“Buying the dip”, and investing in stocks after a sharp drop can be a successful strategy for long-term investors. But making the right decision is difficult when markets are stressed. Managing the risks involved involves first standing back and assessing the nature of the dip you are facing.
Take advantage of price discounts
Remember that just because a share price falls that doesn’t mean the inherent value of that company has suffered to the same extent. One of the reasons stock markets fall is people panicking, and investors moving money to protect it while they can. Being able to buy good companies at a lower price means forward-thinking investors could access future growth potential from a discounted position.
Recovery rallies
Stock market corrections and bear markets are characterised by overall downwards trends but at some point they rebound to form a recovery rally. Recovery rallies are a sign that investors are responding to good news and that panic has begun to fade. Between January and October of 2022, the S&P 500 Index (SPX) dropped in value by more than 25% over a 282 day period. Finally reversing when a recovery rally started on 14th October.
Past performance is not an indication of future results.
Retracement Rallies
A short-lived downwards price move in an otherwise upwards trending market represents another way to buy the dip. A short-term correction in price doesn’t necessarily mean that the upwards trend has broken down, more that markets don’t move in a straight line. A situation such as this was seen during the bull market of 2024. Between the 29th October and 4th November the SPX Index fell in value by as much as 2.23% as political uncertainty about the US Presidential election weakened investor sentiment. After the 5th November election date, the market rallied to continue its upwards trend.
Past performance is not an indication of future results.
Knowing when a market will rally is impossible, and further losses could of course still happen, but investors buying into the dip will be in the best place to benefit from recoveries if and when they happen.
Final thoughts
Markets move in cycles, going up and down, and investors spend a lot of time deciding when’s best to get involved. It’s impossible to know what’s around the corner but buying into these dips could be as good a time as any for investors to apply long-term investing strategies which target making returns from market trends.
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This is a marketing communication and should not be taken as investment advice, personal recommendation, or an offer of, or solicitation to buy or sell, any financial instruments. This material has been prepared without having regard to any particular investment objectives or financial situation, and has not been prepared in accordance with the legal and regulatory requirements to promote independent research. Any references to past performance of a financial instrument, index or a packaged investment product are not, and should not be taken as a reliable indicator of future results. eToro makes no representation and assumes no liability as to the accuracy or completeness of the content of this publication, which has been prepared utilising publicly-available information.
