Every time the market declines, retail investors are quick to buy the dip. In recent years, this tactic has been successful, but what happens if it doesn’t?
It could be really painful.
Over the last 15 years, the stock market has seen a very remarkable bull market, which has generously rewarded those who have remained invested during this time. Even though there have been bear markets (like in 2022) and recessions (like in 2020), downturns have typically been brief and recoveries have been robust.
People who began investing at that time may therefore have a very positive view of the markets.
“If anytime there’s a selloff it’s just a buying opportunity, why would you ever stop that?” According to BourseWatch, Scott Sheridan is the CEO of the brokerage company Tastytrade. “These people have never seen a down move up until the last couple weeks.”
In reaction to the White House’s announcement of sweeping new tariffs, the stock market had some of its biggest declines on record this month. Between April 2 and April 7, the Dow Jones Industrial Average DJIA lost more than 10% and the Nasdaq Composite COMP fell 12%, while the S&P 500 SPX fell more than 11%. High levels of volatility with significant swings in both directions were observed in the days that followed. On April 9, the S&P 500 recorded its highest day since 2008, climbing 9.5%, however it declined the following week. Wall Street’s fear barometer, the Cboe Volatility Index VIX, peaked on April 8 at about 52.
Retail investors were in a buying frenzy, but Wall Street was terrified of how tariffs would affect markets and the US economy as a whole.
According to JPMorgan data, between April 3 and April 16, individual investors invested $21 billion in equities markets, significantly exceeding the typical inflow. On April 3 alone, individuals purchased $4.7 billion worth of stocks, the biggest one-day cash inflow JPMorgan had ever seen. The propensity to purchase the dip has only become stronger since 2022, according to JPMorgan, and if the buying that followed President Donald Trump’s “liberation day” tariff announcement is any guide, individual investors are more prepared to invest in a larger decline.
It may come as a bit of a surprise that investors kept investing for the two weeks after the April 2 tariff announcement, even though they usually buy the dip after significant one-time falls. It had longer-lasting activity than was usual for prior declines.
According to Adam Turnquist, the chief technical strategist at LPL Financial, “Retail has been buying dips continuously since the pandemic,” BourseWatch reported. However, that trade was a huge success. They may have purchased the first 3% to 5% down, but it hasn’t broken yet, and now they’re in trouble.”
BNY said that on April 3 and 4, the volume of retail flows was two to three times higher than usual. Institutional investors sold down over this period, in contrast to this inflow. Retail was still ahead of institutional investors, even though part of that retail volume decreased over the second half of last week.
“The problem for investors simply following the retail buyer – or just buying every big dip in markets – is that this method can fail,” stated Bob Savage, BNY’s head of markets macro strategy. “Outsized moves down have a tipping point linked to volatility and the state of the economy.”
“How the [Federal Open Market Committee] responds to financial conditions is the risk for the remainder of April,” he continued. According to the trading history of 2008, a more significant policy shift is required to make the downturn effective.
Turnquist also emphasized the buy-the-dip strategy’s possible drawbacks. If the market continues to decline or takes a long time to rebound, investors who bought in during the initial drop lose money.
Naturally, no one can predict the future direction of the market or the time it will take for it to turn around. It might either reverse course and reach all-time highs once more, or it might keep declining.
Sheridan described the market using the analogy of a rubber band. Rubber bands snap back into place when stretched. It snaps back when you stretch it again. Over the last few years, the market has been acting in this manner. The market has swiftly recovered from each decline and has been rising ever since. In 2024, the S&P 500 reached new all-time highs 57 times, or about every 4.4 trading days on average, according to Turnquist.
Individual investors have become accustomed to this. However, Sheridan worries that the market won’t recover and that the rubber band will eventually break. Despite acknowledging that he has a tendency to be contrarian, he has experience investing during protracted downturns, having done so during the 1987, 2000, and 2008 crashes. Those who started investing only 15 years ago, he noted, have not yet encountered such a situation.
Individual investors’ capacity to purchase the dip is also being strained in the meanwhile. One of the biggest drops since the start of the COVID-19 pandemic in 2020 was the post-tariff selloff, which was accompanied by a correspondingly significant influx of retail investors. For the time being, it appears that the larger the dip, the greater the buying. However, the buy-the-dip trend can buck if the downturn becomes too large.
Public, a financial platform, said last week that a considerable increase in its users withdrawing funds from high-yield cash accounts to make stock investments. This conduct demonstrates that investors would prefer to optimize profits and attempt to timing the bounce rather than store money in case things go south, which is in contrast to Wall Street’s predictions of a higher risk of a recession.
Public’s general manager of cryptocurrency and brokerage, Sam Nofzinger, could see how much money customers had in their Public accounts and their associated savings accounts at other banks. Investors weren’t necessarily using their emergency funds to make investments, he claimed. Rather, they were using the substantial cash reserves they had set aside for this exact reason.
“People finally see [an opportunity to invest] after sitting on mountains of cash for the past year,” Nofzinger told BourseWatch.
It’s possible that this additional degree of financial savings made it possible for investors to purchase the dip on such a massive scale. However, the dip purchasing may potentially run out of money if that cash reserve is depleted.
A more severe economic downturn might also halt this slump purchasing in its tracks, in addition to market fluctuations. In addition to depressing markets, a recession may jeopardize jobs, which would have an impact on the money that drives dip purchasing.
“You really need a dot-com or [global financial crisis] kind of situation for that to unfold,” Turquist stated. “And who can tell? Our strategy for this year and next year does not include that.
Even while such a catastrophe is unlikely to occur anytime soon, it might be extremely unpleasant for those who have never made an investment of this kind, particularly if they continued to buy the dip as it was going down. Sheridan is concerned that significant losses could drive away investors.
“The markets are resilient, which is fantastic news. The markets will eventually recover. In the next five, ten, fifteen, or twenty years, we will undoubtedly be much higher in the markets,” Sheridan told MarketWatch. “What does it appear like before we arrive is the question. How many individuals do we lose, too?
Sheridan pointed out that investment isn’t a binary decision. Without completely immersing themselves, people can take a small step into the market. Because you might not want to be all in if purchasing the dip doesn’t work, that’s where determining your specific degree of risk tolerance comes in.
