Is now a good time to ‘buy the dip’ and invest more?

George Sweeney 16th Jun 2022 No Comments

Reading Time: 6 minutes

Have you noticed that markets are tumbling further and further? They’re going down faster than a brick off a cliff. But, you might be wondering if now is a good time to invest more and ‘buy the dip’.

I’m going to cover what’s going on with markets right now. You’ll find out why things are so shaky, whether you can take advantage of the uncertainty, and nasty traps to watch out for.

Keep reading for all the latest stock market details or click on a link below to jump straight to a specific section…

• What is going on with the market?
• Why is the market crashing?
• US inflation in 2022
• How to protect investments
• Should you buy the dip with stocks?
• What is going on with crypto?
• Should you buy the crypto dip?
• What to watch out for

 

What is going on with markets right now?

Life never goes completely as you plan, and the same can be said for investing. Just when you think you’ve figured everything out, your investment portfolio takes a wallop!

There’s always going to be some bad news and uncertainty with investing. But right now we’re seeing lots of negative influences all converging at the same time.

When one bad event happens, the stock market can often recover quite quickly. Part of the reason for this is that when the price of shares and other assets drop down, there are enough willing investors waiting to scoop up those investments at a slight discount.

This creates a floor and allows prices to bounce back. The act of jumping in as a price fluctuates downwards is referred to as ‘buying the dip’.

However, when there’s lots of bad news all happening at the same time, there become fewer and fewer investors willing to buy said dip.

And so the floor gets lower and lower until the market finds a ‘bottom’.

 

Why is the stock market crashing?

Although we’re not quite in 2022 stock market crash territory, markets around the world are definitely not looking too rosy.

This is mostly an extension of what’s already been going on:

• Energy and fuel issues
• Supply chain problems causing difficulties for stocks
• Higher interest rates
• Inflation running rampant
• A reduction in Quantitative Easing (money-printing) which means there is less cash for people to put into the stock markets.

The reason that things took another bad turn was because a high inflation reading came out of the US like a bull at a rodeo.

 

The US 2022 inflation story so far

Here’s what America’s inflation figures have been for 2022 so far:

• January – 7.5%
• February – 7.9%
• March – 8.5%
• April – 8.3%
• May – 8.6%

What you’ll notice is that the figure dropped in April, which was good news at the time because it led people to believe that inflation had peaked.

But, inflation is back from the dead like a zombie that just won’t go away. The figures from May were the highest yet and the biggest level for 40 years. This was unexpected.

And if there’s one thing the market hates, it’s uncertainty.

So, the general reaction was a whiplash further downwards. This is not only because inflation was worse than expected, but because it could mean interest rates go up faster than originally planned.

 

How can investors protect investments?

When whole markets are suffering, there are usually very few places to hide.

Even more so because many investors have already been running for shelter. In turn, pushing up the prices of certain stocks and assets.

There’s no perfect way to prepare for uncertainty, because… well, things are uncertain.

Anyone who tells you they know exactly what’s going to happen and when is certainly blowing smoke.

It’s not all bad news though, there is a lot of money to be made.

To help you protect your portfolio and profit when there’s a strong backdrop of inflation – we’ve put together a guide on investing when inflation is high to give you some inspiration.

 

Should you ‘buy the dip’ with stocks?

At the end of the day, it’s up to you. It will depend on your:

• Investing goals
• Time horizon
• Appetite for risk

It’s not worth buying stocks simply because the share price has dropped. But, a low point in the market like this doesn’t come around too often.

Lower share prices could make this a great opportunity to start investing or increase how much you invest. Because you know for sure you’re definitely not buying at the top of the market.

It’s still important to make careful decisions. Investing in index funds or ETFs (exchange-traded funds) is one way to reduce some of your risk. They can be a cheap way to invest with lots of diversity.

Some indices such as the FTSE 100 aren’t actually doing too bad right now. But, places like the US and emerging markets are where values are most depleted.

Before buying the dip, just make sure it’s an investment you believe in or would have considered at previous prices.

This is a good rule of thumb to make sure you’re not just chucking money at the wall and seeing what sticks.

 

What’s going on with cryptocurrency?

The story with cryptocurrency is a little bit different.

There is a knock-on effect where cryptocurrencies like Bitcoin seem to move based on what’s happening with tech stocks.

Since inflation is high and tech is performing poorly, this is spilling over into crypto markets. And, the recent fall of the Terra UST ‘stablecoin’ has given the whole space a shake-up.

Even more recently, a large firm in the DeFi space ‘Celsius’ has paused all withdrawals. This is like a bank stopping customers from taking money out.

It signals that there’s a liquidity issue under the surface and Celsius doesn’t have enough funds to allow lots of withdrawals.

Celsius was paying crypto users very high rates of interest to hold tokens with them and then loaning out your funds.

However, the recent downturn has exposed the fact that their finances weren’t in great shape. As Warren Buffett says:

“Only when the tide goes out do you discover who’s been swimming naked.”

 

So, should you be buying the dip with crypto?

It depends on your time frame and if you’re willing to see things get worse before they get better.

It’s likely going to be a long recovery for the crypto space (the last one went from 2018-2020), so don’t expect a quick turnaround. But, if you were buying Bitcoin (BTC) at £40,000, I don’t see any reason not to consider it at £20,000.

Nothing has fundamentally changed with Bitcoin itself. However, some digital currencies may not survive the ‘crypto winter’.

So, it’s going to be much riskier putting money into more obscure cryptocurrencies. It’s probably more sensible to stick to the more established projects like Bitcoin and Ethereum.

My view is that you need to be more careful than ever with cryptocurrencies right now, but there is potentially a lot of money to be made in the long run.

What to watch out for if you do buy the dip

As mentioned, there’s a lot of uncertainty right now. Things could definitely go lower across the board in the short term.

So, here’s a handful of rules to help you take the right action if you buy the dip:

1. Don’t expect a quick recovery or to make some fast money, keep a long-term mindset.
2. If you buy an investment, just because it’s gone down doesn’t guarantee it will go back up to previous highs.
3. Instead of trying to time the market, invest in smaller doses so that you can benefit if stocks and crypto fall further.
4. Be careful not to overextend and invest more than you can afford, some cash on the sidelines can be useful for more opportunities.

It’s a terrible time for all asset classes at the moment. Even gold and silver are languishing. But, it’s these kinds of situations that have allowed investors who are in it for the long haul to make some serious money.

If you want to stay up to date with what’s going on with investment markets, make sure you sign up for the MoneyMagpie fortnightly investing newsletter.

This is not financial or investment advice. Remember to do your own research and speak to a professional advisor before parting with any money.