Time to ‘buy the dip’ or stop investing in stocks and shares?

Should you ‘buy the dip’ with stocks right now or invest elsewhere? George Sweeney shares what other retail investors are doing.

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

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It’s pretty volatile in the markets right now. The wind keeps blowing in different directions and investors don’t know where to turn. Many investors have chosen to ‘buy the dip’. But should you still be picking up stocks and shares, or looking elsewhere to put your money to work?

Here at The Motley Fool, we like to act as the voice of reason. Think of us as a calm place to anchor in these choppy seas. With that said, I’m going to share what’s going on with markets, how investors are reacting, and steps you can take to benefit.

[top_pitch]

What’s happening in the stock markets right now?

We’re currently seeing a lot of volatility and fairly significant price swings both up and down.

However, the majority of stocks and shares have been trending downwards lately. Here are some of the reasons why this is happening:

  1. The US Federal Reserve has announced plans to reduce stimulus and increase interest rates throughout 2022.
  2. Inflation figures in the UK and in the US are higher than expected, which is bad news for tech growth stocks that trade at high earnings multiples.
  3. Global markets (including Asia) have been suffering due to general uncertainty and a knock-on effect from US markets.
  4. There’s been no full recovery from the coronavirus pandemic and some fears remain around travel and new virus strains.
  5. Ongoing supply issues are suppressing many companies, causing big squeezes in areas like energy, which is leading to rising costs.

How are investors reacting to volatile stocks and shares?

According to David Jones, chief market strategist at Capital.com, the general reaction from most retail investors has been to ‘buy the dip’. This statement is backed up by the whopping 85% of global investors on the platform who are buying rather than selling.

This was an investing strategy that worked very well throughout the turbulence of 2020/21. If you were picking up stocks and shares during periods of bad news over the last couple of years, you’ve likely seen some remarkable returns.

However, past performance doesn’t dictate future results. No one can be sure exactly how things will turn out. Many companies will be looking good when yearly results from 2021 are compared to 2020. But moving forward, it’s going to be much harder for stocks to show notable growth against a bumper 2021.

[middle_pitch]

Should you consider investments other than stocks?

It’s definitely worth considering a variety of investments for your portfolio. After all, you don’t want to have all your eggs in one basket.

Creating a diversified portfolio that includes a mixture of stocks and shares along with other assets can help you succeed no matter what’s going on. David Jones gives the example of oil’s strong performance amongst all this equity volatility.

He explains: “With the continuing large swings across stock markets, traders can perhaps be forgiven for missing out on a major move in the price of oil. Surprisingly for some, oil has put in a sterling performance for the month to date. Up around 13% from where it finished last year.”

If picking out different types of assets sounds like too much work, you can always use a robo-advisor platform to build a multi-asset managed portfolio for you. Alternatively, some brokerages, such as Hargreaves Lansdown and Interactive Investor, will let you invest using a ready-made portfolio managed by their experts.

How can you benefit from uncertainty with stocks?

When you look at these negative periods from the perspective of years in the market, they barely look like blips.

Although you shouldn’t buy stocks and shares randomly during these dips, such lows can be good opportunities to pick up quality investments and funds for a lower price.

If you’re a long-term investor, you should be thinking years ahead when putting your money into the market. We’re unlikely to be talking about the issues of today in five years time. But it is important to realise investing does come with risks and there are no guarantees.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

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