Buying The Dip 🆚 Catching A Falling 🗡 Knife?

The strategy I follow while buying the dip 📉 every time & every month!

The Background!

Markets have been brutal 🔻 for last few months now. The US stock market have officially entered the bear territory. Stock markets spooked by how federal reserve is determined to control inflation through rate rises. The recent rate rise also has been spectacular and highest in the history of the US in last 30 years!

Anyhow, we are not going to discuss macro economics in this writeup – but the main focus for this piece is to delve into one popular technique while investing in stocks (whether US or anywhere in the world) which is “BUY THE DIP!” – a very popular phrase quoted by crypto fanatics and stocks traders alike!

The chart below signifies how long each bear market sustained in the last century – The data is taken form the US stocks which is the biggest market of the world providing best available data to analyze.

A bear market is a term used when an index like the S&P 500, the Dow Jones Industrial Average, or even an individual stock, has fallen 20% or more from a recent high for a sustained period of time
– BEAR MARKET

**The total number of months bear market sustained after the first instance of going down 20%**

Why the investors are loosing?

Many investors have lost 📉 a significant portion of their investment in this bear market – most of them being new to investing (specially the stocks) never knew that stocks can even go down! That’s the dilemma of new investors who enter the market in bull run. Most of them see every dip as a buying opportunity and invest every time the market or their favorite stocks fall irrespective of the reason and value of where they are investing. Remember, stock market may have came down, but it might not be cheap as yet!

Buying the dip is a very famous technique and most investors use it while the market is falling. However, there are 2 key considerations always to be kept in mind while investing into the dip – otherwise, you might be just trying to catch a falling knife!

buying the dip vs catching the falling knife

The strategy 🎯

I am a big fan of dollar cost averaging (DCA) when it comes to stock market investment – the 2 barometers I apply while investing every month with DCA are:

✅ Your investment budget
✅ Your assessment if the market is cheap or expensive based on the current economic scenario.

The first point is very important and should be the building block of your investment strategy! Regular investing is not rocket 🚀 science and just need consistency over long period of time. You need to fix a budget for investing every month specially for stock market (depending on what age you are starting at). Once you fix a budget then don’t deviate – in case market falls big time, just try to top up from some cash upfront from the next month’s investment but don’t simply overdo it. This is the biggest problem people face specially when they are starting new and get carried away by seeing a fall as if there is no tomorrow.

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Secondly, are a assessment of the market on relative terms from indicators like Price to Earning Ratio (P/E). At a basic level, P/E ratio is a way to measure how expensive a company’s shares are – it is also possible to find out the valuation of stock market index too on country level. Just to give you an idea, following is the P/E ratio of S&P 500 in last 20 years

**Historic P/E ratio of S&P500 indicating the highest number in 2009 just before the financial crash.**

There are multitude of indicators which help in analyzing if one can take position in market or a particular stock. P/E is just one of them and one should study based on their financial goals – However, if used in conjunction with other indicators, P/E provides value proposition of a particular market or stock when compared to long term trend as well as the sector and peer markets.

The reason to choose US market data is that it is the most reliable large enough data available freely in public – this can easily be replicated n your country or company of interest.

The way I invest in the US stocks is the same as mentioned above using SARWA, the robot investor platform while also taking benefit of trading opportunity their app provides for the love of $AAPL stock along with other stocks I buy for which I will upload a video on coming Sunday on the YouTube channel revealing my US stocks portfolio.

About Myself

I post 3 videos every week on my YouTube channel on the topics of productivity & personal finance specifically for expats & in general for wider Pakistani community. Besides this, I update this website / blog on weekly basis so do visit regularly for updates – To get value out of the content, please consider subscribing both the YouTube channel and the newsletter.