Buying the Dip- How to Maximize Your Returns During a Bear Market
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With the DOW, NASDAQ and Cryptocurrency Markets in free fall for 6-weeks and counting we are in a bear market. Investors who went all-in have been burned, and are bemoaning their situation. I have been one of these in the past, but after surviving and thriving through stock and cryptocurrency bear markets, I can tell you this is a golden time to make moves. How can we, the intrepid investor profit during the psychologically taxing bear market? We need to buy the dips and live through the whip-saws intelligently, and pay close attention to the technicals.
Buying the dip is a strategy employed when the market falls. An investor waits until indices, cryptocurrencies and stocks fall and then picks up the fallen assets in anticipation they will rise shortly after. A problem this presents is that an investor may go all-in at the wrong time, and end up trapped in a position underwater for an indeterminate period of time. During the cryptocurrency crash of 2017, I found myself falling into this trap. I bought dip after dip, and saw my investment principle fall lower and lower. I learned, and was able to trade during the second quarter to accumulate more assets using technical analysis. I held, and had to wait quite some time for a hearty return. Going all-in can be disastrous if done during a bear market, but can be enriching during a bull market.
What are some guidelines for buying the dip during a bear market? The first is not to dive in headfirst with everything you have all at once. No one knows when a bear market will stop plunging, and the market often has whip-saw effects as roils of buyers and sellers rush in for short-term profits. It makes sense to dip into the dip and pursue a “dollar cost average” strategy. Break up your liquid cash and invest it a little at a time weekly to capture the falling market. It can be difficult to restrain yourself from buying a savage dip, but by dollar-cost averaging over time, you can spread out your money over the volatility to profit. Volatility is your friend, but you need time in the market to make it work for you. According to studies on market timing, missing the top 10-days of the S&P 500 for the past 20-years would reduce your return by half. If you average down during a bear market, you can capture more shares and thus more return over time.
Don’t be afraid to sell off your accumulated assets for a short-term profit as the market whip-saws. During a bear market, volatility is your friend. You can always sell an asset and buy back in at lower prices. Be especially vigilant as market charts signal a head and shoulders movement for a dump or a triple bottom pattern for a bounce. Technical analysis can be especially useful during bear market conditions, so keep your eyes open to lock in profits. Bear markets offer volatility, which when mixed with regular investment creates a huge potential for gains over time. Think of this time period as a sale on a long-term asset.
Understand that as cliché as it sounds, fortunes are made during bear markets. Find the strongest assets you believe in, be it Bitcoin, the S&P 500 or whatever else and consider this a sale. The bear market is a period that plays on our fear, and remember to be greedy when others are fearful. Good luck!
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