What to do during the dip
Let’s talk about the dip for a moment. The stock market dips when there are disruptions in the markets, the more unexpected and the more severe the disruption, the greater the dip. This dip usually lasts until the market gains confidence in the outcome, or the future, at which point the market will rebound.
Let’s look at dip that happened at the start of the COVID-19 pandemic.
Between March 4 and March 11, 2020, the S&P 500 index dropped by twelve percent, descending into a bear market. On March 12, 2020, the S&P 500 plunged 9.5 percent, its steepest one-day fall since 1987. The index began to recover at the start of April, and as of January 20, 2021 had reached a new record [source]
The greatest part of the dip was reached on the 18th of March, with the drop reaching a 27% drop since the 12th of Feb. After March 18th, the stock rose, mostly concurrently.
So with that context, let’s look at what happens when you sell the dip during this time period.
It works great if you can sell on the way down, and then buy back before it rises above what you paid for it. That’s the ideal solution.
However what if you sell right at the bottom? What if it rises above your sell price before you manage to buy back in? Then you will be making a loss, a greater loss than you would have from just holding.
The other aspect to all of this is that as we saw after COVID, after a drop in the market, when the market does regain it’s confidence, it’s likely to attract all the growth that was deferred during the loss in confidence, and that rise attracts new investors and investments which increases the recovery or growth even more.
Long story short — selling on the way down is extremely risky. You could get lucky or be the genius that predicts the right time to sell. You are more likely not to pick the right time, and more likely to lose money. The safest action, if you don’t need the money and the crisis hasn’t revealed fundamental problems with the companies business model you have invested in, is to hold the course.
