Please note: this blog was published in February 2022 and its content is based on what was correct at the time of writing. As a result, some of the facts and opinions may no longer be current or relevant.
You may have heard the popular phrase “buy the dip” when it comes to investing, so here’s what it means.
One strategy for making money through investing is to buy low and sell high. When the markets drop, it effectively means that share prices are lower than they were before the dip, meaning you can get more for your money.
So, does that mean that market dips are one of the best times to start investing?
Well, this may surprise you.
The reality is that in the long run, it doesn’t matter what the stock market is doing right now. Successful investors tend to stick with the knowledge that investing should be about time in the market, not timing the market.
When is a good time to invest?
So, if some shares are cheaper now, does that make it a good time to invest? Potentially, but the real question you should answer is ‘are you ready to invest?’
If you’re only considering investing because you think the markets can only go up, then you’re missing the bigger picture. Investing is a long-term venture – think decades, not days. And with this type of approach, you’re likely to go through market rises and dips.
Before you start investing, you need to ask yourself ‘are you in a financial position to do so? The markets may look low now, but they could go lower or rise then fall again, or just keep rising. The thing is nobody knows what the markets will do in the future. If you’re thinking about investing, you have to be prepared to take some risks.
In terms of "is now the right time", our investment team has a saying, “it’s about time in the market, not trying to time the market.” Basically, the longer you’re invested for the more likely you are to benefit from investing.
In the long run, it shouldn’t matter if you catch the market in a dip, or if you’re buying when the market is high. Sometimes the best days come following a dip – on 24th March 2020 the Dow Jones, which tracks 30 publicly owned blue-chip companies, saw a whopping 11.4% growth[1], the biggest single-day increase since 1933.
Can I take advantage of market lows?
In theory, if you’re in a good position to invest and are ready to start your journey, then buying when the market is lower is a bit like going into a store when some of their products are is discounted. In the space of a month (20th Feb to 20th March 2020), the major UK and US markets fell by around 30%, which was a very unsettling thing to watch unfold[2].
However, this dip has created an opportunity for savvy investors as prices are now the lowest they’ve been in years. This means that there could be a chance to snap up some bargains that you may not have previously been able to afford, or which were simply priced too high to consider.
For example, if you had £1,000 and invested it towards the end of March 2020 rather than early in February, there’s a chance that you could have received 30% more for the same amount of money. If and when the markets go back up, your investments will potentially be in a good position.
What if this isn’t the bottom of the crash?
Again, investing is a long-term approach and trying to time the markets could mean that you miss out on some of the best days on offer. However, there is every possibility that the market could fall further, so it may make sense to try and benefit from any further decreases.
One strategy that is proven to work well regardless of what the markets are doing is to add to your investments little and often. In fact, this approach even has its own investment term – Pound Cost Averaging. If we go back to that £1,000 example earlier and say you started investing in February 2020, but instead of putting it all in in one go, you chose to invest £20 a week for 50 weeks. You’d probably have bought some shares at their peak value before the dip happened, but then by continuing to make purchases in March you could have picked up some real bargains.
This strategy works because you buy at lots of different prices which can work to smooth out the bumps. When the market is low, like it is now, you’ll be able to buy more shares for the same amount of money. If the markets go up, you’ll get less – or different – investments for the same amount of money. Over time, the theory is that this balances out the highs and lows and is a lot more reliable than trying to guess the bottom of a dip.
How long could the markets be down for?
Nobody really knows how long a market dip will last. It could be anything from hours all the way through to years!
That means a market dip could be an opportunity to pick up some bargains, with the markets going back up in a month or two, or you could be looking at a much longer time frame. Historically, declining markets – or bear markets – don’t last as long as when prices are going up – a bull market. In fact, before the 2020 market crash, we’d just come out of the longest bull market ever, which lasted 11 years. The longest bear market ever recorded was the Stock Market Crash of 1929, which lasted 2.8 years[3].
Is it riskier to invest when markets are low?
At Wealthify, our customers choose their level of investment risk when they start investing with us. Investment risk is based on a large number of factors, but the current state of the market is not one of them.
This might be a very unconventional time in the markets at the moment, but it shouldn’t change the way you should think about your investments.
If you’re ready to start investing then with Wealthify it can be as simple as selecting a level of risk, creating an account and letting our investment team manage your investments. We constantly have an eye on the markets, create your Plan with your risk level in mind, and trade on your behalf to keep your performance on track.
References:
1: https://www.marketwatch.com/investing/index/djia/charts
2: https://www.bbc.co.uk/news/business/market-data - 30% drop seen in FTSE100, S&P 500 and Dow Jones between 20th Feb 2020 and 20th March 2020
3: https://www.investopedia.com/terms/s/stock-market-crash-1929.asp
Please remember that past performance is not a reliable indicator of your future results.
With investing, your capital is at risk, so the value of your investments can go down as well as up, which means you could get back less than you initially invested.
