
The joy of shopping for shares at two to 5 % reductions rapidly 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 shedding cash, however the timing was removed from perfect.
In the end, I ought to have unfold out my dip shopping for in 2022 over an extended time frame. That is essential context as a result of as we begin 2026, we’ve had three consecutive years of double digit good points 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 will probably 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 completely play out. In the event you deploy an excessive amount of capital early, you might end up watching costs fall additional with out sufficient dry powder left.
In early 2022 alone, I purchased the dip greater than 35 occasions 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 take a number of quarters of earnings stories for sentiment to shift.
Administration groups want time to regulate steering and methods. 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 circumstances 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, though the vary is huge. 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 engaging alternatives.
Considering in quarters as a substitute of days helps. Quarterly earnings are when actual adjustments in sentiment, steering, and technique happen. In between, you might be largely reacting to noise.
Valuations Matter Extra Than Most Traders Admit
We simply skilled three consecutive years of almost 20 % good points, making most inventory traders considerably wealthier. Over a 3 yr span, the market rose near 80 %. After a run like that, a significant correction shouldn’t be shocking.
Right now, the S&P 500 continues to be buying and selling round 22.5 occasions ahead earnings. Traditionally, when the ahead value to earnings ratio has exceeded 23 occasions (or 30 occasions trailing), the next 10 yr annualized returns have ranged from roughly minus 2 % to plus 2 % per yr. That may be a far cry from the double digit returns many traders have come to count on.
If valuations have been to revert towards a long run common nearer to 18 occasions earnings, a 20 % or higher correction wouldn’t be unreasonable. This is the reason valuation context issues when deciding how aggressively to purchase dips.
The excellent news is that many people have been considering this at the beginning 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 Certain You Have Ongoing Money
Wanting forward, 2026 is a midterm election yr. Traditionally, midterm years are likely to expertise greater volatility as a result of coverage uncertainty. Now there’s heightened geopolitical uncertainty as effectively. Venezuela is probably not the final nation to get attacked.
Given this backdrop, traders ought to keep 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 flexibleness it supplies throughout market corrections.
Shopping for the dip has labored extremely effectively over the previous decade, particularly during times of aggressive financial assist and fast technological progress. I stay optimistic about the long run trajectory of the U.S. financial system and fairness markets. Nevertheless, optimism doesn’t eradicate the necessity for self-discipline when valuations are stretched and markets have delivered years of outsized good points.
The secret is 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 preserving sufficient money available, you give your self flexibility. Flexibility is what means that you can keep calm and opportunistic.
Construct wealth steadily with out working out of ammunition too early.
Reader Questions
- How a lot money do you at present hold in your funding portfolio, and has that proportion modified as valuations have risen?
- Do you purchase each dip mechanically, or do you scale in primarily based on valuation, time, or market sentiment?
- How do you concentrate on shopping for dips on your kids’s funding accounts throughout lengthy bull markets?
Diversify Your Wealth Past Shares and Bonds
One strategy 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 pricey.
That’s why I spend money on actual property, which provides earnings 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 supplies publicity to personal AI corporations like OpenAI, Anthropic, Anduril, and Databricks, serving to stability a portfolio with out chasing short-term strikes.
I’ve personally invested over $500,000 with Fundrise. With a $10 minimal, it’s a simple strategy to diversify whereas staying disciplined throughout unstable markets. Fundrise is a long-time sponsor as our funding philosophies are aligned.
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