Buy the dip or sell the rip? History shows selloffs offer buying opportunities

Investing.com -- Goldman Sachs analysts weighed in on the debate of whether investors should "buy the dip" or "sell the rip" during market volatility, suggesting that historical trends support using selloffs as buying opportunities.

Global equities experienced a drawdown in August and have remained volatile since. According to Goldman Sachs, while equity drawdowns can pose risks, they also offer potential opportunities for savvy investors.

"Buy the dip" has been a successful strategy since the Global Financial Crisis (GFC), says the bank, especially when equities have seen corrections of 10% or more.

Goldman Sachs notes that "the average subsequent returns from simply buying the S&P 500 after a 10%+ dip were higher than the average since 2010," making it a reliable short-term strategy.

However, they caution that over longer time horizons, relying solely on this approach may lead investors to miss out on strong returns during periods without drawdowns.

"5-year returns suggest that by just buying the dips investors missed out on some very strong return periods without any drawdowns," they wrote. "Still, the success of 'buy the dip' also meant that strategies selling insurance on equities, such as put selling, had strong risk-adjusted returns."

Furthermore, the investment bank highlights that elevated valuations, mixed macro momentum, and rising policy uncertainty pose risks to future equity returns.

Nonetheless, they emphasize that "the risk of a bear market remains low with relatively low recession risk," supported by a healthy private sector and central bank easing.

For now, Goldman Sachs believes that while there may be further equity drawdowns, these could present valuable buying opportunities for investors. However, they suggest maintaining a balanced approach and using options hedging strategies to navigate potential volatility in the months ahead.

"While 60/40 portfolios have performed well since the summer, already dovish Fed pricing and upward pressure on term premia might mean a smaller bond buffer from here. Alternative safe havens such as Gold, Yen and CHF are likely to provide more diversification benefits," they conclude.

Source: Investing.com