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:

1. Be disciplined about the price decline.
2. 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.
3. 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.

AetherReportHub, an authorized representative of AetherSync LLC (LIC No. 2429818.01). Aether Sync has made all efforts to ensure the reliability and accuracy of the views and recommendations expressed in the reports published on its website. Aether Sync's research is based on the information known to us or obtained from various sources that we believe to be reliable and accurate to the best of our knowledge.
Aether Sync provides only general financial information through its website, reports, and newsletters without considering the financial needs or investment objectives of any individual user. We strongly recommend that you seek advice from your financial planner, advisor, or stockbroker regarding the merit of each recommendation before acting on any recommendation based on your own specific financial circumstances. Please understand that not all investments will be suitable for all subscribers.
To the extent permitted by law, Aether Sync Ltd excludes all liability for any loss or damage arising from the use of this website and any information published (including any indirect or consequential loss, any data loss, or data corruption). If the law prohibits this exclusion, Aether Sync Ltd hereby limits its liability, to the extent permitted by law, to the resupply of the services.
The securities and financial products we analyze and share information on in our reports may have a product disclosure statement or other offer document associated with them. You should obtain a copy of these before making any decision about acquiring any security or product. You can refer to our Financial Services Guide for more information.