Stocks Dropped After the Iran Strikes—Should You Buy the Dip?

When stocks plunged Monday morning after the U.S. and Israel struck Iran over the weekend, freezing tanker traffic through the Strait of Hormuz, social media lit up with a familiar refrain: “buy the dip.”

“If you’re thinking about buying the dip, then you’re looking at market losses in a healthy manner,” said Peter Lazaroff, chief investment officer of Plancorp. “The key now is to be smart with what you choose to buy.”

Retail investors haven’t rushed in to buy every stock that dipped in light of this weekend’s news. Small traders made targeted bets on energy stocks and defense names like Palantir (PLTR), while net inflows to Nvidia (NVDA) dropped 76% compared with the most recent trading day. But even as “buying the dip” can often be rewarded, there are pitfalls to know about.

What Does It Mean to ‘Buy the Dip’?

Ideally, downturns should offer stocks with strong fundamentals at reduced prices. “Buy low, sell high,” goes the famous investing strategy. So what’s not to like?

Many retail investors know that in recent years, pullbacks during an otherwise strong bull market have been followed by quick recoveries. Investment forums and social media go into overdrive during sell-offs like Monday’s. But identifying market bottoms remains notoriously difficult —and this dip carries a wildcard. If Iran disrupts the Strait of Hormuz for an extended period, analysts warn oil could spike above $100 a barrel, choking consumer spending and potentially tipping the economy toward recession—a point even dip-buyers seemed to recognize this time with their targeted stock-buying.

JPMorgan’s trading desk cautioned Monday that investors should prepare for a “multi-week period of elevated uncertainty” and look for a one-to-two-week decline in risk assets before buying. Dips can deepen into corrections or bear markets, and downturns can produce “sucker rallies”—an apt name for what you’ll feel if you buy into one.

What You Need To Know

Assess Your Financials

Before buying into a dip, ensure your overall financial house is in order:

• Only invest what you can handle losing. Adding more risk is only prudent if you can withstand additional losses in the near term.
• Get your debts in order. The guaranteed “returns” from paying off credit cards (some with interest rates as high as 30% annually) are often greater than potential market gains.
• Assess your income stability. Those with stable incomes can afford to take more risks than those facing potential unemployment or fewer work hours.

“Is this truly long-term money that you will not need for seven-plus years? And if the market drops further, will you stay calm or feel the urge to panic-sell?” said Michelle Perry Higgins, a financial advisor at California Financial Advisors. “If you’re not confident in your ability to ride out more volatility, it may be best to hold off.”

Consider Dollar-Cost Averaging

Rather than putting all your money into a single dip, consider a more measured approach: dollar-cost averaging (DCA). This involves investing fixed amounts at regular intervals—say, $100 weekly or monthly—and removes the psychological and emotional pressure of timing. If you have a 401(k) with contributions from each paycheck, you’re already doing this.

“Understand that you’re unlikely to time the bottom perfectly,” Higgins said. “Statistically, the odds of buying at the exact low are very slim. Instead, think of it as gradually buying at lower average prices over time … nibbling your way in during downturns rather than trying to hit a perfect entry point. This approach helps build long-term wealth without unnecessary stress.”

Focus on Diversification and Fundamentals

Just because something is on sale doesn’t mean you should buy it. The same is true with stocks. Consider shares of companies with strong balance sheets, sustainable competitive advantages, and reasonable valuations (e.g., lower price-to-earnings ratios).

But be wary of companies that appear to be facing business model challenges. Monday’s market action illustrated the point: airlines, hotels, and travel stocks plunged on fears of prolonged Middle East disruption, while energy, defense, and cybersecurity names surged.

Many traders aren’t too concerned about these shifts causing long-term difficulties. Steve Eisman, the investor made famous by “The Big Short,” told CNBC Monday he would change “not a single trade” because of the conflict, calling it a long-term positive for the markets.

Defensive stocks in utilities and consumer staples—things people need regardless of the geopolitical backdrop—may offer better value than chasing the hardest-hit names. Defensive ETFs like the Consumer Staples Select Sector SPDR ETF (XLP) leave specific stock selection to the professionals. “Individual stocks are historically a losing route to wealth building,” Lazaroff said. “The best route is to emphasize broadly diversified, low-cost options that are well aligned with your time horizon.”