How to Buy the Dip: 3 Tips for Smart Investors
The stock market has taken a tumble lately, with the S&P 500 officially entering a bear market after falling more than 20% from its peak.
While downturns and bear markets can be intimidating to even the best investors, they're also one of the best opportunities to buy. Stock prices are significantly lower now than they were a few months ago, and buying the dip can help you get more bang for your buck.
It's important, though, to have the right strategy. Here's how to make the most of your money during a downturn.
1. Avoid knee-jerk reactions
When stock prices are down, it can be tempting to buy first and ask questions later. Market dips can sometimes feel like Black Friday sales, when prices are slashed for a limited time and you have to buy right now.
To make sure you're getting the best deal possible, though, take a moment to think through your decision before you buy. Can you afford to invest right now? Do you have a healthy emergency fund? Have you researched this stock thoroughly?
Market downturns can be fantastic buying opportunities, but they're also one of the worst times to sell. If you buy a stock without thinking and end up having to sell it soon after, you could risk losing money.
2. Take a long-term approach
Nobody knows for certain 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 could take months or even years for stock prices to fully recover.
It's smart, then, to brace yourself for the worst just in case. If stocks don't recover for months or even years, be prepared to hold your investments even if prices continue falling.
You may see your portfolio drop in value during that time, but stay focused on the long term and try not to get too caught up in the market's day-to-day performance. Given enough time, the market will recover eventually.
3. Do your homework before you buy
Not all companies will be able to survive an economic downturn, and depending on how long this bear market lasts, some stocks may not pull through. It's critical, then, to ensure you're only investing 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 the overall business, the more likely it is to recover from market downturns. These stocks are also the best to buy when prices are down, because there's a much better chance that they'll bounce back and you'll make a hefty profit.
Making the most of a market downturn
Bear markets are not always easy to stomach, 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 the dip while keeping your money as safe as possible.
This article was written by Katie Brockman from The Motley Fool and was legally licensed through the Industry Dive Content Marketplace. Please direct all licensing questions to legal@industrydive.com.
