Does "buy the dip" actually work?
- Robin Powell
- 44 minutes ago
- 8 min read
"Buy the dip" sounds like smart investing: wait for prices to fall, then pounce. But new research testing 196 implementations over 60 years delivers a verdict that should give every bargain-hunting investor pause.
You know the feeling. Markets hover near record highs. Headlines warn of stretched valuations, tariff uncertainty, a possible correction. Part of you wants to invest that cash in your account. Another part whispers: wait for the pullback. It's coming. Buy the dip.
The logic feels irresistible. Like holding off before the January sales on something you want and can afford now. Why pay full price when a discount might be around the corner? Applied to investing, it promises the best of both worlds: the discipline of a long-term holder combined with the shrewdness of a bargain hunter.
If you've felt this temptation, you're far from alone. Interest in "buy the dip" strategies has surged over the past five years, particularly after the rapid market recovery from COVID-19 in 2020. Google searches for the phrase spike every time markets wobble and bounce back. The approach has captured retail traders and institutional investors alike.
But does it work? Or is it one of those ideas that sounds smarter than it is?
A new study from AQR Capital Management puts "buy the dip" to the test, examining 196 implementations across 60 years of market data.
"Does it work? Or is it one of those ideas that sounds smarter than it is?"
Why buying the dip feels like smart investing
Our brains are wired to make this strategy appealing. Three psychological forces push us toward waiting.
First, action bias. When markets fall and headlines turn frightening, doing nothing feels reckless. Sitting on cash while waiting for your moment gives the volatility a purpose. You're not passive. You're poised.
Second, loss aversion. Behavioural economists have long documented that losses hurt roughly twice as much as equivalent gains feel good. Buying at a lower price means starting with a cushion.
Third, pattern recognition. Our minds search for cause and effect, especially in financial markets. When you see a dip followed by a recovery, your brain files it away as a reliable sequence. Do it once, you got lucky. See it happen repeatedly, and it starts to feel like a law of nature.
Recent history has reinforced all three instincts. The COVID-19 crash in February 2020 saw the S&P 500 drop 34% in just over a month. By August, it had fully recovered. Anyone who bought near the bottom looked like a genius. The "Liberation Day" sell-off in April 2025 followed a similar script: sharp decline, rapid rebound, vindication for dip-buyers.
But here's what Google Trends reveals: investor enthusiasm for "buy the dip" is itself cyclical. It spikes after quick recoveries and collapses during prolonged drawdowns like 2022, when the dip kept dipping. The strategy feels brilliant when conditions flatter it. Whether that feeling translates into better long-term results is another matter.
"The strategy feels brilliant when conditions flatter it."
What 60 years of evidence reveal
The strategy doesn't work. Or more precisely: it doesn't work reliably enough to justify the wait.
AQR's research team tested this systematically (AQR, 2025). They built 196 "buy the dip" implementations, varying three parameters: how deep the dip needed to be before triggering a buy (5%, 10%, 15%, or 20%), how long the decline had to last (one week to one year), and how long the position was held afterward (one month to five years). They ran each variation against S&P 500 data from January 1965 to September 2025.
The results were sobering. More than 60% delivered worse risk-adjusted returns than holding the index passively. The average Sharpe ratio was 0.04 lower than buy-and-hold, a 16% degradation in efficiency. Using more recent data from 1989 onward, the picture worsened: a 47% degradation.
What about the strategies that appeared to outperform? Out of 196 implementations, only 16 (8%) showed statistically significant alpha. The average excess return was a mere 0.5% per year, and even that figure wasn't reliably distinguishable from noise. When you test nearly 200 strategies, some will look good by chance alone.
This isn't a single study making an outlier claim. Independent research reaches similar conclusions. Bonini, Shohfi, and Simaan (2024), published in European Financial Management, tested BTD strategies and found no reliable outperformance over passive investing.
Perhaps the most striking finding relates to investors who plan to invest regularly. Should they deploy cash immediately or wait for dips? AQR compared BTD to straightforward dollar-cost averaging. The dip-waiting approach resulted in 18.7% lower ending wealth.
The intuition that "buying cheaper must be better" runs headlong into mathematical reality: you can't reliably identify dips in advance, and time out of the market has a price.
The hidden flaw: betting against momentum
The data shows BTD underperforms. But why?
Two of the most documented phenomena in financial markets are value and momentum. Value is the tendency for cheap assets to eventually outperform expensive ones. Momentum is the tendency for recent winners to keep winning and losers to keep losing. Both appear across asset classes worldwide.
Here's the critical insight: these phenomena operate on different timeframes. Momentum persists over weeks and months. Prices rising often continue rising; prices falling often continue falling. Value plays out over years. Cheap assets don't snap back quickly.
