I've heard that professional investors often buy into a falling market.

Can you explain why this strategy might make sense?

Asked by Kathleen

2 Answers

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Answered by John Farmer, Financial Adviser in Prescott, AZ
It's a simple process called "Dollar Cost Averaging" where you buy a falling market in small proportions. No one knows when the market will turn around. | 02.11.14 @ 21:35
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$commenter.renderDisplayableName() — {comment} | 12.11.16 @ 00:45
Answered by Steve Stanganelli , CFP®, CRPC® in Amesbury, MA
The idea behind this is 'dollar cost averaging.' This is a fancy way of saying you invest in increments over time. While sometimes you'll pay a higher price per share at other times you'll pay a lower price. So your average cost to buy in - your basis - will be lower over time.

And since your goal is to 'buy low and sell high' using this kind of technique will help you smooth out and lower your cost of getting in.

More importantly, there is the psychology behind the numbers. By having a set strategy of buying in increments you take away the emotion of what and when to buy. This way you're able to follow a course and not be distracted by the short term 'noise' in the market which can often make an investor second-guess himself.

Related to this strategy is the idea of being 'contrarian' which basically means going against the crowd. Oftentimes, investors are like lemmings and follow the crowd. Oftentimes, when the market goes down in general it pulls down an awful lot of quality stocks of companies that have sound financials.

So in this case, professional investors are essentially 'buying good companies on sale.' You may relate to this if you're the kind of person who sees an advertisement for a TV for 30% off. If the TV hasn't changed and still is highly rated by Consumer Reports, why would it not be a bargain to buy it when it's temporarily on sale. Heck, lots of folks wake up awfully early on the day after Thanksgiving to do just that.

So, consider 'buying on the dips' to get good companies on sale. | 02.12.14 @ 01:36
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$commenter.renderDisplayableName() — {comment} | 12.11.16 @ 00:45
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