Buy The Dip
The Nasdaq is getting crushed, and the trend is lower. The tech-heavy index includes Apple, Microsoft, Amazon, Alphabet, Meta, and Tesla. Since 1987, it's up 3,100%, but it has incurred numerous corrections, including a 75% decline from 2000 to 2002 and the crash on Black Monday, October 19, 1987, where it dropped 29%. It's a bleak time to invest, so should you buy the dip?
Buying the dip has historically paid dividends, but is this time different? Should you buy the dip? Successful investors employ a strategy to automate their investment program through dollar-cost averaging. Let's review four challenging investment times – 1987, 2000, 2008, and 2020 and assume that you started with an initial amount of $10,000 and automatically invested $500 per month.
On October 19, 1987, the market crashed by more than 22%. There were many sellers that day, but what if you established a monthly investment program and bought stocks during the collapse? If you applied the metrics from above, your account grew to $2.1 million by this May. Your net investment was $220,000, generating an average annual return of 10.05%. Despite the rough start, you made 9.5 times your original investment.
The Nasdaq fell 75% from 2000 to 2002 as the tech-wreck crushed stocks and vaporized many dot com companies. If you invested in January 2000, it took more than ten years to breakeven through your monthly investment program. Today, your account is worth $538,257 after investing $144,000 for twenty-two years. Your average annual return was 9.6%, and you made 3.5 times your money.
The Great Recession was vicious as the Nasdaq fell more than 50% from 2007 to 2009. If you invested monthly, you turned a profit in 2009 and averaged close to 13% per year from 2008 to 2022. Your account balance is now worth $297,203 after a net investment of $96,000, or three times your money.
The COVID correction occurred in March 2020, when stocks fell about 30% in thirty days. If you started a monthly investment program in January 2020, you were down more than 13% at the end of the first quarter but recovered quickly. If you established a monthly investment program, you would be up about $375 through this May. At one point, you gained more than 46% before this year's pullback reduced your profits.
If history is a guide, buying the dip is a profitable strategy. The tech-heavy index is aggressive, and you likely own a portfolio of stocks and bonds, diversifying your assets by not putting all your eggs in one basket. You can set up a monthly investment program into a single fund, multiple funds, or an entire portfolio – the more, the better, and automating this process will force you to buy stocks when others are panicking
The bottom line is that automation lowers the risk of human error and adds some intelligence to the enterprise system. ~ Stephen Elliot
May 23, 2022
Bill Parrott, CFP®, is the President and CEO of Parrott Wealth Management, located in Austin, Texas. Parrott Wealth Management is a fee-only, fiduciary, registered investment advisor firm. Our goal is to remove complexity, confusion, and worry from the investment and financial planning process so our clients can pursue a life of purpose. Our firm does not have an asset or fee minimum, and we work with anybody who needs financial help regardless of age, income, or asset level. PWM's custodian is TD Ameritrade, and our annual fee starts at .5% of your assets and drops depending on the level of your assets.
Note: Investments are not guaranteed and do involve risk. Your returns may differ from those posted in this blog. PWM is not a tax advisor, nor do we give tax advice. Please consult your tax advisor for items that are specific to your situation. Options involve risk and aren't suitable for every investor.
Data Source: Yahoo! Finance!