Buying on the dip: Do mantras have an expiry date?

“The riskiest moment is when you’re right.” This memorable one-liner from American economist and educator Peter L. Bernstein has stayed with me for years. Markets reward repetition. You see a pattern work once, twice, then again, and it starts to feel permanent. Give it a little time and it just slips into a habit.

Buying on the dip became one of those habits. Over nearly 20 years, sell-offs kept looking like chances to add. Each rebound proved the reflex – or seemed to. After so many years, even raising a question about it feels contrarian, almost reckless.

Dip buying did not start as strategy. It began as a trader’s tactic and slowly turned into a habit. Structural flows did most of the work. Superannuation and 401k systems fed money in every month. ETFs turned those flows into market-wide buying. After the GFC, central banks kept rates pinned down and balance sheets rising. Every dip was met with policy support, so recoveries felt assured.

A generation of advisers came of age in that world. They saw markets that bounced and clients that rewarded patience. For many, the memory of long stagnation faded. Recency bias hardened into confidence. Buying the dip became less a choice than an expectation, a reflex built by structure as much as belief.

Markets can wait. Investors can’t. That gap is where fragility hides. An endowment can look past decades of flat returns. A retiree drawing-down cannot. For someone in their mid-60s, the first ten years do most of the heavy lifting. Those are the years when sequencing risk bites; early drawdowns leave a hole that never fills because cash is flowing out, not in.

History shows it clearly. Retirees who began in 1968, 2000 or 2008 carried scars long after markets “recovered” on paper. Contributions had stopped. Withdrawals kept going. The compounding engine was running in reverse.

Most strategists now forecast low-single-digit equity returns. Yet the variance around those estimates is in the low double-digits. In practice, that looks like a small positive number on the page, but the real range runs wide enough that negative years, even deep ones, still sit inside the band.

Yet still we talk about time in the market as if every investor has the same time horizon. They don’t. Real people live on shorter clocks.

Markets have long memories, but investors often don’t. We say equities always recover. Over decades, that has been true. What gets forgotten is that whole stretches of time tell a different story.

Inflation compounded the drag

Take the ten years from 1968 to 1978. Equity growth in nominal terms was sluggish, and inflation compounded the drag. A retiree who started drawing-down then saw little recovery once adjusted for purchasing power.

The early 2000s brought another long flat patch: the S&P 500 went nowhere for more than a decade, once you adjust for inflation. Even after 2008, it took years for portfolios to climb back in real terms. They dragged on year after year, more like stalls than pullbacks.

Buying on the dip assumes the rebound arrives soon enough to matter. Sometimes it doesn’t. For a saver adding fresh contributions, a slow recovery feels manageable. For someone already drawing-down, those same years are unrecoverable. Yes, equities work over time. The problem is that time can stretch longer than a superannuation investment horizon.

Rules come and go in markets. The “Rule of 20” once told investors that price/earnings (P/E) ratios plus inflation should hover near 20. It worked for a while. Then disinflation changed the landscape, and the rule lost meaning. Resource stocks once looked attractive when their P/Es spiked, earnings collapsed faster than price. That logic faded too when the structure of the sector changed.

Buying on the dip carries the same risk. It has worked under one set of conditions: steady inflows, low rates and central banks that stepped in at every stumble. Those supports are shifting. Valuations now sit high on almost every measure: cyclically adjusted price-to-earnings (CAPE), equity risk premium, even real earnings yield. None leaves much room for a margin of safety.

Yet buying on the dip has delivered. Advisers who kept clients steady in 2008 or 2020 were rewarded for that counsel. That record is real. But mantras always depend on their moment. The Rule of 20 worked until inflation fell. Resource stocks looked safe when P/Es spiked, until sector structure shifted. Buying on the dip holds only as long as the conditions that gave it life.

I would suggest that today’s conditions look unlike any since the 1970s. Valuations are stretched. Politics is unstable. Economic rules built over decades are being pulled apart. That mix doesn’t look pro-growth. It looks more like disruption. In that world, holding-on to habit without reassessment feels less like discipline and more like hope. Habits deserve respect, but they also need testing when the ground shifts.

Some argue valuations look fairer once you strip out the largest names. That misses how asset allocation works. We don’t set portfolios against an equal-weight index or a blend of active managers. We set them against market-cap benchmarks. Top-heaviness is not a quirk of the index; it is part of the risk investors carry.

Bonds aren’t ballast

Mantras survive long enough to feel like strategy. But they are still mantras. They work until the ground beneath them moves.

Seasoned fixed income managers put it bluntly: without bonds, a portfolio is just vibes. The line sounds sharp, but the truth underneath is solid. Bonds aren’t ballast. They are the structure that keeps portfolios standing when equities stumble.

They do three jobs. They pay income at a defined maturity. They provide liquidity when markets reset. And they work as a counterweight when sentiment flips. For decades the yield curve has called recessions before equities did. Credit spreads tighten or blow-out long before earnings forecasts catch up.

A generation of advisers learned in the post-GFC world to shrug their shoulders at bonds. Yields were low, price returns flat, so they stopped looking. That habit was conditioning, not evidence. Bonds were never dead. They were waiting, doing the quiet work of keeping risk honest.

Bernstein’s warning still sits at the centre. Success is not the same as resilience. A habit can look like strategy when conditions line up and buying on the dip has lived off that alignment for years.

Call it less a forecast and more a reminder that mantras need testing. The riskiest moment is when you’re right, and the danger is when you stop asking why.

Rob Prugue

Rob Prugue is an investment consultant and the former long-time CEO of Lazard Asset Management, Asia Pacific.