BTD sits uncomfortably between these two forces. When you buy after a 10% decline over three weeks, you're betting on a quick reversal. But markets at that timeframe exhibit momentum, not mean reversion. You're positioned against the prevailing trend, expecting a bounce when the evidence suggests continuation is more likely.
AQR's researchers put it succinctly: BTD is "value investing at a momentum horizon." The strategy applies value logic (buy when prices are down) to a timeframe where momentum dominates. The right instinct at the wrong frequency.
The data confirms this. The correlation between the 196 BTD strategies and trend-following approaches (which profit from momentum) averaged -0.14. Not huge, but remarkably consistent. BTD systematically positions investors on the opposite side of momentum.
This explains something puzzling. If buying cheaper were better, at least some BTD strategies should show meaningful outperformance. Instead, we see near-random scatter around a slightly negative average. The expected benefit of lower purchase prices is offset by the cost of fighting the trend.
When the strategy fails most
The worst thing about BTD isn't the average underperformance. It's when that underperformance happens.
Since 2000, the S&P 500 has experienced four drawdowns exceeding 20%: the dotcom crash (September 2000 to October 2002), the global financial crisis (October 2007 to March 2009), the COVID crash (February to March 2020), and the 2022 bear market (January to October 2022). These are the moments when portfolio protection matters most. A 50% loss requires a 100% gain to break even.
How did BTD strategies perform? The average implementation lost 18.4%. Better than the S&P 500's average decline of 40.2%, but hardly the crisis protection investors might expect from a strategy designed around buying low. During the financial crisis alone, the average BTD approach lost 34%.
The COVID crash stands out as the exception. Short and sharp, lasting barely a month before recovery began. Trend-following strategies, which need time to develop, lost 2.4% during this window. BTD had less time to accumulate damage. But investors can't know in advance which type of drawdown they're facing. The prolonged declines of 2000-02, 2007-09, and 2022 are where long-term goals get derailed.
This is where the sale-hunting analogy breaks down. Waiting for a discount on a television carries limited downside. If the price never drops, you pay full price or buy something else. In markets, "waiting too long" can mean riding a falling asset down while your buying signals keep triggering. The sale never ends; it just gets deeper.
What works instead
The answer is simpler than most investors want to hear: invest when you have money to invest.
This isn't a counsel of perfection. It's what the evidence supports. The belief that "prices will eventually be higher" was true before any dip, during any dip, and after any dip. Waiting adds nothing except time out of the market. And time out of the market has a measurable cost.
Some readers will have noticed the trend-following data in the AQR research. During those four major drawdowns, trend-following strategies gained an average of 28.6% while BTD lost money. The academic evidence for momentum-based approaches is genuine, documented across decades by researchers including Moskowitz, Ooi, and Pedersen (2012).
But there's a caveat. Trend following is an institutional strategy. It requires systematic implementation, low costs, diversification across markets, and the discipline to stick with it through painful flat periods. Most retail investors lack access to the infrastructure. Many products available to them fail to capture the academic premium after fees. Credible in theory, hard in practice.
For most investors, the practical alternative to BTD isn't a different timing strategy. It's abandoning market timing altogether. Set a strategic asset allocation based on your goals, risk tolerance, and time horizon. Invest new money as it becomes available. Rebalance periodically. Let compounding do the work.
"The answer is simpler than most investors want to hear: invest when you have money to invest."
The wait itself is the cost
That cash waiting for the pullback that feels inevitable? You're paying for patience that doesn't reward you.
The investor who bought at every all-time high in history still did remarkably well over any reasonable time horizon. The investor who waited for perfect entry points often waited too long, or bought into a decline that kept declining, or finally gave up and bought at prices higher than where they started.
There's a final irony. The dip you're waiting for may eventually arrive. But when it does, will you buy? Market falls come with fear, not opportunity signs. The same psychology that makes BTD appealing in calm moments makes it almost impossible to execute in turbulent ones. The headlines that accompany a 20% decline don't say "sale now on." They say "is this the big one?"
Stocks have rewarded patient owners not because those owners were clever about timing, but because they were present.
"There is no comfortable time to invest."
And here's the uncomfortable truth BTD obscures: there is no comfortable time to invest. Markets at record highs feel expensive. Markets falling feel dangerous. Markets after a crash feel uncertain. The discomfort never lifts. Waiting for it to pass is waiting for something that doesn't exist.
The investors who build wealth aren't the ones who found the perfect moment. They're the ones who accepted the discomfort and invested anyway.
References
AQR Capital Management. (2025). Hold the dip. Alternative Thinking, 2025(4).
Bonini, S., Shohfi, T., & Simaan, M. (2024). Buy the dip? European Financial Management, 30(4), 2033-2070.
Moskowitz, T. J., Ooi, Y. H., & Pedersen, L. H. (2012). Time series momentum. Journal of Financial Economics, 104(2), 228-250.
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