By Lee Sherman
Most financial advisors will tell you to take the long view with your investment strategy, and staying the course is sage advice that typically results in significant dividends. Instead of trying to “time the market” (which is impossible), you invest in blue-chip stocks, bonds, and mutual funds and let time and the power of compound interest run their course.
But there’s another school of thought that suggests that you should “buy the dips,” which means paying closer attention to market corrections and investing in bear markets, like the one created by the stock market crash in 1929 that preceded the Great Depression. Buy low and sell high is another central tenet of investing.
According to Investopedia, “buy the dips” means you should purchase an asset (like a stock, bond or mutual fund) only after it drops in price. Consider the lower price a bargain since the investment should rise in value over time. However, keep in mind that there’s no way to know whether an individual asset will rise or fall.
Buy the dips has become an internet meme and the favored investing strategy of TikTok influencers and the denizens of Reddit’s Wall Street Bets forum, but it’s wise to be cautious about any get-rich-quick scheme. So, is this a fad or a helpful way to grow your wealth?
Historically, the stock market goes through boom periods (a bull market) and bust periods (a bear market). Bull markets regularly follow significant dips. Taking a long position on a particular stock means you expect it to rise in value, and buying on the dips is known as averaging down, which also involves purchasing additional shares after the price has dropped further, resulting in a lower net average price.
A Risky Business
Buying the dips is a risky investment strategy. As an individual investor, you have no way to know whether a lower price is a temporary blip or an indication of the asset’s actual value. Sure, you can do your own research, which will help to limit the risk, but that might not be enough. Your financial advisor can help, but not all advisors believe in averaging down. Some see it as cost-effective, while others think it is doomed to failure. Many have lost their shirts with this approach, so you’ll want to make sure you’ve got the money to dabble. One way to limit this risk is to establish a hypothetical price whereby you are ready to cut your losses. If an asset dips below this price, you sell without waiting for it to rise or perhaps decline even further.
According to many advisors, the less risk-averse should consider dollar-cost averaging instead. With this approach, instead of investing in an asset all at once, you make smaller payments periodically at regular intervals regardless of the asset’s price. This is less volatile and much less work than trying to time the market.
Only your financial advisor can tell you whether this strategy makes sense for your portfolio. As always, past performance is the best indicator of future success, so look at the market’s historical performance before coming to a decision.
Lee Sherman contributes to MyPerfectFinancialAdvisor, the premier matchmaker between investors and advisors. Lee is an experienced journalist and editor with over 30 years of expertise with a significant history of writing in the personal finance and technology arenas.
