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When Should I Buy The Dip? Here Is A Piece Of Information That Will Help You Out

ARTICLE SOURCE: NERDWALLET

Long-term investors should not automatically assume the worst when the U.S. stock market drops. Don't sell off your investments just because the market is down. Perhaps this slump is actually a signal to "buy the dip" and take advantage of lower prices.


Meaning of 'Buy the dip'


Following the basic premise of "buy cheap, sell high," "buy the dip" is a slightly more targeted strategy to investing. Buying the dip requires two things: a significant drop in stock prices and a compelling reason to believe that prices will eventually recover. Common cases include abrupt declines in the stock price of huge corporations owing to general market anxiety rather than specific issues with the company's long-term prospects.

Concerns about a continuing epidemic, rising prices, a Russian invasion of Ukraine, and a possible hike in interest rates all contributed to a decline in the markets in the first months of 2022. To be clear, though, nobody knows when the market bottoms out, and it's never a good idea to try to time the market. However, if you are willing to invest for the long term and you know where to search, there are many possibilities to buy in equities during down periods.


When and how to 'buy the dip'

1. Look at sectors hit hardest during the sell-off

Investing in broad market index funds, which follow a broad stock market index like the S&P 500, is a tried and true strategy. However, the eleven individual sectors that make up an index like the S&P 500 are amenable to the same kind of analysis.

It may be possible to identify promising opportunities to purchase the dip by first identifying the industries experiencing the highest share price reductions and then studying the mutual funds or exchange-traded funds that track those industries.

The global pandemic severely impacted the value of certain blue-chip corporations that had been consistently profitable for years. To acquire shares of major firms at their lowest prices in years, investors should keep an eye out for drops like those.

NerdWallet cautions against this method, as most financial experts agree that low-cost index funds are the best option for most investors. If you're looking to diversify your portfolio with a single investment that is also less risky than buying individual equities, index funds may be the way to go.

2. Max out your 401(k)

Investors who have stable employment and sufficient emergency savings may be advised to contribute as much as they can to their 401(k)s during market downturns. If you increase your contributions, it's like buying more of the investments you already have at a discount. (Find out how much you can put into a 401(k) here)


Still, thanks to the drop in share prices, continuing to contribute the same amount as before will result in a greater number of shares being acquired for each dollar spent. You shouldn't stop making payments to your retirement plan just because times are tough unless you really need the extra money each month.

3. Use dollar-cost averaging

Rather than making a single, large payment to your 401(k), IRA, or other retirement savings plan at the time you deem most advantageous, consider spreading out your contributions over time. Dollar-cost averaging is a method of steadily adding to a stock portfolio through market downturns.

Dollar-cost averaging is demonstrated via 401(k)s: Over the long run, an established investment strategy involves setting aside a set amount of each paycheck and reinvesting it at set intervals. The investment strategy of dollar-cost averaging can be implemented across the board.

Limitations of buying the dip

However, there is no assurance that you will be able to purchase the stock at a low price by buying the dip. A market's low point today can be its highest point tomorrow. In other words, prices are much more affordable now than they were a few months or weeks ago, giving investors a chance to make a purchase.

Buying shares at today's lower prices could be a solid strategy for creating long-term returns if you believe share prices eventually will rise to or beyond past highs; you may just have to tolerate a few major losses before you realize them.

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