Strategie
Buying the Dip: When It Actually Makes Sense
Key takeaways
- Buy the dip makes sense as a complement to a regular strategy, not as a replacement.
- Without a cash reserve and a clear investment horizon, buying during a downturn is risky.
- The biggest risk of buy the dip is catching a falling knife — buying into a decline that keeps going.
- Do not try to hit the exact bottom — buy gradually at multiple levels.
- The strategy works best with diversified ETFs, not with individual stocks.
"Buy the dip" is the strategy of adding to positions after their price has dropped significantly — on the assumption that the decline is temporary and the price will return higher. For globally diversified ETFs this logic has historical backing. For individual stocks, less so.
When buy the dip makes sense
The strategy works as a complement to regular DCA investing, not as a replacement for it. Conditions for sensible buying during a decline:
- You have a cash reserve outside the portfolio and you are buying from surplus
- You are buying a diversified index, not a bet on one company
- Your horizon is at least 5 years
- You are buying gradually at multiple decline levels, not everything at once
The "catching a falling knife" risk
The biggest trap with buy the dip: you buy after a 15% decline, the market keeps falling to -30%, then -50%. You spent your cash reserve too early. The solution is to spread purchases across multiple "tranches" — for example, buy after a 10% decline, add another 10% after a 20% decline, and keep the rest in reserve for 30%+.
Psychology: why people get it wrong
Buying more when the market is falling and the news is apocalyptic requires active resistance to instinct. Anyone who has not set rules in advance (at X% decline I will invest Y CZK) will either not act at all during a real downturn, or act too early and too aggressively.
Combine buy the dip with the overall strategy for what to do when the market falls — it is the same topic viewed from different angles.
FAQ
What does "buy the dip" mean?
Buying assets after their price has dropped significantly, on the assumption that the decline is temporary. For globally diversified ETFs this strategy has historical backing — every downturn so far has been overcome.
How do you buy gradually during a decline?
Split the reserved cash into tranches and buy gradually: part after a 10% decline, part after 20%, and the rest at 30%+. Do not try to hit the exact bottom — you will arrive either too late or too early.
Is buy the dip suitable for individual stocks?
Highly risky. A company can go bankrupt or stay permanently low. Buy the dip makes sense mainly for diversified indices, where the movement of the whole market is historically temporary.
How much cash should I keep for buying the dip?
Depends on the strategy, but typically 5–20% of the portfolio as dry powder for opportunities. The rest should be invested — an overly large cash position reduces returns on its own.