According to Bufett it is next to impossible to go wrong when you invest in the dip because the stock market always recovers. – The rationale behind buying the dip is that it’s common during a downtrend and and higher prices usually follow these.
However, there is a risk that when an uptrend ends, prices could dramatically go lower and take a long time to recover.
A. The Advantages of Buying the Dip
1. When you buy the dip, you purchase a good asset when its price drops because you believe it will rebound and bring future profits.
2. Thus, buying the dip is most useful when you are the buy-and-hold type or a long-term investor and exemplified in the following approaches:
A. Value Investing in this approach, you buy stocks that you believe are underpriced or are trading below their company’s intrinsic worth. While you can buy the stock at any time, you prefer to wait for its price to dip so you can purchase them at a better bargain.
B. SIP Mode – in this approach, you buy shares at set intervals to average out the volatility and cost of the stock. If the stock is on a downtrend, you will be buying the dip at the said intervals. Continuously buying the dip is called averaging down, and this happens when you keep on buying stocks that are on the downtrend to realize profits sooner
Advantage of buy when market down. For long term perspective.
However, this is not a fail-proof strategy, considering other factors such as your time horizon as some assets may take a long time to recover. – The Disadvantages of Buying the Dip One of the most significant risks in buying the dip is that the asset price will not increase again or take a very long time to recover.
When this happens, a trader may get stuck in his position or take a significant loss when he decides to exit the market, especially if he has been averaging down. Another risk when buying the dip is that there is no surefire way to distinguish if the decreasing price of the asset is a temporary drop or a sign that prices are about to go much lower.
Disclaimer this for education purpose. Thanks for reading