After a mid-2020 to late-2021 bull run that saw many stock prices rebound and flourish post-COVID-19 pandemic crash, the stock market is once again facing some tough times — to put it lightly. The three major stock market indexes — the S&P 500, Dow Jones, and Nasdaq Composite — are down over 21%, 14%, and 31%, respectively, year to date (as of Oct. 24).
As stock prices have continuously dropped this year, many people have been shouting from the mountaintops for investors to “buy the dip.” Buying the dip refers to buying stocks when prices have drastically fallen, and there are few better times to do so than during bear markets when stock prices are dropping across the board.
With stock prices seemingly falling daily, investors may be wondering if they should wait to invest, and the answer is simple: No.
Stay the course
One major mistake investors can make during bear markets is to stop investing because they want to wait for prices to bottom out (hit their lowest point). After all, why buy stocks today when you can get them for cheaper later, right? Logically, that makes sense. However, since nobody knows when stocks will bottom out, it becomes a case of trying to time the market — which is virtually impossible to do consistently over the long run.
The best way I’ve found to stop myself from trying to time the market is by using dollar-cost averaging. When you dollar-cost average, you set yourself on an investing schedule and stick to it regardless of what’s happening in the stock market. For example, you could decide to invest a set amount every other Friday. Whether stock prices are up, down, or stagnant, when every other Friday comes, you make your investment no matter what.
When you dollar-cost average, sometimes you’ll buy when prices are high, and sometimes you’ll buy when prices are low. What’s more important is that you remove some of the emotions from investing and remain consistent.
See the sunshine in the storm
The sooner investors learn that bear markets are inevitable (dare I say necessary), the easier it becomes to navigate them. Volatility is as much part of the stock market as stocks themselves; no bull market lasts forever, just as no bear market does. By understanding that, investors can tune out the short-term noise and keep their eyes on the long-term prize.
Short-term downturns can be a chance for investors to ramp up their investing if they have the means and go “discount” shopping. Imagine you’ve been eyeing a pair of shoes that was suddenly 20% cheaper. You wouldn’t disregard them because of the sale; if anything, you’d consider buying them even more. You can apply the same thought process to investing. If I liked a stock at $200 per share, I should love it at $160 per share.
An often-overlooked metric in investing is cost basis, which is the average price you’ve paid per share of a stock. For example, if you bought 10 shares at $100 and 10 shares at $80, your cost basis would be $90. Your cost basis determines how much you profit (or lose) when you sell a stock, so the lower, the better. Part of buying the dip is potentially lowering your cost basis, which puts you in a better long-term position.
Don’t get discouraged
Nobody likes seeing their portfolio’s value drop; that defeats the purpose of investing. However, your actions during these tough times in the stock market can either set you back or propel you closer to your financial goals. If time is on your side, there’s no need to panic and do something that goes against your long-term interest (like panic-selling or not investing when you have the means).
The best thing investors can do is understand these times are inevitable, stay consistent, and focus on the end goal.