Now Is The Time To Buy On The Dips

Published in Investing on 22 May 2012

Buy at the bottom of roller-coaster stock markets.

Buy on the dips has been my personal mantra for the last 18 months. In roller-coaster stock markets, you don't want to buy at the top of the ride, but the bottom.

The recovery is set to be a long, bumpy and often nauseating ride, but you should find it more profitable if you're buying when the FTSE 100 is plunging towards 5,000 rather than flying near 6,000.

My mantra is now coming into its own, because if this isn't a dip worth buying on, I don't know what is.

The big dipper

As recently as February, we were all feeling giddily wondering what we'll do when the FTSE hits 6,000. This week, it has shaded 5,200.

That means share prices are more than 10% cheaper than just three months ago. Exactly how big a dip do you want?

Actually, I know the answer to that question. You want it bigger, much bigger -- say, 5,000, 4,500, 4,000 -- and are relying on the eurozone to give it to you.

Some of you will be looking forward to the next big lurch downwards, and I see from the discussion boards that some have set a target date of 17 June, when the Greeks go to the polls again. If they reject austerity, or fail to produce a working government, markets could take another ride on the big dipper.

The great bear hunt

Be warned, because a lot could happen in the interim. Central bankers could bring out their big bazookas and blow the bears away, leaving the field clear for the bulls. Germany might finally cave in and let the European Central Bank slash interest rates, print money, issue eurobonds and accept fiscal union. The BRICs might reboot their slowing economies with a dose of monetary easing.

If that happens, you'll kick yourself for failing to buy today. So beware Greeks bearing gifts (or IOUs, for that matter).

Cheap as dips

Don't confuse buying on the dips with timing the market. You aren't trying to guess what happens next, which, as every Foolish investor knows, is an impossible task.

All you are doing is buying shares because they were cheaper than yesterday. There is a good chance they may be even cheaper tomorrow, but they may also be more expensive. You don't know. You aren't pretending you know, either.

Pump it up, baby

I'm not suggesting you throw all your spare cash at the current dip. I'm certainly not. I've been feeding in one-off sums of £1,000, or £2,000, whenever markets dip a little lower.

I've bought units in the SWIP Foundation Growth fund, which has a total expense ratio of just 0.11% if you buy through Hargreaves Lansdown (LSE: HL), plus a £2 monthly platform fee.

There are other cheap trackers to choose from. Here are five of them.

How low can they go?

As David Holding has discovered, the short, sharp bear market has thrown up some big bargains. They include insurer Aviva (LSE: AV), down 25% since 27 February.

Barclays (LSE: BARC) is down 29% since that date, too. BHP Billiton (LSE: BLT) is down 16%. Royal Dutch Shell (LSE: RDSB) is down 12%.

Mining companies Kazakhmys (LSE: KAZ) and Eurasian Natural Resources Corp (LSE: ENRC) are both down nearly 40%.

I think of the shares I bought in last year's dip, such as Smith & Nephew (LSE: SN). The purchase is still in profit, despite recent falls, and I have also pocketed a pleasant yield.

The psychological bit

You have to brace yourself for the fact that any share you buy now could fall further. Provided you have committed to the stock for at least five or 10 years, that is only a paper loss, and you should recover it once the economy starts moving again.

If you're pocketing an attractive yield, it could prove a rewarding wait. And at least you won't have lost as much as if you bought at the market peak in February.

Plus, you can always console yourself by averaging down at an even cheaper price.

Lucky dip

Most investors find it a lot easier to buy shares when the big dipper is rising rather than falling. You really have to bully your mind into doing the opposite.

I'm getting there. I talked myself out of piling into stocks in a panic in February. With the underlying eurozone contradictions completely unresolved, I suspected that rally couldn't last.

This is a doozy of a dip, and I'm doing my best to take advantage of it. I'm even downloading reports such as this to find potential winners.

Like you, I suspect markets have further to fall. If they do, I will feed in more money.

Then wait.

Are you looking to profit from this uncertain economy? "10 Steps To Making A Million In The Market" is the very latest Motley Fool guide to help Britain invest. Better. We urge you to read the report today -- it's free. 

Further investment opportunities:

> Harvey owns shares in SWIP Foundation Growth, Aviva, Barclays, BHP Billiton, Royal Dutch Shell and Smith & Nephew. The Motley Fool owns shares in Hargreaves Lansdown and Smith & Nephew.

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Comments

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jf2007 22 May 2012 , 4:35pm

I use iii sharebuilder which costs £1.50 to buys on the 23rd of each month. It is annoying seeing shares i had ordered to buy last week shooting up in price this week. Too bad the negative sentiment didnt last till monday and today

tru2me 22 May 2012 , 4:58pm

Some of you will be looking forward to the next big lurch downwards, and I see from the discussion boards that some have set a target date of 17 June, when the Greeks go to the polls again. If they reject austerity, or fail to produce a working government, markets could take another ride on the big dipper.

There could be more bad news coming from places even closer to Blighty Harvey, such as Ireland, Spain, Portugal, Italy or France?

Mike10613 22 May 2012 , 6:32pm

I recovered losses today, but it's too early to celebrate. The markets could go into free fall again and never recover... But we take the risks so we can be sure we're still alive...

UncleEbenezer 23 May 2012 , 1:36am

Erm, did this article get held up in the post? The best of this dip is past, and the markets have had two days of strong rises.

Happy to have made three top-ups on Friday afternoon; just wish I'd made more.

apprenticeDRL 23 May 2012 , 9:05am

I think that may have been a temporary rise as the FTSE is heading south again today. I am breathing a big sigh of relief as I wasnt able to participate until the end of this week and thought I had missed it.

danhx 23 May 2012 , 9:45am

@UncleEbenezer

2 days doesn't make a trend. This Euro stuff is going to drag on all summer I suspect.

mcturra2000 23 May 2012 , 10:24am

"I'm certainly not. I've been feeding in one-off sums of £1,000, or £2,000, whenever markets dip a little lower."

