Is Buying The Dip A Good Strategy?

Buying the dip relies on markets reverting to their mean after a selloff. In theory it is not a bad strategy. However it also relies on two unknowns, which may make the strategy unprofitable.

Firstly, choosing the right entry point. Have you bought the dip? Or is the dip getting deeper?

And secondly, what caused the dip and can mean reversion be expected as this factor subsides?

Not all dips are the same and mean reversion may be clouded by other noise and factors that impact the dip. The dip could be sustained longer than expected for reasons unrelated to your rationale for buying the dip in the first place.

The challenges of "buying the dip" is well illustrated by Global Equity Markets in March: One the one side, extreme geopolitical risks could be identified as a primary causal factor for the sell off. But on the other side, commodity price inflation, supply chain disruption, rising interest rates and the threat of a recession or even stagflation, suggest the dip may be sustained.

In other words, buying the dip requires deep insight and patience.