Stop “Buying the Dips”
Start selling the rips.
The psychology that stocks are cheaper when the price drops drives me bonkers. This age old investment saying is the most toxic piece of advice to ever come out of our industry.
Buying the dips is a good strategy in diversified, portfolio solutions. Like mutual funds, or diversified ETFs. Why? Because you are purchasing a basket of companies and all of them together reduce the risk of a massive default and total loss of your investment. Notice the key operative, reduce, not eliminate.
Buying the dips of individual stocks is a sure formula for loss. Guaranteed. 100%. 1,000%. Add as many zeros as you want.
Here is a simple truth – there are more companies that have went bankrupt then are currently listed on the exchange. So, if you go ahead an pull up any chart of an existing company, sure, buying the dips, or averaging down looks like it makes sense.
But ask yourself, what if you averaged down in the thousands of companies that went belly up whose charts you cannot see?
You lose everything, and devastate your psychology and possibly your family’s well being. Stop that.
Start learning how to appreciate, respect and welcome the downside. Movements lower are an important part of the stock market, or any other asset and/or commodity in the world. When the market slumps, it is not the markets fault because it is crooked, or the governments fault, or Janet Yellen’s fault. It is YOUR fault, for not knowing what conditions precede a drop and not having a plan to execute when these inevitable bear markets do happen.
Get it? Got it? Good!
Now let’s get on to selling the rips.
This market has not crashed yet. But it will, and soon. We see another 15 to 20% drop in the next 2 to 3 months. We will enter a bear market in the coming months – and we are pretty confident of that. But no one, not a soul on this planet, can say that for sure.
Here is the question though – do you really want to risk your portfolio based on optimism?
Since 2009 we have had numerous scenarios where the market has dropped, and it was a great time to buy more (buy the dips) because we were in a bull market!
Things have changed. When?
When this happened:
Above we can clearly see that on January 8th, 2016 that black line was broken, and while the buyers made a dramatic effort to save that level and get us to close above they failed that day, and the two next days as well. On January 13th, 2016, we saw a massive reversal, from around the 1950 level, down and through the black line and 40 points lower all in one session. On this day, the damage was done. Dip buying should have ended. This was the precise realization that made you a trader and not an investor. If you were, and/or still are a buy and hold type of guy or gal – good luck to you in the next few months. Keep on holding, but don’t complain.
Why is that black line so important?
Because it is a key support level which has contained higher prices since 2009. Look at how scary good it has worked in the past.
You can clearly see from the chart above that we are below this lower support level. Think that means nothing and technical analysis doesn’t work? Look at the next chart from 2008 and compare the similarities. I want you to specifically look at June 30th, 2008, when prices formed new lows after rallying back up to the black support line, now resistance.
Now look at where we are today:
Stop buying the dips, stop losing money. There is a saying in our business that rings to be true in the past 7.5 years – don’t confuse bulls for brains. Sure you might have made good money in the past few years buying any three or four letter symbol – but those days are over.
I cannot tell you how many people have made a ton of money in bull markets only to lose all their gains, and even all their capital on the first bear market.
Then they leave bitter, hating the markets, pointing fingers and not taking accountability for their actions.
Don’t be that person.
A market crash can be the best thing that happened to you – if you take advantage of it.
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