- Friends and family keep telling me to buy more individual stocks while prices are low.
- But that advice makes no sense to me: who knows if prices will go up again?
- To me, dollar cost averaging, or investing a set amount each month, makes more sense.
When I started investing in the stock market during COVID, I didn’t have much of a strategy. I bought shares in a handful of random companies that I chose based on suggestions from friends and my own loyalty as a consumer.
Since then, I’ve tried to make more strategic decisions about where I invest my money, putting it less in individual stocks and more in diversified index funds. Recently, however, I feel like everyone in my life, from friends to family, is trying to get me to abandon that strategy and urge me to buy individual stocks that are going down in price.
The concept of “buying the dip” simply means buying a stock (or any asset) after the price has dropped, hoping that over time the price will rise again and the value of your assets will increase.
As tempting as it might be to buy the dip right now in the stock market, here are three reasons why I’m hesitant to do so.
1. I don’t trust this strategy
The only way to be successful as a fall-buying investor is to have confidence that the stock will appreciate in value in the future. But there is a higher level risk in this strategy as the stock could continue to lose value or never recover its value. In those cases, you may not get back the money you invested.
Either way, buying the dip is a strategy that involves a level of risk that I don’t have the confidence, knowledge, or interest to take.
2. I don’t know if it’s the right time to buy
Last week a friend called me and told me that now is the time to buy a particular stock that is 40% lower than it was last week. If I don’t buy now, they said, I would miss out on a great opportunity to invest in this company.
A financial rule I made last year, in an effort to make smart moves with my money, is not to make decisions out of fear. While this friend is confident that now is the best time to buy stocks, he could be wrong, as it is impossible to know if a stock’s price will fall lower than it currently is, or if it will rise again.
Although I might miss out on the opportunity to buy at the right time, I care more about making financial decisions based on research, expert advice, and backed by a strategy that I worked to craft myself or worked with a financial planner.
3. Dollar Cost Averaging Might Make More Sense
Instead of trying to buy a stock at its lowest point, a strategy that seems to make the most sense for my investment goals is dollar cost averaging. This is the practice of making equal size investments in the market on a regular basis.
For example, if there is a
or a stock I want to continue investing in, I may decide to invest $100 each month. The method behind this strategy is that sometimes you will buy at market highs and other times at market lows. Over time, you’ll buy fewer shares when prices are high and more when prices are low. Over time, things should balance out
This type of strategy is less about trying to time the market, which is not something I have the knowledge or time for.