Dubai: Stock market investors have encountered a constant stream of uncertainties this year. Since the start of 2022, the stock markets on average plunged by more than 20 per cent, officially taking it into a prolonged period of declines. But have stocks bottomed out? Should you buy now or wait?
“Falling markets are one of the biggest challenges faced by investors,” said Brody Dun, an investment manager at a UAE-based asset advisory firm. “But such testing periods are an inevitable part of investing.”
“Historically, this has presented opportunities to acquire assets as others despondently sell, and with markets now showing hints of rebounding back, it makes it an ideal time to buy stable stocks now.”
Changes in financial markets are effective at playing with investor emotions, but instead of exiting the market, there are ways to take advantage of a market downturn, like the recent downturn.
‘Buying the dip’ is a strategy used to buy stocks when their prices are down, betting that the long-term upward trend will eventually win out. But this strategy is not exclusive to stocks.
Investors can ‘buy the dip’ on any investment-worthy asset class, like commodities, exchange-traded funds and cryptocurrencies, among many others.
Buy low, sell high
So the phrase ‘buying the dip’, which is simply a reference to making money on the back of a stock market fall, is still popular among active investors facing a backdrop of volatile markets.
“Buying a dip ideally allows investors to purchase shares at lower prices than was previously the case,” Dun added. “There is also the opportunity of buying shares sold in a 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.”
But how do you ‘buy the dip’ without having to ‘time the market’ or foreseeing that the market has bottomed out? Instead of putting your cash all in at once, experts say to slowly add in money over time.
‘Cost averaging’ will help
This is called ‘cost averaging’, which is investing a set amount of money on a regular basis. Because the investments are spread out evenly over time, investors avoid the pitfalls of emotional investing.
“Cost averaging is what often tends to lead people to buy when stock prices are high and sell when they are low,” Dun added.
"If you miss the five best days, beginning with Dh10,000 in 1980 through the first quarter of this year, your portfolio would be 38 per cent lower than if you had stayed full invested.”
That's why Dun recommends remaining disciplined and continuing to get more shares of great companies at lower prices in periods like this.
As much as any investor would like to avoid market downturns and take advantage of rallies, to do so means getting out at the right time and knowing exactly when to get back in. But that’s difficult.
"Sometimes you may be early, but in the long term it won't matter. It's in the short term where it feels really uncomfortable," explained Aditya M, UAE-based Indian expat investing for over three decades.
"Ideally, you get more shares at lower prices, so if you can increase your allocation now or put savings to work, the market may go down another 10 per cent, but three years from now, it won’t matter.”
While no one knows when the stock market will recover, history has proven that staying in the market leads to higher returns than trying to time the market.
The prospect of higher interest rates may spook markets, Dun said, but he stressed that investors need to remember that even recent history shows it’s not the end of the world for stocks.
“If you look at the whole period from the middle of 2015, when we started hearing rate-hike chatter like now, through September of 2018, the stock market had an incredible run, with stock markets surging between 40 per cent to 60 per cent; so history is a good reminder to stay invested,” Dun added.
Is now a good time to buy stocks, or do I wait?
So how do you evaluate whether it's a good time to buy and when to wait for a pullback? If you're looking to invest for your future -- five, 10, or 40 years off -- then now is as good a time as ever to buy stocks.
“Waiting for a pullback in stocks with a long-term time horizon isn't going to move the needle that much. How much is a 10 per cent difference going to make on your buy price today in 40 years when your original investment has grown more than 10-fold?” Aditya explained.
If you like to research stocks, it might be harder to find good buying opportunities when the overall market valuation climbs higher. Fewer stocks will present value relative to their underlying fundamentals, but that doesn't mean those opportunities don't exist.
“It's always a good time to invest when you find a stock to be undervalued by the rest of the market,” added Aditya, who consistently makes an average of at least 10 per cent profits on stocks every year.
When facing bouts of market volatility, it is important to not focus on the day-to-day swings, but on your longer-term investing goals.
Investors often ask “How should I handle market volatility?" and “Do I sell stocks when markets are volatile?" That’s why it can be hard to accept that often the option in market selloffs is to do nothing.
“When times are tough, we want to limit losses. Even when things go well, we wish we had invested more. We all fear missing out,” added Aditya.
“But when you’re investing, giving in to fear is often a losing strategy. More often than not, investors with this mindset tend to buy high and sell low as they invest more in a rising market and pull money out in a falling market.”