Stock Market Sell-Off: Should You Buy the Dip, or Is This Time Different?
2025 has been a highly unenjoyable roller coaster for many investors.
Monday’s sell-off pushed the Nasdaq Composite (NASDAQINDEX: ^IXIC) down over 20% from its 52-week high, while the Dow Jones Industrial Average (DJINDICES: ^DJI) and S&P 500 (SNPINDEX: ^GSPC) remain in correction territory — down 15.2% and 16.1%, respectively, from their recent highs. Since then, major benchmarks have remained volatile.
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Geopolitical tensions, tariffs, trade wars, and a potential recession are all factors driving uncertainty — and the stock market despises uncertainty.
President Donald Trump’s pressure on Federal Reserve Chair Jerome Powell to lower rates has reached a new level of hostility, with Trump openly suggesting Powell should be fired. As my colleague Matt Frankel pointed out, the independence of the Federal Reserve is a check on the U.S financial system. Keeping fiscal and monetary policy separate adds balance and is essential for maintaining global confidence in U.S. markets.
With uncertainty at its highest levels in years, investors may be wondering if now is the best time to buy the dip, or if this sell-off is different and taking a defensive approach is the better course of action.
Image source: Getty Images.
Embrace uncertainty
One of the biggest mistakes investors can make is being overly confident or assuming that certain stocks that have performed well in the past are guaranteed to continue doing so in the future. A good lesson for times like this is a quote by Mark Twain (that was also used in the opening scene of The Big Short) — “It ain’t what you don’t know that gets you into trouble. It’s what you know for sure that just ain’t so.”
No one knows how long this current sell-off will last, if the bottom is already in, if there’s far more downside, or the economic extent of tariffs. Policies could change, and the market could return to making all-time highs. Or we could find ourselves in a prolonged bear market. We simply don’t know.
What we do know is that there has never been a 20-year period in the S&P 500’s history with a negative total return. This means that, even if you bought at the top right before a big crash, you would still come out ahead over 20 years.
We also know that the average annual return in the S&P 500 from 1928 to 2024 was 8%, and the total return (with dividends reinvested) was a 10% compound annual growth rate over the last 97 years.
So if you have a multi-decade time horizon, buying stocks, whether they are falling or rising, is an excellent decision. But what about folks who don’t have that long an investment time horizon, or who are more sensitive to near-term movements in the stock market?
Focus on what you can control
Uncertainty and volatility are necessary elements in investing. As individual investors, we have the luxury of controlling where we invest our hard-earned savings and for how long, without the pressures that come with being a professional money manager. We don’t have to get caught up in the noise of a sell-off or worry about how our portfolios are doing relative to a benchmark. Ultimately, what matters most is achieving financial goals.
Achieving financial goals means being true to yourself and investing in alignment with your personal risk tolerance and time horizon. Doing that will help limit potentially regrettable investment decisions.
For example, if you are a young investor with a high risk tolerance and a multi-decade time horizon who’s saving for retirement, then buying beaten-down growth stocks on sale could be a great decision even if those stocks fall further in the near term. But if you’re a young investor who’s saving for a big purchase in the near or medium term, like a car or a house, then it may not be a good idea to try to buy stocks with the intention of selling them in less than three years.
Conversely, if you have a five-year time horizon and are nearing retirement, it could be a good idea to ensure your portfolio is balanced across value, income, and growth companies from different industries. Going full throttle by buying the dip only in growth stocks could lead to taking on more risk than necessary and jeopardizing investment objectives. Buying the dip in quality dividend stocks that have sold off, industry-leading value stocks, and growth stocks, while ensuring no single position can make or break your portfolio, could be a better way to participate in the market while resting easy at night.
Taking action to limit emotional mistakes
In the stock market, it’s important to remember that time is the best tool for compounding wealth. The longer the time horizon, the more risk can be taken. But taking on too much risk or investing in companies you don’t understand to make a quick buck is never a good idea.
Something that all investors can do, regardless of risk tolerance or time horizon, is conduct a portfolio review. When market volatility spikes, it can be helpful to focus less on the day-to-day price action and more on the reasons why you bought the stocks, exchange-traded funds, and/or index funds in your portfolio.
Another action you can take without necessarily buying or selling anything is to update investment theses for your positions. Companies that are valued more for their potential than their existing results can be especially vulnerable to selling off if investors lose confidence in their growth trajectory or fear they have to wait longer for a story to unfold. Listening to upcoming earnings calls and management commentary can shed light on vulnerabilities to trade tensions.
If a company with a strong balance sheet, manageable expenses, a good business model, and a reasonable valuation is selling off just because the broader market is going down, it could make the buy case even more compelling. If prolonged tariffs could severely affect a company’s financial health, it may be a good idea to revisit the position.
Where to go from here
There isn’t a universal “yes” or “no” answer for buying the dip. That decision comes down to what you already own, the cash you have available to invest, risk tolerance, time horizon, and your financial goals.
For some investors, now could be a great time to buy. Others may find themselves overly exposed to risk.
By understanding that there are nuances to investing, you can stay even-keeled and use volatility to your advantage, instead of getting overwhelmed when portfolio balances fall rapidly.
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Daniel Foelber has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.