High inflation, interest rate hikes and fears of a European recession continue to impact equity markets, with the local ASX experiencing its worst week since mid-June on Friday, September 2, with total losses for the week down 3.9%.
The situation was equally dire on Wall Street, with the Dow Jones and S&P 500 ending the first Friday of September down 1.1%. The Nasdaq fell 1.3%, reflecting the poor performance of technology stocks.
During this time, the warmongering comments by the Chairman of the Federal Reserve Board, Jerome Powell, put many investors on their toes. Speaking at the Jackson Hole annual conference in late August, Powell said cutting inflation would likely require a prolonged period of below-trend growth and cause “a bit of pain” for households and businesses. .
“Our goal is to avoid this outcome by acting decisively now,” Powell said.
“We are taking strong and rapid action to moderate demand so that it better aligns with supply and to keep inflation expectations anchored. We will continue until we are confident the job is done.
After his comments, the S&P 500 index fell 3.4%, while the Nasdaq fell 3.94%. About $45 billion was wiped out of Australian stock markets.
Powell admitted that bringing inflation back to around 2% was likely to cause “some pain” for households and businesses. In his last speech a year ago, he was more circumspect, describing inflationary pressures as “transient”.
Similarly, praised US investor Jeremy Grantham has warned of a “super bubble” that has yet to burst in US stock markets, saying that despite the rocky year for stocks, the worst is yet to come. coming.
He cites the “dangerous mix” of overvalued stocks, bonds and housing, combined with a commodity shock and the Federal Reserve’s hawkish policy as reasons for his warning.
So what does this mean for contrarian investors looking for a bargain? When stock markets begin to fall, a question that inevitably arises is whether investors could take advantage of the associated plunging price movements, in a strategy known as “buying the dip”.
Kasim Zhafar, chief investment strategist at EQ Investors, says it’s important to keep a sense of perspective: “Market fluctuations are an essential ingredient of investing. Stock prices and the stock market can overreact in the short term.
Buy the dip
The phrase “buying the dip” — a reference to making money on the back of a stock market drop — is popular among active day traders and cryptocurrency investors facing a downturn. volatile market environment.
In June, Salvadoran President and prolific social media user Nayib Bukele took to Twitter to inform his 3.9 million followers that his country “just bought the dip” in a buyout. of 500 bitcoins.
Last year, El Salvador was the first country in the world to adopt cryptocurrency as legal tender.
Experts say buying the dip is a valid strategy. Poppy Fox, investment manager at Quilter Cheviot Wealth Managers, says: “There may be logical logic in buying stocks of companies after their price has fallen, particularly if you continue to believe in the record of investment.
Tom Stevenson, director of Fidelity International, agrees: “Buying the dips usually makes sense.”
According to Stevenson, in the 14 years since the 2008 financial crisis, it has generally paid off to assume that central banks or the government would come to the rescue at the first sign of trouble in the markets.
“‘Don’t fight the Fed’ has been a profitable mantra,” Stevenson said, referring to the willingness of the US central bank, the Federal Reserve, to support the economy.
Juliet Schooling Latter, research director at investment analysts FundCalibre, says buying the dip gives investors the chance to gain exposure to an asset they may have once liked, but at a cheaper price. .
She says, “The saying goes that it’s the time in the market that counts, not the timing of the market. Basically, investors need to stay invested through the ups and downs because getting the timing right every time is impossible.
Ms Fox agrees on the issue of timing and adds that investors should only consider buying a stock market decline if they are a long-term investor: “Trying to time the market is extremely risky. and to look to trade when you see a good buying opportunity.As such, it is much more profitable to buy the dip and hold it for the foreseeable future.
“Traditionally entering and exiting markets, trying to time the bottom of a decline, could cause you to miss some of the best days and this can have a significant impact on the value of your portfolio. As a long-term investor, volatility shouldn’t worry you because you have time to ride out subsequent declines.
Buying a dip ideally allows investors to buy stocks at lower prices than before. There is also the option of buying stocks that have been oversold in the herd mentality rush to unload a stock.
If you are clear about why you are buying a drop, the choice of investing directly in stocks or funds may depend on how much you have decided to invest.
Think before acting
Whether you’re investing in stocks or funds, it’s also important to remember the benefits of maintaining some diversification within your investment portfolio. Holding a mix of assets such as stocks, bonds and cash can help protect your portfolio against financial shocks.
Investors may be tempted to divert excess cash into individual company stocks that have fallen in price. Keep in mind, however, that this has the potential to alter the dynamics of an existing portfolio of holdings.
Alice Haine, personal finance analyst at investment service Bestinvest, says identifying when the stock market has bottomed out is “something almost no one can achieve”.
She adds: “The best advice for those with a long-term approach is to invest in the markets at regular intervals, rather than stacking up aggressively after a short-term move.
“Investing on a monthly or quarterly basis takes advantage of the technique known as pound cost averaging. With this strategy, rather than buying a lump sum at a single price, such as during a supposed decline, investors can buy smaller amounts at regular intervals, regardless of the price at the time.
“This mitigates some of the effects of volatility in the short to medium term, and by staying invested for the long term, investors can further moderate risk and increase the chance of decent real returns. Over the long term, your investment costs should be lower and your yields higher.”
Michael McCarthy, Chief Strategy Officer of Tiger Brokers, told the ABCthat buying the dip was a dangerous strategy, involving many risks.
“I think we all need to unlearn the ‘buy the dip’ mentality because it’s a dangerous proposition in a falling market environment,” he said.
Note: When investing, it is possible to lose some, and very occasionally all, of your money. Past performance is not indicative of future performance and this article is not intended as a recommendation of any particular asset class., investment strategy or product.
When is a good time to buy the dip?
It’s a tough question and no one, not even the most experienced investors, can predict it accurately 100% of the time. To buy the dip with certainty, you need to know when the stock bottomed and it’s not something you can predict. This is what makes buying the dip a risky strategy.
Is buying the dip a good strategy?
Should I wait for a dip to buy crypto?