What does 'buy the dip' mean?

When the stock market takes a dive, it's natural to fear losing money on your investments. However, some investors prefer to view market downturns as opportunities to purchase stocks or assets at a discount—a strategy sometimes called "buying the dip."

Before making an investment decision based on short-term market fluctuations, it's helpful to understand how buying the dip works and how it compares to other investment strategies during market volatility.

Here's what buying the dip means and what to consider before making your next move.

To buy the dip means investing in stocks or mutual funds right after prices have dropped with the expectation they'll soon rebound. It's based on the belief that the stock market’s long-term uptrend will continue and that market declines offer you a temporary chance to get shares of an otherwise strong company at a lower price and then profit from their regained value when the market rises again. While the stock market historically has risen over time, past performance is not a guarantee of future results for the stock market or individual companies.

An investor typically starts tracking a fund or stock they think has strong long-term potential. When the market drops 10%, that stock's price may drop with it. If the investor has extra cash they won't need soon and they're comfortable with the risks involved, they may choose to buy shares during the dip in price. If the stock price recovers, they've added a strong performer to their portfolio at a discount.

However, the market has no guarantees. Some price declines are short-lived, but others can take years to recover—or not come back at all. The strategy of buying the dip has risks. While it may make sense for certain investors in particular situations, it's critical to know whether buying the dip fits into your overall financial plan and aligns with your risk tolerance and long-term goals.

Market downturns refer to periods when overall stock prices are falling, while market volatility describes rapid and unpredictable swings, both are considered normal when investing. Some investors think a sharp price drop may signal that it's the right time to buy because of the potential benefit if the market rebounds. But this strategy is a form of timing the market—an attempt to predict future market movements to buy at the lowest point and sell at the highest point—by trying to pin down when a price is at a low before the volatility shifts and takes it upward again. It's very difficult to get right, even for experienced investors.

Investors often watch for specific milestones to determine how severe a downturn is and what it may mean for stock prices.

These markers can give investors some context for current market conditions, but other factors—such as economic uncertainty, geopolitical tensions or a widespread disaster—also can affect investor confidence and drive market declines.

For example, during the COVID-19 pandemic in mid-2020, the market fell nearly 20% but recovered in just a few months. However, it took more than five years for the market to fully recover from the 2008 Great Recession. In both cases, the initial dip may have seemed like a prime buying opportunity, but the timelines and outcomes were very different.

Like any investment strategy, buying the dip has potential upsides but also clear risks. Before deciding if this approach fits your financial plan, consider the advantages and drawbacks of buying the dip.

Pros of buying the dip:

• You may be able to lower your cost per share. Buying during a downturn can reduce the average price you pay for an investment, especially if you purchased it at higher levels in the past.
• It can feel like an opportunity to buy low. For some investors with a long-term view, market dips may feel like a temporary discount on investments they already believe in.
• You're putting extra cash to work. If you have funds you don't need in the short term, a dip may seem like a good time to invest these dollars.
• You may benefit if the market rebounds quickly. Buying during the dip sometimes can lead to gains if the market turns around soon after.

Cons of buying the dip:

• Catching a falling knife idiom. Refers to buying a stock or fund that looks cheap today but may continue falling in value, risking further losses.
• You can't know if you're buying at the bottom. What seems like a good deal at the time may not look that way in hindsight if prices continue to fall before stabilizing. This can compound if you start second-guessing and let regret or uncertainty drive your financial decisions.
• It can be hard to separate logic from emotion. Fear of missing out, panic-selling and overconfidence can lead to emotional decision-making during periods of market volatility.
• You may end up overexposed. You may throw off your portfolio's balance if you add heavily to one particular investment or sector during a dip.

Many financial professionals encourage long-term planning over short-term predictions. If you're thinking about making a move during a downturn, it may be worth stepping back to consider whether the dip you're seeing is part of normal market volatility or something more.

With dollar-cost averaging, you invest a fixed amount of money regularly regardless of what the market is doing.

Instead of trying to time stock purchases around market highs and lows for potentially big short-term gains, dollar-cost averaging relies on consistency and time to build in long-term growth. This can help protect your savings in a down market and reduce some of the outside pressure to make the right move at exactly the right time.

For example, rather than trying to time the market with a single $6,000 investment, an investor who uses dollar-cost averaging instead might invest $500 per month over a year (also totaling $6,000). This approach spreads out both the risk and reward as market fluctuations play out over a long time rather than affecting the entire investment at once.

Dollar-cost averaging works for many investors because:

• It removes much of the guesswork and emotion from investing.
• It helps establish a consistent investing habit.
• It naturally can lead to buying more shares when prices are low and fewer when they're high, without trying to time the market.
• It can help you stay engaged in the market, even during downturns.

For long-term investors, this type of steady, repeatable, set-it-and-forget-it approach may be a dependable long-term strategy that aligns with your financial plans.