From Investopedia.com. Read more answers from Dejan on the Investopedia Advisor Insights Network.
When buying during dips in the market, does it matter which type of funds to purchase? For example, should I buy just stocks, just bonds, stocks and bonds, or other types of funds? I’m 61 years old and plan on working till age 67. I have other resources in case of a market drop to help sustain losses.
First, to help your odds of success in the long term, focus only on actions that add value. You can’t control the market, and no one can predict what it will do tomorrow. For that you need a crystal ball. So, forget about sector, stock, time, manager, or any other market attribute picking. Speculation does not add value to your long-term success.
Defining market dips is a form of time picking (market timing). As someone already usefully pointed out, how do you define a market dip? It really is dependent on your time frame. There are market dips every minute, hour, day, week, month, year, decade, etc. How do you choose which time resolution to use for your trade triggers? It’s impossible, that’s why market timing doesn’t work.
Instead, if you already know the right balance of stocks and bonds for your portfolio (based on your risk tolerance), then don’t worry about what the market is doing. Simply continue to contribute to your account on a regular time interval (known as dollar cost averaging) regardless of whether the market is hitting new highs or recent lows. Then every quarter or so, check whether your portfolio conforms to your target allocation of stocks and bonds. If it’s really off whack, then rebalance to get it back to your target levels.
Finally, you don’t need to pay financial professionals more or for expensive funds in order to get better returns. On the contrary, the lower the fees, usually much higher are your odds of success. Cost-generating gimmicks like market-timing, stock picking, frequent trading, and other conventional strategies only guarantee that more wealth will trickle up from your account to the pockets of your broker/advisor. Don’t pay for gimmicks and proven myths. Be disciplined for the long haul and stick with low-cost index funds. Good luck.