Is your plan to buy on the dip? What does that mean?
Doing What When
Buy the dips means purchasing an asset after it has dropped in price. The idea is to buy just after a price decline, assumedly with the expectation, or hope, that the decline is temporary and the stock will subsequently, or more hopefully shortly, increase.
Not Knowing
Of coourse, when a stock declines, there is no guarantee it will thereafter go up. So “buying the dip” is a market timing activity. I will admit that I sometimes have engaged in this kind of activity; I supposed many also have so. It seems like a good reason (or an excuse) to buy something I was planning to buy nonetheless.
Timing?
When prices pullback for a broad range of stocks, it would seem that the general sentiment is not specific to one industry, sector, or particular company. As a result, sensing the general mood regarding the reasons for the selloff might indicate how deep the decline might be. In addition, “Buying the dips tends to work better with assets that are in uptrends.”
As investing plans go, buying the dip is not the worst thing one can do. In fact, it is sometimes successful.
The Truth
While many exhort to avoid market timing, and buying the dip a market timing-type activity, most buying is a form of market timing.
Time
One of the more obvious observations about buying the dip, or transacting based on any signal, is that it requires one to pay close attention to the markets. One must have knowledge about the recent (and not so recent) past, current conditions, finances of the companies in question, and many other factors. As a result, it requires investing time to be aware and alert to what is happening.
So it comes down to determining what kind of investor one is. Do I want to be the kind of person who sensitive all to sorts of information about the current state of the stock markets? Or do I want to put my attention elsewhere? I like being able to take advantage of financial opportunities, and I like to know generally what is going on in the markets, but I don’t want to be a day trader or market timer. I will let others be the one who follow market trends. I prefer a less stressful day.
What are your buy signals? Let me know here.
The illustration of pumkins used as dwellings on the moon so as to be secure against wild beasts is from the 1776 volume (in Italian) “Raccolta delle cose piĆ¹ notabili vedute dal Cavaliere Wild Scull, e dal Sigr. de la Hire nel lor famoso viaggio dalla Terra alla Luna” (Suite of the most notable things seen by Cavaliere Wild Scull and Signore de la Hire on their famous voyage from the Earth to the Moon) by Filippo Morghen, an eighteenth-century draughtsman, engraver, and print-seller. Courtesy Yale University Art Gallery.
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