3 Reasons I’m Ignoring the Advice to ‘Buy the Dip’

  • Friends and family keeping telling me to buy more individual stock while prices are low.
  • But that advice doesn’t make sense to me — who knows if prices will go back up?
  • For me, dollar-cost averaging — or investing a set amount every month — makes more sense.

When I first started investing in the stock market during COVID, I didn’t have much of a strategy. I bought stock in a handful of random companies that I picked based on friend’s suggestions and my own loyalties as a consumer. 

Since then, I have tried to make more strategic decisions with where I invest my money, putting it less in individual stocks and more in diversified index funds. Yet, recently, it feels like everyone in my life, from friends to family members, are trying to get me to waver from that strategy and urging me to buy individual stocks that are dropping in price.

The concept 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. 

As tempting as it might be to buy the dip right now in the stock market, here are three reasons why I’m hesitant to do so. 

1. I’m not confident in this strategy

The only way to be successful as an investor who buys the dip is to have confidence that the stock will gain value in the future. But there’s a higher level risk in this strategy since the stock might continue to lose value or may never recoup its value. In those cases, you might not make back the money you invested. 

Either way, buying the dip is a strategy that involves a level of risk I don’t have the confidence, knowledge, or interest to take on. 

2. I don’t know that this is the right time to buy 

Last week I had a friend call me and tell me that now is the time to buy a particular stock that is 40% lower than it was last week. If I don’t buy now, they said, I’d lose out on a big opportunity to invest in this company.

One financial rule I made last year, in an effort to make smart moves with my money, is to not make decisions out of fear. While this friend is confident that right now is the best time to buy the stock, they could be wrong, since it’s impossible to know if a stock price will fall any lower than it currently is — or whether it will rise again. 

Even though I might miss out on buying at the right time, I care more about making financial decisions that are rooted in research, expert advice, and backed by a strategy that I worked to put together myself or worked on with a financial planner.

3. Dollar-cost averaging might make more sense 

Rather than trying to buy a stock at its lowest point, a strategy that seems to make more sense for my investing goals is dollar-cost averaging. This is the practice of making equal-sized investments in the market on a regular basis. 

For example, if there’s an

index fund

or a stock that I want to continue to invest in, I can decide to invest $100 every month. The method behind this strategy is that sometimes you’ll buy at market highs and sometimes at market lows. Over time, you’ll buy fewer shares when the prices are high and more when the prices are low. Over time, things should even out

This type of strategy relies less on trying to time the market, which isn’t something I have the knowledge or the time to do. 

Source link

About the author

Divyansh Singh

Talks about #technology #innovation #investing and #business.

View all posts

Leave a Reply

Your email address will not be published. Required fields are marked *