What to know before 'buying the dip'

Downward trends in the stock market can spark an array of reactions. Some nervous investors may feel tempted to sell off tanking stocks, while others may see the downturn as a buying opportunity.

Although the former aforementioned investor wants to get out before the going gets worse, the latter group is banking on the fact that the stocks they buy now, which have declined in price, will increase in value once the market levels back out. Known as 'buying the dip,' this strategy can pan out — but it is not a sure-fire bet.

What does it mean to buy the dip?

In an ideal world, "downturns should offer stocks with strong fundamentals at reduced prices" — which goes hand in hand with the "buy low, sell high" investing strategy, said Investopedia. When investors buy the dip, they aim to make money by buying stocks when their value is down, holding them for a period of time and then selling once things are on the up and up.

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To do so effectively, however, "there are two requisites," said NerdWallet: a "sharp decline in stock prices, and a strong indication that they'll rise again." So, for instance, a better bet may be buying "when a large corporation's stock price drops suddenly due to broad market fears, rather than concerns about the company's long-term performance," said the outlet.

What are the risks of buying the dip?

While buying the dip can potentially work out, "it could be risky given it's tough to determine if the market will keep falling," said CNBC Select. You might think you are buying at the lowest point, but then "stocks could tumble even more." Even with extensive research and expertise, there are no guarantees — "even professional investors with vast resources and experience fail to time market bottoms," said Investopedia.

In other words, if you are willing to attempt to buy the dip, you also have to be open to the possibility of experiencing real losses.

How should you approach investing amid market downturns?

Before investing, especially during a market downturn, it is critical to first "ensure your overall financial house is in order," said Investopedia. This means that you should "get your debts in order" and "assess your income stability." Then when you do invest, "only invest what you can handle losing."

To mitigate the guesswork, it also helps to adopt a smart investing strategy. One to consider is dollar-cost averaging, which involves "making steady investments at regular intervals, rather than a lump-sum contribution timed when you think is best," said NerdWallet. With this approach, you can "capture lower prices while reducing risk," said CNBC, citing Jay Spector, CFP, the co-chief executive officer of EverVest Financial.

Regardless of your strategy, remember investing basics. Make sure to "keep your portfolio diversified" and focus on "shares of companies with strong balance sheets, sustainable competitive advantages and reasonable valuations," said CNBC. Most importantly, do not lose sight of your long-term investment goals. It does pay to fall into the trap of making "impulsive decisions based on short-term market moves."