Stocks & Shares: Is Now The Time To Buy The Dip? – Forbes

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Updated: Sep 5, 2022, 12:18pm
High inflation, interest rate rises and fears of a European recession are continuing to impact sharemarkets, with the local ASX experiencing its worst week since mid-June on Friday, September 2, with total losses for the week down 3.9%.
It was a similarly dire state of affairs on Wall Street, with the Dow Jones and S&P 500 finishing the first Friday in September by 1.1%. The Nasdaq fell by 1.3%, in a reflection of the poor performance of tech stocks.
Meanwhile, the hawkish comments by the Federal Reserve Board chairman Jerome Powell, have put many investors on edge. During a speech at the annual Jackson Hole conference in late August, Powell said reducing inflation was likely to require a sustained period of below-trend growth and would bring “some pain” to households and businesses.
“Our aim is to avoid that outcome by acting with resolve now,” Powell said.
“We are taking forceful and rapid steps to moderate demand so that it comes into better alignment with supply and to keep inflation expectations anchored. We will keep at it until we are confident the job is done.”
After his comments, the S&P 500 index fell by 3.4%, while the Nasdaq fell by 3.94%. Around $45 billion was wiped off the Australian sharemarkets.
Powell conceded that bringing inflation back to around 2% was likely to cause “some pain” to households and businesses. In his last speech a year ago, he was more circumspect, referring to inflationary pressures as “transitory”.
Likewise, lauded US investor, Jeremy Grantham, has warned of a “super bubble” that is yet to pop in the US equities markets, claiming despite the turbulent year for stocks, the worst is still yet to come.
He cites the “dangerous mix” of overvalued stocks, bonds and housing, combined with a commodity shock and hawkishness from the Federal Reserve as reasons for his warning.
So what does this mean for contrarian investors looking for a bargain? When stock markets begin falling, a question that’s inevitably asked is whether investors might be able to profit from associated plunging price movements, in a strategy known as ‘buying the dip’.
Kasim Zhafar, chief investment strategist at EQ Investors, says it is important to retain a sense of perspective: “Market fluctuations are an essential ingredient of investing. Share prices and the stock market can overreact in the short term.”
The phrase ‘buying the dip’ – a reference to making money on the back of a stock market fall – is popular among active investor ‘day traders’ and cryptocurrency investors facing a backdrop of volatile markets.
In June, El Salvador’s president and prolific social media user, Nayib Bukele, took to Twitter to inform his 3.9 million followers that his country has “just bought the dip” in connection with a purchase of 500 Bitcoins. 
Last year, El Salvador was the first country in the world to adopt the cryptocurrency as legal tender.
Experts say buying the dip is a valid strategy. Poppy Fox, investment manager at wealth managers Quilter Cheviot, says: “There can be some sound logic in buying shares of companies after their price takes a tumble, particularly if you continue to believe in the investment case.”
Tom Stevenson, a director at Fidelity International, agrees: “Buying the dips has usually made sense.” 
According to Stevenson, in the 14 years since the financial crisis of 2008, it has generally paid to assume that central banks or the government would ride to the rescue at the first sign of trouble in the markets.
“‘Don’t fight the Fed’ has been a profitable mantra,” Stevenson comments, 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 provides investors with the opportunity to gain exposure to an asset that they perhaps already liked, only at a cheaper price. 
She says: “The saying is that it’s time in the market that counts, not timing the market. Basically, investors should stay invested through the ups and downs as it’s impossible to get the timing exactly right each time.”
Ms Fox agrees about the issue of timing and adds that investors should only consider buying a dip in stock markets provided that they are a long-term investor: “It is incredibly risky trying to time the market and looking to trade when you see a good buying opportunity. As such, it is much more profitable to buy the dip and hold for the foreseeable future.
“Moving in and out of markets regularly, trying to time the bottom of a dip, 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 should not worry you as you have time to ride out any subsequent dips.”
Buying a dip ideally allows investors to purchase shares at lower prices than was previously the case. There is also the opportunity of buying shares that have been oversold in the herd mentality rush to offload a stock.
If you’re clear about your reasons for buying a dip, then choosing whether to invest in shares directly, or funds, can depend on the amount you’ve decided to invest.
Regardless of whether you invest in shares or funds, it’s also important to remember the benefits of maintaining a certain amount of diversification within your investment portfolio. Holding a mix of assets such as equities, bonds and cash can help defend your portfolio from financial shocks.
Investors might be tempted to divert spare cash into individual company stocks that have nosedived in price. Bear in mind, however, that doing this has the potential to alter the dynamics of an existing portfolio of holdings.
Alice Haine, personal finance analyst at investing service Bestinvest, says that pinpointing when the stock market has hit the bottom 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 aggressively piling in 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 point, such as during a supposed dip, investors can buy smaller amounts at regular intervals no matter what the price is at the time.
“This cushions some of the effects of volatility in the short and medium-term and, by staying invested for the long term, investors can further moderate risk and increase the chances of decent real returns. In the long run, your investment costs should be lower and your returns higher.”
Michael McCarthy, the chief strategy officer of Tiger Brokers, told the ABC, that buying the dip was a dangerous strategy, with many risks.
“I think all of us need to unlearn the ‘buy the dip’ mentality as that is a dangerous proposition in a falling market environment,” he said.
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Note: When investing, it’s possible to lose some, and very occasionally all, of your money. Past performance is no prediction of future performance and this article is not intended as a recommendation of any particular asset class, investment strategy or product.
This is a tough question and no-one, not even the most experienced of investors, can accurately predict this for you 100% of the time. To buy the dip with certainty you need knowledge of when the stock has hit rock bottom and that is not something you can predict. This is what makes buying the dip a risky strategy.
It depends on who you ask. Some investors swear by the strategy, while others are wary of the approach and prefer to invest in good-quality stocks and ride the highs and lows over the long-term. As with any investment strategy, it’s important to be aware of the risks beforehand and make sure you’re prepared to lose money if things don’t go as hoped.
While some crypto enthusiasts swear by this strategy, cryptocurrency is already a volatile asset class in its own right without adding another layer of unpredictability to the mix. This is not to say that you should not wait for a dip to buy crypto, only that you should be wary of any internet pundit championing this approach without knowing your individual financial circumstances or risk appetite.
Associate Editor at Forbes Advisor UK, Andrew Michael is a multiple award-winning financial journalist and editor with a special interest in investment and the stock market. His work has appeared in numerous titles including the Financial Times, The Times, the Mail on Sunday and Shares magazine. Find him on Twitter @moneyandmedia.
Johanna Leggatt is the Lead Editor for Forbes Advisor, Australia. She has more than 20 years' experience as a print and digital journalist, including with Australian Associated Press (AAP) and The Sun-Herald in Sydney. She is a former digital sub-editor on The Guardian and The Telegraph in the UK, and lives in Melbourne.

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