Don’t Blindly Buy The Dip

Buying the dip is not a fail-safe investment strategy. Especially, if you mindlessly buy every dip into very overvalued parts of the equity market. You will be wrong on multiple counts. You may either be buying too much, or you may be too early. And you may end up buying too much too soon. This will always lead to an irremediable situation in your portfolio as you may have gone too far, too quickly and it will be imprudent to do anything more. Your position sizing would have already reached the limit and as the stock falls further you will not know how to respond.

But, there is also another trend that is very visible. As people keep buying the dip in just a few stocks in their portfolio, they overlook the poor liquidity in the stock while buying. They fall too much in love with illiquid stocks and genuinely think they may never need to sell that stock. Often, this assumption is not well thought through and gets very badly tested as the stock dips keep following a lower top and lower bottom pattern. The investor realises that he has bought too much quantity in the wrong stock and this dawns on him too late in the day. This makes him regret the Buying the dip investment strategy he followed to buy that stock. He realises that if he goes to sell that stock, he will lose even more money as the stock may only go further down.

As luck would have it, stocks which go down from a lifetime high will take more people down than an undiscovered stock. This market needs to be viewed ultra cautiously, especially while considering such investments in super expensive, fully discovered stocks. Undiscovered stocks may be far better bets to follow a buy-the-dip strategy than fully discovered stocks. So, investors must know where they must avoid buying the dips and which stocks may be safe to buy as prices decline. Only then would their investing be safe and secure. If not, portfolios will get loaded up with the wrong stocks and these stocks will still have some distance to go further down. This is strictly avoidable in the current market context.

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