The dream of any investor is naturally to buy a stock when it’s at its lowest price, only for it to rocket up to unseen heights, generating huge amounts of profit along the way. But is this dream realistic, and is it how the best investors make their money? Let’s find out.
If you try to buy on the dip, you’re essentially trying to buy a stock, bond, or fund after it’s fallen in value. Negative media attention, poor revenue numbers, or perhaps the result of a broader stock market decline can cause this.
Theoretically, if you manage to buy in the dip, you stand to make a lot of cash. Looking back with the benefit of hindsight, it’s easy to see where these opportunities presented themselves, but it’s much more difficult than it seems to apply these learnings properly in the future.
We believe that trying to perfectly time when you buy into the market is a strategy inferior to buying and holding for the long term.
Most investors, many of which are professional, try and fail to time the market – even with a wealth of information and experience available to them. The fact is, it’s very, very difficult to process all the relevant information and sentiment that can determine whether or not a stock will decline or increase in price over the next day or so.
“When an investor focuses on short-term investments, he or she is observing the variability of the portfolio, not the returns – in short, being fooled by randomness.” - Nassim Nicholas Taleb, Trader and Risk Analyst
A much better strategy is to focus on long-term holdings. The evidence shows that stock markets have increased overall for the past 80 years. Why would you try to buy and sell over the course of a day when you could simply sit back and watch your holdings increase over time?
The more time you spend trying to buy the dip, the less time your money will actually be in the market earning you a return.
Of course, if there comes a time when you spot an opportunity, and you’ve already got your buy and hold strategy in play, you could add some stock to your portfolio by taking advantage of what you perceive to be a low price.
We believe, however, that the best way to go about investing is to invest regular, small amounts of cash each month into your chosen holdings. This means that some months you will buy high, will others you will buy low.
Over time, you’ll ensure that you are buying the average price of the stocks, meaning you are making sure you are paying a fair price for them.