◼ FINANCE Bloomberg Businessweek March 9, 2020
23Investors with workplace retirement plans such
as 401(k)s who actively buy into the dip may actually
be double-dipping. Since employees have money
deducted from their paychecks and automati-
cally moved into their 401(k) funds every month or
so, buying into the market even when it drops is
already baked into the plan for many people.
It does make sense to rebalance portfolios peri-
odically, adjusting allocations when market moves
push your mix of stocks and bonds far away from
where you want it. But again, that readjustment
often happens in portfolios without people having
to do anything. Popular target-date mutual funds—
all-in-one investments that split assets among
stocks and bonds based on an investor’s age—are
designed to rebalance assets over time. Many of
the new online investment services known as robo-
advisers offer a similar service.
Retirement savers have been making an unusu-
ally high number of moves in their accounts lately.
Trading activity in 401(k)s for the week of Feb. 24
made it among the busiest five-day periods in the
20-plus years that benefits administrator Alight
Solutions has tracked such activity. Almost all of the
recent activity was savers moving from equities to
the relative safety of fixed income. Still, there was
evidence of a buy-the-dip mentality: Savers made
a slight increase to the equity allocation for their
future 401(k) contributions.
Some financial advisers are fine with opportu-
nistic buying as long as clients have enough cash
set aside so they don’t run the risk of needing to sell
stocks into a downturn. “When the market moved
to a 10% correction point, the conversations with
clients became ‘Are we going to be adding to equi-
ties?’ ” says Kerrie Debbs of Main Street Financial
Solutions. Debbs says this additional buying gener-
ally only makes sense for retirees with enough safe
assets to cover expenses for two to three years and
for working people who can cover one to two years.
One helpful thing investors can take away from
the current volatility is a better reading on their
own tolerance for risk—a gut check. If you didn’t
before, now you know what an 11% drop feels like.
“Talking about risk is an academic exercise if it’s
not happening to you,” says Paul Simons, presi-
dent of private banking, wealth, and trust at Boston
Private. “In times like this, you find out what a cli-
ent’s real risk tolerance is.”
For younger investors, it may be difficult to
know how much risk you can stomach if all you’ve
known since you had significant money to invest
is a bull market. “To clients that started work-
ing with me in 2010, I look like a genius because I
don’t carry the baggage of the financial crisis,”● Price gain of the
S&P 500 from March 9,
2009, through Feb. 21393%
When equity markets fall, there’s always a chorus
urging you to take advantage of the opportunity to
buy stocks for less than they cost the day before.
Everyone loves a bargain, and after 11 years of a bull
market, the S&P 500’s 11% plunge during the week
of Feb. 24 made for the worst-performing five-day
stretch since the financial crisis more than a decade
ago. Even Larry Kudlow, head of President Trump’s
National Economic Council, said investors should
heed the old advice to “think about buying the dip.”
Plenty did, for a moment at least. The S&P 500
rallied 4.6% on March 2. Then it wobbled again,
dropping even after an emergency 50-basis-point
cut to the Federal Reserve’s benchmark rate, before
climbing the next day. It will likely rise and fall dra-
matically again and again while the markets grap-
ple with the spread of Covid-19 and what it means
for the global economy and the risk of a reces-
sion. Meanwhile, the bond market keeps flashing
signs of economic anxiety: Traders are willing to
pay so much for safe-haven bonds that the 10-year
Treasury yield slid at one point to a record of below
1%. (Yields fall as bond prices rise.)
This is the trouble with buying the dip: It’s basi-
cally a form of market timing, which even pro-
fessional traders can rarely do well for very long.
Many investors planning for a long-term goal such
as retirement do themselves no favors by letting
market noise creep into their consciousness and
narrow their vision. It doesn’t make sense to aban-
don a well-thought-out asset allocation because
one part of a portfolio may suddenly appear
cheaper than it was a few months ago.
Cheapness is always relative. What feels like an
ugly downdraft looks inconsequential in light of
the market’s stubborn climb over the years. From
March 9, 2009, through Feb. 21, the S&P 500 had a
price gain of 393%. Against that, even an 11% plunge
hardly gets you to bargain-basement prices.
Of course, what really matters isn’t the price
alone but the corporate profits and growth you get
for your buck. It’s not clear yet if you can discern
by looking at, say, price-earnings ratios whether
stocks are really a better buy now. “As markets fall,
we are also seeing earnings estimates fall and are
not sure where they are going to settle,” says Katie
Nixon, chief investment officer for the wealth man-
agement business at Northern Trust. “When you
don’t know the ‘e’ in p-e, it’s hard to say whether
the market is cheap.” This process could take awhile:
Richard Bernstein, chief executive officer of Richard
Bernstein Advisors, says Wall Street analysts have
been slow to lower their profit estimates in response
to the outbreak, because they typically wait for com-
pany guidance before making adjustments.