My investor friends keep telling me to 'buy the dip' while the stock market is slumping, but I'm ignoring them for 3 reasons (2024)

FAQs

Should you buy the dip in the stock market? ›

Buying the dip can lead to some positive outcomes. But there are other points to consider, including: By buying low, you can increase your chances of never paying top dollar for securities, which may also increase your potential for capital gains.

While it appears that you're losing money during a market crash, in reality, it's just your stocks losing value. For example, say you buy 10 shares of a stock priced at $100 per share, so your total account balance is $1,000. If that stock price drops to $80 per share, those shares are now only worth $800.

Buying stocks when the overall market is down can be a smart strategy if you buy the right stocks. You could pick up some blue-chip winners that will perform well in the long run. Weaker stocks that rode the market higher are better avoided.

While many experts are making predictions about whether the market will crash in 2024 or how severe the next downturn will be, it's impossible to say with certainty where stock prices will be in the short term. However, the market's long-term performance is all but guaranteed to be positive.

Since 1950, the S&P 500 index has declined by 20% or more on 12 different occasions. The average stock market price decline is -33.38% and the average length of a market crash is 342 days. However, and this part is critical, the bull markets that follow these crashes tend to be strong and last much longer.

When investors hold onto cash waiting for a dip, they miss out on potential gains from this overall upward trajectory. The primary issue with waiting for the market to dip is the opportunity cost involved. Opportunity cost refers to the potential gains that one misses out on when choosing one alternative over another.

Lack of knowledge and expertise. Investing in the stock market requires a certain level of knowledge and expertise, and many people may not have the necessary skills or experience to make informed and profitable decisions. Emotional decisions.

Where to put money during a recession. Putting money in savings accounts, money market accounts, and CDs keeps your money safe in an FDIC-insured bank account (or NCUA-insured credit union account). Alternatively, invest in the stock market with a broker. Let's go over each of these options.

No one, including the company that issued the stock, pockets the money from your declining stock price. The money reflected by changes in stock prices isn't tallied and given to some investor. The changes in price are simply an independent by-product of supply and demand and corresponding investor transactions.

Key Takeaways. While holding or moving to cash might feel good mentally and help avoid short-term stock market volatility, it is unlikely to be wise over the long term. Once you cash out a stock that's dropped in price, you move from a paper loss to an actual loss.

Should I sell my stock if it keeps going down? ›

Winning stocks increase in price for a reason, and they also tend to keep winning. Don't sell a stock just because its price decreased. Every investor wants to buy low and sell high. Selling a stock just because its price fell is literally doing the exact opposite.

If you have achieved or are nearing your financial goal

If a market correction occurs, you may not have sufficient time to recover any gains. To safeguard your profits, an early exit may be prudent. Consider reallocating your proceeds to secure avenues such as liquid funds or fixed deposits.

When the year began, many analysts saw stock gains slowing from 2023's strong pace, with the consensus seeing the S&P 500 gaining only 8% to 9% for all of 2024.

What are the best investments during a stock market? Some investments that may provide positive returns during a stock market crash can include safe-havens such as gold and the US dollar. Companies related to consumer staples also tend to rise in value, such as utility, food or pharmaceutical stocks.

The month of September has been, on average, the worst month for the stock market going back more than a century.

Advantages of Buying the Dip Strategy

Opportunity for Lower Entry Prices: Buying the dip allows investors to purchase assets at lower prices than their recent highs. It can potentially lead to higher returns when the market rebounds.

Key Takeaways. While holding or moving to cash might feel good mentally and help avoid short-term stock market volatility, it is unlikely to be wise over the long term. Once you cash out a stock that's dropped in price, you move from a paper loss to an actual loss.

But what does the data show? It shows that buying the dip underperforms dollar-cost averaging 70% of the time! This is true even though you knew exactly when the market was at the bottom between two all-time highs.

Saving is generally seen as preferable for investors with short-term financial goals, a low risk tolerance, or those in need of an emergency fund. Investing may be the best option for people who already have a rainy-day fund and are focused on longer-term financial goals or those who have a higher risk tolerance.