When global markets plunged on Monday, a surprising thing happened: hedge funds and other big-money investors jumped at the opportunity to buy the dip – stealing a much-loved tactic from the retail crowd, who in this case pounced at the chance to sell. And if history is anything to go by, those fund-managing institutions probably played it right.
According to Goldman Sachs, hedge funds that bet on both rising and falling share prices grabbed individual US stocks at the fastest pace since March, reversing a months-long selling spree. JPMorgan, meanwhile, said institutional investors bought a net $14 billion in shares on that day – much more than average. Retail investors, on the other hand, dumped $1.4 billion in individual shares.
While it’s hard to generalize institutional investors’ thinking, it’s reasonable to assume that they viewed the sell-off as a short-term, mood-driven overreaction rather than a long-term problem for stock fundamentals or the broader US economy. And although it’s still early days, the S&P 500’s sharp rebound from Monday’s nerve-jangling intraday low is already vindicating their decision to buy the dip.
In fact, if history is any guide, the recent pullback likely does spell opportunity. Since 1980, the S&P 500 has generated a median return of 6% in the three months that followed a 5% decline from a recent high, with the index delivering a positive return in 84% of those episodes. But an important caveat applies here: just because a certain dip-buying strategy has worked in the past, that doesn’t mean it’s guaranteed to work in the future.
The performance of the S&P 500 following a 5% pullback. Source: Goldman Sachs.
If there’s one thing to take from all of this, it’s that you should avoid basing investment decisions on big, single-day market moves. Panic-selling during declines and buying back after rebounds is a surefire way to lose money. You’re generally much better off staying invested over the long run with a well-diversified portfolio that’s robust enough to handle different environments. And that means accepting the reality that the stock market moves down as well as up, and that it’s hard to time its movements.