Buying the dips is an investment strategy aimed at purchasing assets, typically stocks, when their market price decreases. This allows you to acquire stocks at a lower price, enabling you to make more money from your investments.
What is “Buying the Dips”?
Buying the dip means attempting to time your investments such that you buy stocks when their prices fall, assuming that they will continue to increase in value.
If you look at a stock chart, especially one that spans a long period of time, the lines that move up or down may appear relatively stable. In reality, stock prices fluctuate, and these straight lines include peaks and troughs. If you can buy stocks that are on an upward price trajectory after a temporary price drop, you can make a greater profit than if you had purchased them at one of their peaks.
For example, in 2020, investors could have bought shares of 3M, a multinational company known for brands like Ace and Scotch, when the company’s stock price ranged from $124.89 on March 20 to $189.48 on March 15, 2021.
Does Buying the Dips Work?
The success of buying the dips depends on your ability to predict how stock prices will change in the future. If you are confident that the stock will continue to increase in value overall, buying stocks after a price drop means you are getting a good deal. However, if you are wrong and the stocks continue to decline in value, you may have purchased the stocks near the peak, implying they might have a long way to fall.
Making investment decisions this way—attempting to buy low and sell high, instead of buying and holding for the long term—can be risky. If successful, you could earn a lot of money, but timing the market is extremely difficult and can also lead to losses. Additionally, market timing usually incurs more fees compared to long-term investing, so the extra return you achieve from active trading needs to be enough to offset those fees to be worthwhile.
How to Buy the Dips and Manage Risk
Buying the dips can be risky, according to Walter Russell, CEO of Russell & Associates. “For long-term investors, we generally recommend dollar-cost averaging. A good example of this is your 401(k) plan, where you make regular contributions. With dollar-cost averaging, you will naturally buy during dips.”
Russell noted that if you try to buy the dips and prices continue to fall, you may not see any profits on your investments for years, making it a riskier decision for investors.
But there are ways to succeed, according to Andrew Wang, managing partner at Runnymede Capital Management.
“When buying the dip in individual stocks, it’s important to identify the reason for the drop,” Wang explains. “Did the stock decline due to a broader market downturn, or is it unique to the company? Furthermore, when buying the dip, it’s important to focus on stocks that have positive fundamentals and good value. The biggest risk in buying the dip is entering a stock that will continue to decline further. You want to avoid the worst-case scenario of trying to buy the dip in a company that is heading towards bankruptcy.”
Buying the Dips vs. Dollar-Cost Averaging
An alternative to active investment strategies like trying to buy the dip is dollar-cost averaging—a popular strategy among long-term investors that removes emotions from investing.
With a dollar-cost averaging strategy, you make regular investments of equal size into the market, regardless of the price or how it fluctuates. For example, you might decide to invest $100 every month.
The idea
The idea behind dollar cost averaging is that over time, you will sometimes buy when prices are at their highest and sometimes when they are at their lowest. However, if you invest the same amount each time, you will buy fewer shares when prices are high and more shares when prices are low. This means you will naturally end up owning more shares that were bought at a good price.
The dollar cost averaging strategy is much easier than timing the market, because you don’t have to constantly monitor stock prices. All you need to do is determine the amount you want to invest and how often you want to buy shares.
Conclusion
Buying the dips is an investment strategy that relies on predicting future price movements. If you can time the market – buying shares at a low price before they rise in value – you can make a good profit. However, timing the market can be challenging, and you might end up buying stocks that continue to fall rather than being in a temporary price dip.
If you are confident in your abilities as an investor, trying to buy the dips may be worth the effort, but the simpler and more suitable strategy for most investors is dollar cost averaging.
Frequently Asked Questions (FAQs)
How can I buy the dips using cryptocurrencies?
You can buy the dips using cryptocurrencies just like you do with stocks, ETFs, or mutual funds. All you need to do is place a buy order when the price drops. The only difference is that cryptocurrencies tend to be more volatile than traditional stock markets, so they may not meet the definition of a significant dip. A 10% drop might be worth buying for stocks, for example, but it could be a moderate move for cryptocurrencies.
How do I know when I should buy the dip?
Buying the dip is ideally a very challenging task, like any strategy that relies on timing the market. Momentum indicators can help you assess the strength of price movements in either direction. Looking at long-term trends can also help. For example, if short-term relative strength indicators are oversold, and the dip occurs within a long-term uptrend, that might signal an opportunity to buy the dip.
Source: https://www.thebalancemoney.com/buying-the-dips-2536744
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