The idea of "buying the dip" simply means purchasing a stock (or any asset) after the price has dropped, with the hope that over time, the price will rise again and your assets will increase in value. Buying at dip in the stock market proves to be a successful strategy for long term investors who wants to hold the quality stocks at right price. Warren Buffett is one of the many success stories of averaging. The basis of this strategy is that the market recovers over a period of time.
Investors who buy at dip are looking to purchase a stock when it has fallen from its recent peak. They assume that the price decline is temporary and the fall is an opportunity to buy shares at a discount price. Investors who buy the dip have already hold the shares of a company whose price has declined from a recent high. Investors buying at dip generally are looking to build a larger position in a stock, and use temporary price decline to increase their holdings. Those who buy the dip expect the stock’s price to bounce back. As the investor buys more shares of a stock they already hold during a dip, they “average down” to lower the net average price of their position in the stock.
Factors that play an important factor are Time Horizon and Risk Tolerance.
Time Horizon – The investment time horizon is probably the most important factor in determining whether you should buy into the bear market of 2022. If you have the capacity and appetite of bearing any additional potential losses, then, buying the dip is likely a good strategy to play.
Risk Tolerance – Investor’s risk tolerance is another factor that may even outweigh the profit potential of the current bear market. If you’ve already lost money in this market and fear losing more, then buying more may not be a successful strategy for you. Although if you are a patient investor, then the buying the dip will prove to be a successful strategy if the company is fundamentallly sound.
Remember the crash of March 2020, all investors have seen their investments crumble to pieces. Investors who held strong with their investment and took the crash as buying opportunity have seen their returns over the year like never before. A healthy risk appetite along with some solid research will help to navigate the market volatility.
Timing the Market
Buying the dip is an attempt to time the market. To buy the dip, an investor sets a threshold for a price decline and saves cash in the interim. To make this strategy successful, it’s important to establish some investing rules:
- Be disciplined about the price decline.
- Monitor the stock movement. When a stock price continues to fall, reaching a lower low with each consecutive decline, the stock is in a downtrend and will make the investors lose more money.
- Know your biases. You need to understand the psychological and emotional biases that may influence your investment decisions.
Buying the dip: Always Good for investors in Long Term
By its nature, averaging is a long-term strategy primarily. It may increase losses in the short term if the bearish trend persists for a long period but once the market recovers, the gain will be exponential. Buying the dip is not a simple trading strategy and should be cautiously approached. Done right, you can have stocks with sound fundamentals and strong prospects at high discount. Picking the wrong/weak stocks at dip will double your losses and make it impossible to recover. Quality companies built for the long-term with strong business models and healthy balance sheets stand a better chance of weathering the bear market environment than a company whose business fundamentals are weak.
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