When It Makes Sense to Buy the Dip

Around the beginning of 2018, the volatility of the stock market suddenly picked up. It was a worrying development for most investors, who prefer a smooth ride to a turbulent one. But volatility is a necessary condition if you want to deploy a strategy known as buying the dips, or BTD. The idea is to purchase stocks when they have dropped sharply, anticipating that they will bounce back.

The BTD strategy requires some courage, but it seems to work. In a recent paper, Vivian Ning, of investment research firm S&P Global, looked at every stock in the Russell 1000 index that fell at least 10% more than that index on a single day. In other words, if the Russell (roughly the 1,000 largest U.S. companies) fell 1.5%, the stock would have to have dropped 11.5% or more to be counted. Then Ning looked at the