ON THE MONEY: Rushing to buy the dip may be hazardous to your wealth

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By John Grace

Contributing Columnist

None other than Goldman Sachs has bad news for investors rushing to buy the dip, purchasing stocks after they have dropped in value.

These days, buying the dip could be no different than a sucker’s rally. A false rally can attract a lot of money, but too many investors are woefully unprepared for a market that moves against them.

When prices rise, everyone thinks they are intelligent. And when prices fall, investors often feel regret.

Savvy investors do not trust this market. It’s no different than being in a crowded auditorium. Having an exit strategy in advance is always in order.

It’s for good reason. According to me over the past 40 plus years, the securities industry is notorious for advocating phrases that include buy the dip stocks for the long haul. This time is different.

For example, we were referred to the mother of a professional who has traveled to 78 countries. And her son was delighted that his mother’s account had doubled in the past three years. That’s the good news.

What the pair was astonished to discover is if the same portfolio had been held in 2008, world-travelling mom would have experienced a 70% loss, when stocks were off 37%. That discovery got mom’s attention to see what could happen so that she could potentially limit her losses the next time the grits hit the pan.

On Dec. 7, Goldman Sachs Group expressed a cautionary tone for dip buyers plunging back into stocks. While the December volatility breakout has room to run, their risk gauges aren’t flashing buy signals at this time.

Let me ask you: Do you have a risk gauge or are you simply being optimistic that all trees grow to the sky? Do you know how much risk you can take or do you believe that hope is a strategy?

Is your portfolio designed to possibly hold up better when the market goes to that very hot place or is it the case you believe you can ride out something like another 50% loss (or worse in mom’s case)? Suppose the “recovery” takes longer than you ever imagined?

As reported by Yahoo Finance, just as the Omicron variant continues to create all kinds of trading challenges, the hawkish remarks from the Federal Reserve give some investors reason to pause at this time, said Christian Mueller-Glissman, Goldman Sachs’ managing director of portfolio strategy and asset allocation.

He went on to say that the selling wave that crushed everything from Bitcoin to big tech, the Goldman Sachs Risk Appetite Indicator is below zero and it could fall farther.

December is often a time that the market enjoys a Santa Claus rally for the end of the year. The month started with what has been interpreted as good news that the new variant may not be as virulent and deadly as thought, which if so, is not likely to drive the economic recovery off the road.

On the other hand, a Deutsche Bank AG gauge is also signaling “risk assets may be closing in on a bottom,” per Yahoo Finance. And there are other signs that suggest investors anticipate greater turbulence in the near future.

Now is the time to learn from the past so that you don’t repeat the parts you would prefer to avoid. This observer is fond of saying: “Too many Americans don’t learn from the past because we are so busy repeating it.” 

John L. Grace is president of Investor’s Advantage Corp, a Los Angeles-area financial planning firm that has been helping investors manage wealth and prepare for a more prosperous future since 1979. His On the Money column runs monthly in The Wave.


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