Over the past few weeks, ASX investors have become acquainted, or I should say reacquainted, with volatility. Yes, the S&P/ASX 200 Index (ASX XJO) did reach a record high on Monday last week. But it was a choppy road to get there. And just after Monday’s record high, ASX 200 shares had gone backwards by close to 3% by Thursday.
As the new week starts today, the ASX 200 looks to be on the rise again and approaching its new high watermark once more. But it looks as though volatility is here to stay too, at least in the short term. As we discussed at length, it was renewed fears over US inflation that stirred the pot with the volatility we saw over last week. And the worst hit ASX shares were those in the ASX tech sector. Take Afterpay Ltd (ASX: APT). It managed to lose more than 12% of its value since Monday last week, not helped by the ~1% loss today. Other ASX tech shares that have taken similar beatings over the past week include Xero Limited (ASX: XRO), Zip Co Ltd (ASX: Z1P) and Appen Ltd (ASX: APX).
It’s been a bit of a rollercoaster ride, owning any of these companies over the past month (or even week) alone. Those investors who love to follow the ‘value investing‘ playbook might be telling you to ‘buy the dip’ or something similar today. You know, ‘buy low, sell high’ and all. But is volatility always a buying opportunity?
Volatility and ‘buying the dip’
Well, that’s not the easiest question to answer. There are a few questions you might want to ask yourself before you rush into these shares or any other shares that are looking relatively cheap to what they were a few months, or even weeks ago.
Firstly, asking ‘why is this volatility happening?’ is probably a top idea. Shares sell off for all sorts of reasons. Investors might have lost interest in the company. The market might not like a company’s management team’s new plan for its business. A company might be competing in a dying industry. Or, in the case of ASX tech shares recently, the prospects of interest rates and inflation might be spooking investors in one particular sector. The list goes on. Obviously, not all of these reasons to sell a share mean it’s a good idea. Some of these issues might be temporary, meaning that it might be a better idea to buy more shares, rather than sell out. If it turns out that the fears over inflation and interest rates are unfounded, this may apply to the ASX tech space right now.
But on the other hand, you want to get out as fast as possible if there is truly a long-term, structural problem with a business that will result in it shrinking, rather than growing over time.
Volatility can be your friend. Sometimes shares just drop because the market is temperamental and emotional at times. But not always. Sometimes things drop for a good reason. Knowing the difference can make a big difference to your ASX share portfolio over time.