Here, we are not giving financial advice, but this blog provides a great platform to share ideas and discuss experiences. One of the many back and forth that are debated is whether or not to invoke the buy the dip strategy versus the typical dollar cost averaging. But there is an in-between that we should not overlook. If you have a dollar cost averaging strategy, consider integrating a buy the dip and hold strategy.
Dollar Cost Averaging
To quickly summarize, dollar cost averaging is an investment strategy where the investor invests the same amount across a set period of time. For example, investing the same amount each month regardless of whether or not the price of the stock increases or decreases. This can reduce the impact of volatility on the overall purchase.
With dollar cost averaging, you are not buying an asset when it is on one end of the spectrum, high or low. Here, the attempt is to control volatility as it averages out over the period of your purchase. Dollar cost averaging works very well, as the market is expected to go up over the long run. Further, dollar cost averaging echos the mantra of “it is not timing the market, it is time in the market.” But what about buying the dip?
Buy The Dip
Unlike dollar cost averaging, buy the dip is the purchasing of an asset only after it has dropped in price. Here, the general belief is that the new low price is a bargain. Therefore, profits will be gained as the asset price increases over time. This strategy is the classic buy low and sell high.
If you are employing buy the dip, your threshold for the dip is important. If your threshold is a 5% drop in prices, you may potentially miss a 4% drop in price followed by a 10% increase. A second issue with buy the dip is that you are essentially trying to time the market. Not many are successful at this. In fact, overtime, you are proven to fail. It is really difficult to know when a market has hit the bottom of its fall.
While there are drawbacks with buy the dip, if you do your research and are lucky, buy the dip can be very lucrative. This is especially true in a bull market or a fast recovery following a significant drop in the market. In view of the pandemic drop in 2020 and the recent bull run, no wonder this strategy is so popular.
Buy The Dip And Hold
There is another option besides dollar cost averaging and buying the dip. You may buy the dip and hold. If you have a dollar cost averaging strategy, it may be wise to integrate a mini buy the dip strategy. Meaning, if you invest $500 each month on the 1st of the month, consider having a date range from the 1st to the 5th to invest. In that 5 day period, invest when the market is down. If this strategy is repeated over time, the incremental gains that you may obtain could add up to be of substantial benefit. A half of a percent gain here, a third of a percent gain there for twenty to thirty years. This could be the difference between living on a budget and financial independence.
Conclusion
Here, we are not giving financial advice, but this blog provides a great platform to share ideas and discuss experiences. One of the many back and forth that are debated is whether or not to invoke the buy the dip strategy versus the typical dollar cost averaging. But there is an in-between that we should not overlook. If you have a dollar cost averaging strategy, consider integrating a buy the dip and hold strategy.
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