Last Updated on June 10, 2025
Overview – What’s the Deal With Buying the Dip?
There are many popular sayings in the investing world, but one of the most well-known among investors and non-investors alike is arguably “Buy the dip.”
Many investment “experts” and “pundits” are quick to parrot this three-word saying, especially when bouts of volatility or prolonged decline hit financial markets, as if taking this action is a no-brainer.
While buying the dip under the right circumstances may be a smart move, it is by no means something that should always be done, regardless of the circumstances. If done carelessly, buying the dip may end up doing more harm than investors originally anticipated.
Understanding the Theory of “Buy the Dip“
Before continuing, what exactly does it mean to “buy the dip”?
While specific definitions may vary, the underlying idea remains the same: to purchase investment instruments when they experience a price decline, with the hope that they will return to their former, higher price in the future.
The “dip” comes from the idea that, when looking at the investment instrument’s price chart, there will be a distinct valley, or “dip”, before returning to its former, higher price.
The hope is that investors can acquire certain investments they want that were previously too expensive (or, in their opinion, too overpriced).
When buying the dip, investors make some implicit assumptions, namely: that the price decline of the investment they just acquired is temporary, underlying investment merit is largely unchanged, and that the price will not decline any further than it already has. We will revisit these assumptions and their implications later.
While buying the dip is commonly associated with equities, it can apply to almost any other type of investment instrument; the only “true” limitations to buying the dip are an investor’s means and creativity.
Buying the Dip, if Done Right, Has Its Merits
When carried out by an investor who knows exactly what they’re doing, buying the dip can be one of the most effective ways to significantly grow their portfolios. Why? Because, as we mentioned earlier, it can provide an opportunity to acquire some high-quality investments at very attractive prices.
For example, imagine an investor has been eyeing a certain medical equipment company for the past few months. They’ve performed their analysis and have judged it to be a company worth investing in. The only problem is that the current share price is a bit higher than what they’re willing to pay, hovering at around $100.
Fortunately, a bout of market volatility strikes, and the share price of the medical equipment company plummets to $70. Confident that this volatility will quickly subside and that the company’s underlying business strength remains unchanged, the investor chooses to buy the dip and scoops up its shares.
Once the dust has settled, the share price rebounds, and the investor now has another high-quality investment in their portfolio.
Many prospective investment opportunities catch the attention of investors and may be worth investing in, yet may currently be trading at prices they feel are beyond what they can afford or what is considered to be fair. After all, no sensible investor wants to risk overpaying.
Knowing when to buy the dip, especially during periods of volatility or down markets, can allow investors to hit these two birds with one stone.
The major caveat behind investors who successfully buy the dip is that they already have certain investments in mind that they wish to acquire, and have already performed the necessary analyses needed to support their decision that it’s worth buying.
That being said, it’s important to remember that investors have no control over how the dip will unfold, and whether prices will ever return to “normal”. No matter how detailed their analysis or how experienced they are, investors who choose to buy the dip are ultimately taking an “informed gamble.”
Investment Prices That Fall Must Rise Again, Right?
If done under the right circumstances and carried out by an investor who knows what they’re doing, buying the dip can be a highly beneficial move. But, as we stated at the start of the article, “buy the dip” isn’t always the smart move to make. Why?
We previously discussed how buying the dip entails a few major assumptions, specifically “the dip in price is only temporary” and “the price will not decline any further than it already has”. The success of buying the dip hinges on these conditions staying true; however, this won’t always be the case.
All investments experience intermittent price drops, but there is no guarantee whatsoever that these declines are temporary, or worse, won’t continue to drop. Just because prices go down doesn’t mean they will eventually return to what they previously were – that is simply what investors hope will happen.
Investors who mistakenly believe that the “dip” will always return to its former price level are in for a very rude awakening when that doesn’t happen.
A high-profile example of when the buy the dip didn’t turn out as expected is Citigroup. Throughout the 2000s, Citigroup’s stock price was consistently above $300, and at its peak was trading at more than $500. Then, the Financial Crisis happened. Investors who blindly chose to buy the dip would’ve most likely picked up shares of Citigroup, especially since it took such a heavy hit and is a major financial institution.
After all, once the dust settles, the price will return to at least $300, right? Ever since the end of the Financial Crisis and up to the time of this article’s last update, Citigroup’s stock price has never exceeded $100.
Again, buying the dip can be beneficial, but only if the implicit assumptions that investors make remain valid.
“Buy the Dip” Doesn’t Mean “Buy Indiscriminately“
Whenever they’re presented with a sale, some people have a bad habit of believing that everything on sale is worth buying. After all, something that’s currently selling for a fraction of what it usually sells for should be acquired no matter what, right?
Any sensible person knows that just because something is on sale doesn’t immediately mean it’s worth buying. A low-quality or defective item selling at a discount is, fundamentally, still low-quality or defective, no matter what price it happens to be selling at.
Some investors who buy the dip may end up falling for the same trap.
As we know, buying the dip involves making some assumptions, two of which we’ve discussed in the preceding section. Now, we have one assumption left, and that is, when buying the dip, the underlying investment merit of a given investment instrument is largely unchanged.
This final assumption is, arguably, the most important of all the ones we’ve gone over because this is the one that’s the most easily overlooked.
When faced with an opportunity to buy the dip, some investors interpret this as “buy whatever they can get their hands on.” As a result, they conveniently forget that proper investment analysis is still required and quickly go on an unrestrained buying spree without any regard for investment merit.
Investors who benefit from buying the dip do so because they are given an opportunity to acquire high-quality investments at a discount. However, they’ve done the work beforehand to ensure that whatever it is they acquire is still a strong investment.
Buying indiscriminately will only lead to investors acquiring “investments” that are not worth owning in the first place, and may add very little, if any, value to a portfolio.
Wrapping Up
“Buy the dip” is frequently lauded as a smart move for investors to make, and while it certainly has its merits, buying the dip without fully understanding what it entails can prove to be disastrous.
Assuming it’s done under the right conditions and performed by an investor who knows what they’re doing, buying the dip provides an excellent opportunity for investors to grow their portfolios by acquiring investments that were too expensive or overpriced for them. However, buying the dip means making certain assumptions, some of which may not always remain valid.
Investors who buy the dip assume that the price decline they’re currently witnessing is temporary, and that the price won’t decline any further than it already has. If these assumptions fail, then investors will simply end up buying “investments” that ultimately fail to provide the value they sought.
Additionally, buying the dip assumes that the underlying investment merit is largely unchanged. Just because a given investment is selling at an attractive price doesn’t automatically mean it’s worth scooping up, otherwise, investors may simply be getting their hands on investments that weren’t worth acquiring in the first place.
