How To Buy the Dip: Tips and Strategies For Success

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“Buying the dip” is a strategy that involves purchasing securities after their prices drop in the expectation that they will recover. It is the first half of the buy low, sell high concept, which is the central thesis of successful investing. 

What Does ‘Buy the Dip’ Mean?

Buying the dip means taking advantage of what an investor believes will be a temporary drop in a healthy stock’s price. 

Basic Concept

The concept could apply to virtually any asset, including stocks, real estate or crypto. Any number of factors can temporarily force down an asset’s price, and those who buy when the price is at or near the bottom essentially purchase the asset at a discount. Then, they can sell it for a profit or hold it for continued appreciation if the price recovers — but that’s a big if. 

Historical Context

While buying the dip usually involves taking advantage of modest price drops, significant recent downturns gave investors once-in-a-lifetime opportunities to buy at the bottom. 

• When the housing market imploded in 2008, real estate investors were able to secure steep discounts on distressed or foreclosed properties, which became valuable assets after the market rebounded. 
• The Dow lost 37% of its value between Feb. 12 and March 23, 2020, as the COVID-19 pandemic created widespread panic and a historic market selloff. Those who bought the dip enjoyed nearly unprecedented discounts and then rapid appreciation as the market quickly recovered.

However, timing the market is notoriously difficult and spotting the low point before the recovery — if there is to be one — is much easier said than done. For example, Sears was a retail giant that spent a half-century as an S&P 500 stalwart — just like Amazon and Walmart today — before e-commerce rendered its business model obsolete. 

• As the company’s fortunes foundered, its share price fell from nearly $40 in May 2015 to just over $19 in July. 
• Investors bought what they thought was the dip and the stock price rose to nearly $24 — but Sears had much, much farther to fall. They hadn’t bought the dip. They bought a lemon.
• The company declared bankruptcy shortly thereafter, its share prices cratered and Sears closed out the 2010s as a penny stock. It currently trades at less than $0.03 per share after losing 99.97% of its overall value.

When to ‘Buy the Dip’

When it comes to buying the dip, “when” is the question that matters most — timing, after all, is the key to timing the market. 

Market Indicators

Anything from presidential tariff threats to spiking gas prices to a terrorist attack in a far-off country can trigger a temporary market decline.  Modest downturns are a regular and necessary part of the market cycle. One might last a few days or even just a few hours.

The trick — which few are able to master with any regularity — is to identify overreactions to an otherwise strong market based on your own assessment of economic fundamentals. But beware — if you get it wrong, the “dip” you buy could be just the start of a major downturn or full-on recession that leaves you holding a stock in freefall.

Company-Specific Factors

Indicators can reveal when the market as a whole overreacts but is otherwise strong — and the same goes for individual companies. 

• A single underwhelming earnings report can trigger a brief panic selloff of a company that is fundamentally sound, offering the opportunity to buy a dip. 
• In other cases, poor performance of an industry leader can drag down an entire sector. For example, a Walmart selloff could pull fellow retail stocks into a slump, opening the door to buy a dip for a company like Target. 
• Other times, legitimate headwinds can spur an undue lack of confidence in a company that has overcome worse before. For example, in January, Apple shares fell by 3% when the company revealed that competition from China created a slump in iPhone sales. That opened a window for investors to buy at a discount — as long as their analysis convinced them that Apple was a strong company experiencing a temporary setback and not the next Sears.

How to ‘Buy the Dip’

If you decide that the strategy is right for you, follow these steps to increase your chances of success when buying the dip. 

Steps to Take

1. Keep cash in your brokerage account so you can pounce on temporary downturns when the opportunity arises so you don’t miss your moment waiting for funds to settle or clear.
2. Conduct thorough research on several companies or funds that interest you and track their price movements so you can spot a dip when one appears — never act spontaneously, be driven by emotion or follow the bandwagon to a stock you didn’t analyze and vet.  
3. Set investment goals and limits, and determine how much you’re willing to lose should you fail to time the market correctly, which is often the case. 
4. Be aware of common dip-triggers like earnings reports and tune in when they happen.
5. Diversify your portfolio as a hedge against losses due to a miscalculation. 

Tools and Resources

It’s crucial to conduct thorough research and analysis before executing a trade, particularly with a strategy as risky as buying the dip. That means poring over financial news about the companies you’re considering from a variety of reputable, credible sources like Forbes, Kiplinger and the Financial Times — but never take their word as gospel or use it as a substitute for doing your own research.  

Wise investors also lean on stock analysis tools, which most brokerages offer for free with their platforms. Those who want a deeper dive might consider subscription-based services, like those from trusted brands like Morningstar, Bloomberg and Zacks.

Risks and Considerations

Buying the dip is a potentially profitable strategy, but one that comes with significant risks that many investors would be better off avoiding. 

Potential Pitfalls

“Catching a falling knife” is an idiom used to describe buying a stock that is losing value. It alludes to the risk of trying to wrestle a potentially dangerous falling security away from the forces of financial gravity. Investors who misjudge could find themselves with a nasty wound caused by stagnation or further decline. 

They can also overextend their resources and pour money they can’t afford to lose into a dangerous stock trade that has a high probability of failure.

Risk Management Strategies

Stop-loss orders can be a powerful tool for mitigating risk and capping potential losses. They trigger an automatic sell when a security reaches a predetermined price.

It’s also important to allocate only a limited portion of your funds to risky strategies like buying the dip, which should be done only with money you can afford to lose.

Alternatives to ‘Buying the Dip’

Unless you’re an expert with access to sophisticated trading tools and resources, you might consider safer strategies for long-term investing success.

Dollar-Cost Averaging

Dollar-cost averaging is a tried-and-true method for reducing short-term market volatility for long-term investors. The strategy involves contributing a fixed amount of money on a set schedule — adding $100 to an S&P 500 ETF every other Tuesday, for example. This guarantees you’ll buy less of a stock or fund when it’s expensive and more when it’s cheap, which is a good outcome for consumers and investors alike.

Value Investing

Warren Buffett is the most famous and successful stock-picker in history — and the Oracle of Omaha is a value investor. Instead of trying to time the market and buy the dip, investors like Buffett analyze stocks to identify those they believe are selling for less than they’re worth as part of a long-term investment horizon.

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