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When the stock market dips, there are two schools of thought among investors. The first is that you should stay away from the stock market while instability makes the shares of large-cap companies tumble from previous highs. The other school of thought is that you should “buy the dip,” picking up stocks while they’re low so you can sell them when the economy rebounds.
Neither of these approaches is “incorrect,” because no one can predict the future. You might buy a stock at its lowest possible price before it surges back to its previous high. Or, you might buy it at its highest point for the next three years, soaking a huge loss on the investment. So, should you buy the dip? Or are you better off sticking to bonds and other products?
Let’s say you’ve been eyeing shares in a tech company. Suddenly, inflation and market insecurity cause the company’s shares to dip dramatically. You’re certain the stock is being undervalued by investors, so you buy it while it’s “on sale,” essentially netting yourself a ground-floor buy-in on a stock you think will go to the moon.
If you’re right, you stand to gain quite a bit of money. If you’re wrong, you could lose most–if not all–of your investment. Should you buy the dip? That depends entirely on your personal tolerance for risky investments in your portfolio. If you want to make a lot of money in a small period, and you can stomach some potential losses, then you might buy the dip.
On the other hand, if you’re a more conservative investor, you might have a low tolerance for risk. This is especially true of younger investors who need their money to accrue consistent interest for years so they can grow a nest egg. If you’re trying to secure your financial future, you might want to avoid buying stocks just because you think they’re low enough for you to turn a profit on them.
Instead, you could consider investing in a more secure product, like a Treasury bond. US Treasury bonds offer consistent, reliable returns on your investment, as they’re backed by the US government. Instead of betting on a company to perform well over time, you’re offering a loan to the Federal Government and waiting for them to pay you back. If you want your money to net you essentially guaranteed profit, this is the ideal investment, though you’ll naturally miss the potential upside of a huge stock swing.
