The jargon’s drifting up from the financial district again.
“Buy the dip”, they’re shouting.
“Don’t grab a falling knife,” they’re hollering.
Who are these people? And what the hell does it mean?
It means they don’t want to buy a plunging stock before it hits the ground. The knife in this metaphor is the stock, and if you grab it in mid-air, you might cut your hand. But if you wait for it to clatter on the kitchen floor, you can safely pick it up by the handle and get back to chopping broccoli.
Don’t grab a falling knife, but when will it stop falling?
Here’s why this isn’t useful advice for the average investor: We don’t know where the floor of this hypothetical kitchen is. When will the knife stop falling? It’s anyone’s guess. Money managers have to avoid the plunging knife because that’s their job. In the words of Rob Carrick: “Professional money managers live in a different world than individual investors. They’re constantly accountable for their work and thus have to be more reactive to market events.”
Those of us looking for long-term returns may be wise to just stick to the plan, buy index funds, and Dollar Cost Average for life. (Aside: When you’re looking for a place to live, ensure the kitchen has a floor. #winning)
Don’t grab a falling knife, but do grab small knives every single day
What we do know is this: If a stock is dropping in value, and if history suggests it will eventually regain that value and then some, it’s a good deal. So if you’re in it for the long haul and have a suitably balanced portfolio, leave the knife talk to the chefs and traders. Buy low, sell high. It’s just common sense.
