When ‘buying the dip’ pays off – and when it doesn’t

[SINGAPORE] Over coffee, a colleague beamed as he announced that his US equities portfolio had chalked up an impressive 35 per cent time-weighted return over the past five years.

Another colleague offered a hearty “that’s not bad”, while I couldn’t resist checking what inflation had done over the same period. Turns out, about 17 per cent.

So, after five years in the markets, his real return was roughly 18 per cent – not exactly the champagne-popping outcome he’d imagined.

In fact, for someone who’s lived through record-high stock markets and elevated interest rates, it’s a bit like showing up for a buffet after everyone’s had dessert.

Had he instead parked the money in an exchange-traded fund tracking a major index such as the S&P 500, his portfolio would have grown about 83 per cent over the same period. A textbook case of “responsible investing”, as fund managers like to say.

So, what happened?

Turns out, the culprit was a series of “gambles” on penny stocks, including one that cost him dearly after he “bought the dip”, only for the company’s share price to crater even further.

“The allure of high returns at 20 years old – using my National Service allowance – was too hard to resist,” he admitted.

Our chat then drifted to the week’s market movements.

On Wednesday (Oct 15), US President Donald Trump declared that America was in an active trade war with China – news to no one who’s been watching for the past few years.

It’s been a week since his latest tariff salvo: a 100 per cent levy, on top of existing duties, on Chinese imports from Nov 1.

The language feels like deja vu from his “Liberation Day” tariffs earlier this year, only this time, investors seem less panicked.

Stock prices have barely flinched. In the past five days, the benchmark S&P 500 has dipped 1.3 per cent, the Dow Jones Industrial Average has fallen 0.8 per cent, and the tech-heavy Nasdaq Composite is down 1.6 per cent.

In Asia, markets have been more or less unfazed, too. Singapore’s blue-chip barometer, the Straits Times Index, has slipped 1.9 per cent over the same period, while Hong Kong’s Hang Seng Index is down 2.4 per cent.

This is hardly the carnage of April’s double-digit drops. For now, investors seem to have priced in the bluster – helped, no doubt, by a US Federal Reserve that appears set to keep trimming rates.

Still, Trump’s trademark unpredictability – the whiplash-inducing kind that’s equal parts strategy and spectacle – suggests he’s more likely to turn up the heat on China before any truce is struck. Beijing, for its part, has vowed to “fight to the end”.

The real question for investors, then, is this: When the next “dip” comes, should one dive in headfirst or simply stick to the tried-and-tested routine of dollar-cost averaging?

After all, even the most disciplined “hands-off” investors can feel tempted when headlines scream “buying opportunity”.

I recall commentaries cautioning readers against buying the dip amid “elevated risks” right after Liberation Day, when markets tumbled. Since then, the S&P 500 has climbed more than 20 per cent, in a reminder that fear, too, can be expensive.

Of course, not everyone stayed on the sidelines.

One colleague, ever the opportunist, gleefully rubbed his hands when DBS shares briefly dipped below S$40 and declared he would buy the dip.

With South-east Asia’s largest lender now comfortably above the S$50 mark, I’d wager his portfolio is looking more festive than fearful.

So perhaps the lesson is this: Buying the dip can be tempting, but it would be wise to do so with both eyes open to the potential risks and rewards.

After all, it’s a thin line between buying the dip and catching a falling knife.