Buy the Dip Definition: How it Works & Examples

Written by Sean GraytokUpdated: 5th Oct 2021
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What is Buy The Dip?

The phrase “buy the dip” refers to an investment philosophy of buying an asset or security that has experienced a short-term decline in price. Going long an asset after it has dropped in price can be a profitable investment strategy if the asset eventually recovers or exceeds previous price levels.

However, it is not obvious how long a given price decline may last or if the asset will ever actually recover.

This is why it’s important to allocate capital to high conviction assets you are confident in their long-term success.

Buying the dip can lower an investor’s average purchase price of an asset, which will maximize the investment returns of an appreciating asset over the long term.

>> More: Best Stocks to Buy Right Now

Buy The Dip as an Investment Philosophy

A “Buy the Dip” framework for investing depends on the investor anchoring to their trade’s top or bottom.

This quote from Ben Carlson describes the psychological roller coaster of buying the dip: “If you don’t have the intestinal fortitude to buy your high-flying stocks when they turn into low-flying stocks, you’re probably better off just owning an index fund.”

Ben explains how anchoring to the bottom makes it hard to buy more of a good stock, and anchoring to the top makes you think you’ve found a bargain.

Each of these scenarios is neither right nor wrong, and your optimal strategy depends on your investing goals.

Next, we’ll examine how the same dip in an asset impacts two investors differently.

Buy The Dip Examples

Scenario: Two investors with different purchasing histories watch bitcoin fall from $60k to $30k from April to July 2021.

Investor #1

Sam purchased 1 BTC years ago when it cost $1K and has not made any purchases since. He determined the asset was ripping too much, and he chose to wait for another “buying opportunity.”

Following the 2021 crash, Sam decided to purchase another whole BTC at 30K, a decision that significantly increased his cost-basis, but less than it would have had his second purchase been at $60K.

Sam increased his cost-basis from $1K to 31K and now owns 2 BTC at an average price of $15.5K. Sam bought the dip and significantly increased his average buy price.

Investor #2

Alex purchased 1 BTC at the April highs of $60k. He watched the asset fall 50% to $30K and elected to buy another BTC at the reduced price, determining it to be a bargain.

Alex’s decision to buy increased his cost basis from $60K to $90K, and he now owns 2 BTC at an average price of $45K. Alex bought the dip and significantly reduced his average buy price.

Sam and Alex watched the same dip happen but experienced far different emotions when executing their buy.

Psychological Factors of Buying the Dip

Few assets can make you feel the full range of emotions like bitcoin. When it moves in either direction, it feels like it’s going that way forever.

FOMO sets in on the way up, and it can be hard to pull the buy-trigger when it’s free-falling.

Bitcoin is going to have some nasty corrections in the future, just from higher levels. If it crashes from $200K to $80K and you see that as a bargain, why aren’t you buying at $50K?

It all comes back to anchoring.

If you’re a long-term believer in an asset, “waiting for a dip” can be a terrible investment strategy because it keeps your depreciating cash on the sidelines longer than it should be.

“Buy the Dip” FAQs

What does buy the dip mean?

“Buy the dip” is a phrase used to describe an investor buying an asset or security after a recent price decline. If the asset eventually recovers, the individual is awarded with more returns for taking on the risk of buying during uncertain times.

Is buying the dip a good strategy?

Buying the dip is a good strategy if you’re investing in a high-quality asset with long-term upside potential. Some assets dip and just keep falling. Buying a never-ending dip after dip will wreck your portfolio. Sometimes it’s best to cut your losers.

What does buy the dip sell the rip mean?

The phrase “buy the dip and sell the rip” essentially translates to being greedy when others are fearful and fearful when others are greedy. When others panic sell a high-quality asset for any reason, an investor with conviction in the asset can buy it on the cheap. When some time passes, and the asset starts ripping upwards, euphoria and FOMO will attract investors to buy at inflated prices. An optimal investment strategy is to take their shares at the bottom and give the shares back at the top. However, it’s impossible to know when each inflection point will occur.

What does BTFD mean in trading?

BTFD means “Buy The F****** Dip” and is used when “buy the dip” cannot accurately convey the situation’s urgency. We recommend only using BTFD when a generational buying opportunity presents itself. Studies show that a well-placed swear word can alleviate physical pain. Examples include watching your net worth get cut in half on a computer screen.

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Bottom Line: Buy the Dip Definition

Buy the Dip is really an optimized version of dollar-cost averaging. Over the long-term, buying at routine time intervals will balance out your portfolio, as you will inevitably buy at tops and at bottoms.

It will never feel like “the right time to buy.” A great time to buy an asset you’re bullish on is when it falls 30%, but it’s easier said than done.

This article is for informational purposes only. It is not intended to be investment advice.

Sean Graytok
Sean Graytok

Sean Graytok is our Co-Founder and leading expert in investing and financial management. His work has been cited in leading industry publications, such as InvestorPlace and Business Insider. Sean is interested in the people and technologies that are improving the world.