Buy The Dips

stock market performance graph

 

Buy the dips refers to securities such as stocks, mutual funds and exchange traded funds (ETFs).

Basically, that has to do with a strategy of buying when the market takes a dip such as when the DJIA drops 1,000 or 1,500 points in or or several trading days.

It is a way to dollar cost average into the market so that you are not paying full price for equities.

A good example of this is the sharp selloff in the major equity markets that occurred around February 2020.  The markets dropped like a rock.  Towards the end of March 2020 the markets turned around and started going back up.

I happened to feel that the market had bottomed out and would start heading back up so near the end of March 2020 I opened a Fidelity brokerage account with no money.

A couple of days after I opened my brokerage account with Fidelity I made an electronic fund transfer of $150 into my Fidelity account.

The next business day the money was available for me to start buying securities.

I made my first securities purchase on April 1, 2020.  Little did I know at that time that the market had bottomed out a few days prior to my first investment.

Buying on large dips in the market allows you to buy stocks, mutual funds and/or exchange traded funds (ETFs) at a reduced cost.  For example. say you are buying a security at $150, and this security was previously priced at $200.  You have saved 25% by not buying when the security was at $200.

Of course that does not mean that as soon as you buy the dip in the market that the securities will turn around and start going back up.  The securities can continue going down.  How far down is unknown.

If you are a long term investor, which you should be, you will continue buying as the market is dropping.  Why?  Because you are buying at a much lower price and you will rarely be buying at the top or at the bottom when using dollar cost averaging.

As a long term investor you will be holding onto the securities you buy for at least three to five years, and maybe even a lot longer.

If you buy when the market is down and five years later the market has been on a long term uptrend you will make a nice profit on your investments over that five year period if you decide to sell.

You profit from the price rising over time.  Of course there is no guarantee that the securities will be rising before you sell.  The market could be on a long term downtrend instead of an uptrend.

The biggest mistake I have seen people make with their investments is selling when the market is down instead of holding on to their  investments.  They panic and sell when the market is at or near the bottom.

I was working at a mutual fund company in a huge call center many years ago.  My largest transaction was a seven figure sell transaction when the market was down.

Had this investor held onto their investment for another year or two they would have likely been able to sell their mutual fund at a higher price.  However, this investor was 72 years old so preservation of capital was a top priority.

If the market is in a downtrend it is hard for investors to want to continue investing.  This is normal because nobody wants to own securities that keep on decreasing in value.

What you have to do is think long term rather than short term.  If you have a five to ten year investing time horizon and if you are young you can stick it out much easier than someone that only has a few years until they are going to retire.

Invest on a regular basis

Don’t just buy on the the dip.  If you invest on a regular basis rather than only buying on market dips you are likely to come out ahead because you are investing consistently rather than waiting for large dips in the market to occur.

Use caution if your investment strategy is buying the dip when a security drops by a certain percentage.  Yes, stocks have always gone back up but there is no guarantee that this will continue to happen.

Please leave a comment below.

Happy investing.

Jim Juris Signature

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