“Buy the dip, short the VIX, **** Bitcoin.” – Slightly censored version of a quote from HBO’s “Industry”

Few investing phrases are repeated more often than “buy the dip”. Financial television talks about it. Social media treats every market decline as a fire sale. Even advisors can describe corrections as “healthy” because they create buying opportunities (and reassure nervous clients).

It sounds like common sense. If you liked an investment yesterday, surely you should love it after it has become 10% cheaper.

But investing has a habit of punishing ideas that sound obvious.

A recent paper by Javier Estrada examines one of the longest datasets ever used to test buy-the-dip strategies, covering U.S. stock market history from 1871 through 2025. The conclusion is surprisingly simple: buying the dip usually changes the balance between return and risk, but it rarely improves the overall investment.

Buying after prices fall rests on several assumptions.

• First, the decline must be temporary rather than permanent. Investors have to believe the market has overreacted and prices will recover.
• Second, the recovery has to occur on your investment horizon. An asset that eventually rebounds but spends five years falling isn’t much consolation if you needed the money after two.
• Third, you need capital available to invest. That money has to come from somewhere. Either you hold cash waiting for opportunities, or you sell another investment.
• Finally, higher returns alone aren’t enough. If those returns come with substantially more risk, the strategy may actually leave investors worse off.

These caveats are often ignored when people enthusiastically recommend buying every correction.

Estrada begins with a straightforward question. Suppose the market falls this month. How do returns over the next one, three, five and ten years differ from returns after an average month?

The answer is: not by very much.

Even after relatively large monthly declines, future returns are generally no higher than normal in a statistically meaningful sense. One year after a negative month, returns are actually lower than average. Five-year returns tend to be somewhat higher after declines, but not enough for the evidence to be convincing.

But possibly the paper’s most useful contribution is that it moves beyond looking only at stock returns.

Instead, it asks a more realistic question.

Suppose an investor normally holds a balanced portfolio of stocks and bonds. Whenever stocks fall, they move part of the bond allocation into equities. Does this improve the portfolio? This is probably how many institutional investors actually implement buy-the-dip strategies.

Against this benchmark, the results are fascinating.

Buying the dip usually increases returns. Unfortunately, it also increases volatility and produces significantly deeper drawdowns. And the extra return is almost exactly what you would expect from taking more equity risk. After adjusting for that additional risk, Sharpe ratios show essentially no improvement across almost every scenario tested.

In other words, buying the dip mostly acts as a way of increasing equity exposure after markets fall. That’s a perfectly reasonable choice if you intentionally want more risk. It is much less impressive if you thought you had discovered a market anomaly.

Estrada also considers another benchmark. Instead of comparing against a balanced stock-bond portfolio, he compares buy-the-dip investing against simply remaining fully invested in stocks (buy and hold).

Because part of the portfolio sits in bonds waiting for opportunities, buy-the-dip investors earn lower returns. On the positive side, they also experience lower volatility and somewhat smaller drawdowns. But once again, risk-adjusted performance barely changes.

Buying the dip doesn’t appear to create meaningful additional value once risk is properly considered.

Perhaps the most impressive aspect of the paper is the breadth of its sensitivity analysis.

Estrada varies:

• Stock-bond allocations
• Rebalancing frequencies
• The size of market declines required before buying
• The proportion of bonds transferred into stocks

The headline result survives almost every variation.

• Sometimes returns improve.
• Sometimes they fall.
• Sometimes risk rises.
• Sometimes it falls.
• But improvements in risk-adjusted returns remain elusive.

There is another way to think about these findings.

Buying after declines is, almost by definition, a bet against (time-series) momentum. Momentum is one of the strongest and most persistent empirical findings in finance. Assets that have recently outperformed often continue outperforming over intermediate horizons.

Buying the dip means doing the opposite. That doesn’t guarantee failure. Momentum itself is fallible, and time-series momentum is weaker than cross-sectional momentum. But it should make us cautious before assuming buying weakness is automatically profitable. Sometimes the “dip” is simply new information being incorporated into prices.

Buying the dip is often described as if it creates alpha. But much of what it does is just altering your portfolio’s risk exposure. If you deliberately want higher expected returns and are comfortable accepting deeper drawdowns, buying after market declines may be entirely sensible. But don’t confuse taking more risk with finding an edge.

Whenever a strategy appears to outperform, the first question shouldn’t be “How much more did it make?” It should be “How much more risk did it take?”

Only after answering that second question can we decide whether we’ve discovered genuine skill—or simply found another, unnecessarily complicated way to lever up the portfolio.

Disclaimer

This document does not constitute advice or a recommendation or offer to sell or a solicitation to deal in any security or financial product. It is provided for information purposes only and on the understanding that the recipient has sufficient knowledge and experience to be able to understand and make their own evaluation of the proposals and services described herein, any risks associated therewith and any related legal, tax, accounting, or other material considerations. To the extent that the reader has any questions regarding the applicability of any specific issue discussed above to their specific portfolio or situation, prospective investors are encouraged to contact HTAA or consult with the professional advisor of their choosing.

Except where otherwise indicated, the information contained in this article is based on matters as they exist as of the date of preparation of such material and not as of the date of distribution of any future date. Recipients should not rely on this material in making any future investment decision.