How to buy dip: 3 tips for smart investors | personal financing
The stock market has experienced a downturn recently, with Standard & Poor’s 500 Officially entering a bear market after falling more than 20% from its peak.
While recessions and bear markets can be intimidating even for the best investors, they are also one of the best buying opportunities. Stock prices are now much lower than they were a few months ago, and buying the dip can help you get more bang for your buck.
It is important, however, to have the right strategy. Here’s how to make the most of your money during an economic downturn.
1. Avoid knee reflexes
When stock prices are low, it can be tempting to buy first and ask questions later. Market dips can sometimes look like Black Friday sales, when prices are down for a limited time and you have to buy now.
To make sure you get the best deal possible, take a minute to think about your decision before buying. Can you invest now? Do you have a health emergency fund? Have you researched this inventory thoroughly?
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Downturns in the market can be great buying opportunities, but they are also one of the worst times to sell. If you buy a stock without thinking and have to sell it too soon, you may risk losing money.
2. Take a long-term approach
No one knows for sure how long this bear market will last. Some downturns, such as the crash in the early stages of the COVID-19 pandemic, are quick and stock prices recover almost immediately. Others, though, are more severe. In some cases, it can take months or even years for stock prices to fully recover.
It is smart, then, to prepare for the worst should this happen. If stocks don’t recover for months or even years, be prepared to hold on to your investment even if prices keep dropping.
You may notice a decrease in the value of your portfolio during that time, but stay focused on the long-term and try not to get caught up in the day-to-day market performance. Given enough time, the market will eventually recover.
3. Do your homework before buying
Not all companies will be able to survive an economic downturn, and depending on how long this bear market lasts, some stocks may not be able to last. It is critical, then, to ensure that you only invest in strong, long-term stocks.
The strongest stocks are from companies with healthy underlying business fundamentals. This means that the company’s finances are in good shape, it has a competent leadership team that can guide it through periods of volatility, and it has a competitive advantage in its industry for example.
The healthier a business is overall, the more likely it will recover from a market downturn. These stocks are also best to buy when prices are falling, because there is a much better chance of them bouncing back and making a big profit.
Make the most of a market downturn
Bear markets are not always easy to endure, but they can be incredible wealth building opportunities. By taking a thoughtful approach, choosing the right stocks, and holding those stocks for the long-term, you can buy low while keeping your money as safe as possible.
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