Introduction
Many people are happy to leave their savings in a bank account. This can give them instant access and guaranteed returns.
However, if the interest rate is below inflation, the spending power of their savings will fall over time. Taking this approach means they miss out on the opportunity to earn stronger returns that can beat inflation over periods of at least five or 10 years by investing in financial markets instead.
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Buying the dip has been a popular refrain of generations of optimistic investors. The investment philosophy behind buying the dip is clear: invest when shares are “cheap or cheaper” so that you can realise gains when prices have recovered or have continued to rise. The trend of buying the dip may be so popular because we have seen a number of quick recoveries in markets after sharp declines in recent years.
This is not an easy investment strategy to execute, however. Trying to time markets successfully by buying when they have fallen is challenging especially in a period of volatility. And indiscriminate buying does not necessarily mean you will find investments with long-term value.
History shows it is more rewarding to stay invested in markets over the long run given the power of long-term compounding of investments. Had you bought the market through the FTSE All-Share Index on 30 April 1985, for example, your return would have been 3,180% over the following 40 years. Had you invested £10,000 on 30 April 1985, kept it invested and reinvested your dividends, then the value of your investment would be £327,979.
Had you missed the 10 best days of the FTSE All-Share over this period, however, your ending value would “only” have been £167,462, meaning you would have roughly halved your gain. The challenge is that these 10 days came during periods of market volatility and often were experienced very soon after significant market falls.
The phrase “buying the dip” went viral on social media in April 2025. This was largely driven by younger retail investors in the US in response to the dramatic stock market falls following President Donald Trump’s announcement of tariffs on 2 April.
Across social media and investment forums such as Reddit, posts and comments were making the case that the drop in share prices offered a buying opportunity. US retail investors, for example, bought a record $4.7 billion worth of stocks in a single day on 3 April.*
This phenomenon was not contained to the US. Investment platforms in the UK reported a flurry of buying by retail investors in April as well. The platform Interactive Investor recorded its highest-ever trading volumes on 7 April, with 61% of trades being buys.** Such investors should have been rewarded as markets began recovering in April and indices made up their losses by May.
While this phrase may have hit the zeitgeist now, it has been a popular refrain of generations of optimistic investors. The investment philosophy behind buying the dip is clear: invest when shares are “cheap or cheaper” so that you can realise gains when prices have recovered or have continued to rise. The trend of buying the dip may be so popular because we have seen a number of quick recoveries in markets after sharp declines in recent years.
This is not an easy investment strategy to execute, however. Trying to time markets successfully by buying when they have fallen is challenging especially in a period of volatility. And indiscriminate buying does not necessarily mean you will find investments with long-term value.
These dangers are exacerbated when an investor has a short-term investment perspective. Anyone who has ridden a rollercoaster knows that when you think you are through the worst, sometimes things get even hairier before ending safely. Those with a short-term perspective could sell having suffered further losses, losing the ability to gain from the dip in the long run. Investors who fully commit to their first experience of a dip may find themselves experiencing “buyer’s remorse” soon afterwards.
A related, and crucial point, is what to buy on the dip. Single stocks can be risky which is why when the Liontrust Multi-Asset team considers buying on market weakness, they do so on a diversified basis, including across regions, investment styles and asset classes.
History shows it is more rewarding to stay invested in markets over the long run given the power of long-term compounding of investments. Had you bought the market through the FTSE All-Share Index on 30 April 1985, for example, your return would have been 3,180% over the following 40 years. Had you invested £10,000 on 30 April 1985, kept it invested and reinvested your dividends, then the value of your investment would be £327,979.
Had you missed the 10 best days of the FTSE All-Share over this period, however, your ending value would “only” have been £167,462, meaning you would have roughly halved
your gain. The challenge is that these 10 days came during periods of market volatility and often were experienced very soon after significant market falls.
Markets tend to turn before the news does and so hoping to be able to sell and buy back in at the right time is very difficult. There is also an expense to trading in and out of stocks and markets which should be part of the consideration.
Another tactic that can spread risks over time is to invest regularly. This is known as pound-cost averaging and involves investing the same amount every month, for example, no matter what is happening in markets. This enables you to purchase investments more cheaply when prices are down and, over time, this smooths out the ups and downs. Therefore, you will automatically be buying the dip and not missing out on the best days of the market.
* Source: JP Morgan/Morningstar, 4 April 2025.
**Source: City AM, 23 April 2025.
