“Buy on the dips” has been my personal mantra for the last 18 months. In rollercoaster stock markets, you don’t want to buy at the top of the ride, but the bottom.
The recovery is set to be a long, bumpy, and often nauseating ride, but you should find it more profitable if you’re buying when the market is in a funk than when it’s flying high.
My mantra is now coming into its own, because if this isn’t a dip worth buying on, I don’t know what is.
The big dipper
We’ve just finished a month in which shares – as measured by the S&P/ASX 200 (ASX: XJO) (Index:^AXJO) index – fell over 7%.
That means share prices are more than 7% cheaper than they were just a month ago. Exactly how big a dip do you want?
Actually, I know the answer to that question. You want more — and you’re relying on the eurozone to give it to you.
Some of you will be looking forward to the next big lurch downward, and some have set a target date of June 17, when the Greeks go to the polls again. If they reject austerity or fail to produce a working government, markets could take another ride on the big dipper.
The great bear hunt
Be warned, because a lot could happen in the interim. Central bankers could bring out their big bazookas and blow the bears away, leaving the field clear for the bulls. Germany might finally cave in and let the European Central Bank slash interest rates, print money, issue eurobonds and accept fiscal union. The BRICs might reboot their slowing economies with a dose of monetary easing.
If that happens, you’ll kick yourself for failing to buy today. So beware Greeks bearing gifts (or IOUs, for that matter).
Cheap as dips
Don’t confuse buying on the dips with timing the market. You aren’t trying to guess what happens next, which, as every Foolish investor knows, is an impossible task.
All you are doing is buying shares because they are cheaper than they were yesterday. There is a good chance they may be even cheaper tomorrow, but they may also be more expensive. You don’t know. You aren’t pretending you know, either.
Pump it up, baby
I’m certainly not suggesting you throw all your spare cash at the current dip. I’ve been feeding in one-off sums of $1,000 or $2,000 whenever markets dip a little lower.
I’ve bought units in the SWIP Foundation Growth fund, which has a total expense ratio of just 0.11% if you buy through Hargreaves Lansdown, plus a 2 pound monthly platform fee. And there are other cheap trackers to choose from. Here are five of them.
The psychological bit
You have to brace yourself for the fact that any share you buy now could fall further. Provided you have committed to the stock for at least five or 10 years, that is only a paper loss, and you should recover it once the economy starts moving again.
If you’re pocketing an attractive yield, it could prove a rewarding wait. And at least you won’t have lost as much as if you bought at the market peak in February.
Besides, you can always console yourself by averaging down at an even cheaper price.
Most investors find it a lot easier to buy shares when the big dipper is rising, rather than falling. You have to bully your mind into doing the opposite.
I’m getting there. I talked myself out of piling into stocks in a panic in February. With the underlying eurozone contradictions completely unresolved, I suspected that rally couldn’t last.
This is a doozy of a dip, and I’m doing my best to take advantage of it.
Like you, I suspect markets have further to fall. If they do, I will feed in more money — then wait.
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A version of this article, written by Harvey Jones, originally appeared on fool.com
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