Should You Buy the Dip? What Advisors Say

The familiar advice of “buy low, sell high” makes buying the dip during market drops sound appealing, but in reality, this approach often carries more risk and complexity than it appears.

In this article, we’ll break down what it really means to “buy the dip,” the potential strategies and mistakes to be aware of, and how to decide whether this approach makes sense for your financial goals. To round out the discussion, we’ll share insights from seasoned financial advisors on how they view this strategy and the lessons investors can learn from past downturns.

What It Means to Buy the Dip

“Buy the dip” refers to an investment approach where investors purchase assets when their prices fall, typically during a market downturn or after a period of weak performance by a particular stock. The idea is straightforward: buy at a discount now with the expectation that the price will rebound later, creating an opportunity for profit.

For example, imagine a major event occurs in the U.S. that temporarily drags down the share price of a large, blue-chip company. An investor might see this as a chance to purchase shares at a lower cost, believing the decline was driven by external factors rather than the company’s fundamentals. If the stock recovers to its previous levels or grows further, the investor stands to benefit.

While the concept sounds simple, putting it into practice is more complicated. “Market downturns can be an opportunity to buy quality assets at a discount. But frankly, trying to time the exact bottom of a downturn is impossible,” notes Andrew Matz, financial planner at Oak Road Wealth Management. “Be prepared for the market to continue to decline even after you buy,” he says.

Risks of Buying the Dip

Buying discounted assets may result in profits, but it can also be dangerous to your portfolio. There are several important risks you should keep in mind before buying the dip:

1. Continued Decline in Value

An asset purchased at a discount isn’t guaranteed to rebound quickly. In fact, prices may continue to slide for months or even years, making it very difficult to catch the bottom.

“The greatest error that I can perceive is to attempt to time the market too accurately,” says Paul Ferrara, CIM^®, Senior Wealth Counsellor at Avenue Investment Management. Investors often “leap in and out, trying to get the best dip,” but this can lead to poorly timed trades and lossess. Ferrara highlights that this risk is reduced by following a well-designed plan with clearly defined entry and exit points.

2. Overlooking Your Time Horizon

Your time horizon, or the amount of time you have before reaching a financial goal, plays a major role in the sensibility of buying the dip. Purchasing a declining asset may be manageable if you have years to wait, but it can be risky if you need to sell before it rebounds. “Time is the great healer of portfolios; the longer your time horizon, the more volatility you can afford to endure,” says Matz.

3. Value Traps

Not every stock that falls in price is destined to recover. Declines can also signal structural or organizational issues, such as:

• Poor company management.
• Shrinking market share or increased competition.
• Unsustainable debt.
• Broader market or economic pressures.

Without thorough research, what looks like a bargain may turn out to be a trap that erodes your investment returns.

4. Emotional or Impulsive Decisions

Market downturns drum up both fear or excitement, which can lead to rash choices. Fear of missing out (FOMO) may push investors to buy too soon, while anxiety might cause them to sell too quickly. Before acting, it’s crucial to slow down, weigh the risks and rewards, and consult with a financial advisor if needed.

What to Consider Before Buying

If you decide that buying during a downturn fits your goals, how you approach it matters just as much as the decision itself. Financial advisors often point to a few strategies that can help investors navigate volatility without relying on perfect timing:

Dollar Cost Averaging (DCA)

“Dollar-cost averaging is the most common approach and involves investing a fixed amount at regular intervals,” explains Matz. He compares it to grocery shopping: “If you go to the store every week and buy $20 worth of apples, you’ll naturally get more apples when they’re on sale and fewer when they’re expensive.” By applying this same logic to investing, you accumulate more shares when prices are lower and fewer when they’re high, smoothing out the impact of market swings over time.

Rebalancing

Rebalancing is another disciplined strategy. It means periodically buying or selling assets to bring your portfolio back to its target allocation (for example, 60% stocks and 40% bonds). Matz calls this the “systematic way to ‘buy low and sell high’ without ever having to predict the future.” By trimming winners and adding to underperformers, you maintain alignment with your long-term plan while taking advantage of temporary dips.

Selective Buying of Quality Assets

Instead of trying to scoop up any stock at a discount, many advisors suggest focusing on fundamentally strong companies or funds that are briefly out of favor. This approach requires careful research to distinguish between an asset that’s temporarily discounted and one that’s declining for structural reasons.

How to Decide What’s Right for You

When you see markets or individual stocks dip, the opportunity can be enticing. But how do you decide if it fits into your goals? The answer lies both in your investment objectives and your financial capabilities.

“Begin by gauging your time horizon, which is the length of time until you need the invested funds,” says Marcus Sturdivant, financial advisor and chief compliance officer at The ABC Squared. From this, he explains that you can weigh your risk tolerance based on “the amount you could stand to lose or gain within your time horizon, and the level of wherewithal you have to fund the actual investment.”

For example, consider the following situations:

• A young investor with a 25-year retirement horizon might have the ability to tolerate short-term losses. If the market dips further after they buy, they have decades to wait for recovery.
• A near-retiree planning to use funds within the next three years faces a different scenario. A prolonged downturn could directly impact their ability to fund retirement expenses. Their shorter time horizon and lower tolerance for volatility may make it wiser to prioritize capital preservation instead.

Based on the examples above, there is no universal answer when it comes to buying the dip. Rather, you’ll need to determine what best fits your unique situation and the risk you’re comfortable shouldering.

Determining the right strategy, however, can be a difficult task. We recommend speaking with a qualified financial advisor before buying assets at a discount to ensure they fit your goals. If you need help finding a professional, this free matching tool will connect you with a vetted fiduciary professional who aligns with your needs.