Well, then you're timing the market!

UncleEbenezer 23 May 2012 , 10:26am

@danhx: indeed, I anticipate more buying opportunities (wouldn't argue with ram59's suggestion, though the world is anticipating it).

I was just a little bemused to see this article amidst such strong rises as were in evidence yesterday.

amsterdamgroove 23 May 2012 , 1:27pm

@jf2007 - I too use the £1.5 sharebuilder from iii.co.uk. When they had 2 sharebuilder dates per calendar month, it was much easier to time your purchases and keep trading costs down.
More than trying to time the market, I need to time the £10 vs £1.5 for small sums invested.

4spiel 23 May 2012 , 1:49pm

Crap. Time to buy was 2008/09. Now you should only buy what falls out of bed for no good reason and they are few and far between. BT was good at 69p and so were the bonds BATS and IMT were good as much as 1500 There were loads of them . Now you should be waiting for a big correction and hoping you bought cheap enough. Why should you be encouraging people to buy when they are high Motley Fool must be short of a few pennies.

Jonesey12 23 May 2012 , 2:16pm

UncleEbenezer. Luckily the market came to my rescue this morning!

Harvey Jones

carrotandblue 23 May 2012 , 2:31pm

That's right amsterdamgroove. In my case, motley sharebuilder, it is £2 v £10 !! It is all about timing, and nerves! I remember a few years ago when I invested in BHP Bilton. Had quite a few pounds in, then they did a 'dip', I paniced and sold! I have regretted it ever since, but I learnt from it. Hopefully I am now a 'savvy' investor.

globally 23 May 2012 , 2:38pm

As a young man, I was taught that the surest way to lose money was on slow horses and fast women! To that I would now add forecasting the bottom of the market particularly in these very volatile times If you can do that with any degree of certainty, and I don't know anyone who can, you should be a multi-millionaire by now.

ribuck 23 May 2012 , 2:47pm

To globally: admittedly one can't know for sure whether the market is at its bottom.

But for sure one can know that the market is nowhere near its top!

DashingDave123 23 May 2012 , 3:55pm

We only have TA methods to give an estimate of how far the FTSE100 will fall. Using Point & Figure, there is a bullish support line at 5,100. If it breaks below that, which is a sell signal, a vertical count estimate says it may go down to 3,500, as it did in 2003 and 2009. Buyers at 5,300 will look pretty silly if it gets down to 3,500!

Another TA estimate is to note that if the FTSE drops below 5,000 it will complete a Head and Shoulders pattern with a peak at 6,000 and a neckline at 5,000. the prediction then is that it will fall to about 4,000.

We may see the last couple of days as what I think used to be called a sucker rally that draws investors back in before the market plunges down again. All the shares I owned have broken below their P&F stop losses and been sold automatically by my broker. I am now moving cash into savings accounts. I highly recommend stop losses.

Another good guide is the Sell in May, buy back on St Swithun's Day one. This has done remarkably well over the last ten years and more and seems to be working this year too.

amsterdamgroove 23 May 2012 , 4:23pm

DashingDave123 >I am now moving cash into savings accounts. I highly recommend stop losses.>

I am investing for the future. I am young, it is all within my ISAs, and I do not need the cash. May I ask a quick question? What does it matter if the market drops to 4000 or even 3000? Are stop losses a good idea for someone like me? In the long run, it is likely that it does not make a difference, and meanwhile I am accumulating dividends. Am I being too naive? Thanks

unhappymondays 23 May 2012 , 4:54pm

I use Sippdeal's Regular Investment for their £1.50 trading fee as my purchases are pretty low value. That trades on the 10th of the month. That does make it much more difficult to buy at the dips though, so I don't bother trying - just buy then.

apprenticeDRL 23 May 2012 , 5:14pm

@amsterdamgroove I agree with you sentiment. I guess most of us on here are not day traders and investing for the future. personally if the FTSE falls to 4000 or even 3000 I would view that as top up opportunities.
One thing is certain it will rise again.

globally 23 May 2012 , 5:21pm

It is the unforeseen events that cause the biggest shocks normally. Heaven only knows what would happen to The London Stock Market if Greece leaves the EU. Such an event could well precipitate a domino effect, and market meltdown, also involving, inter alia, Spain, Portugal and Ireland and many other major markets worldwide. We would be in uncharted territory then and graphs serve little practical purpose when prices are in free-fall. It's all too awful to contemplate but I do remember what happened in 1973 and I haven't forgotten the hard lessons I learnt then.. In those sort of situations, reverse gearing and margin calls can have a devastating effect not just domestically but throughout the financial world. So as an OAP, I suppose I'm more risk averse now and it would be of no comfort to know that we are no where near the top of the market if a large percentage had already been wiped off the value of ones savings. If you're young enough, and not leveraged, you have a longer time horizon, and can sit tight, and good quality shares will probably recover in due course but it may be a bumpy ride along the way..

snoekie 23 May 2012 , 5:46pm

I have bought a couple of shares on the dips, RSA & LONR, but bought GSK at price, knowing it would be cheaper at sometime, and now down, but reckon long term will come good, in the meantime it is earning a lot more than in a bank account. I am content, but tapped out ftm.

col99 23 May 2012 , 7:15pm

WRT the market falling to 3500: will people make the same mistake again and sell off wholesale - after all 2008/9 is still in the collective memory?
Also have large amounts of shares been sold off already, limiting the fall?
eg Pension funds going to bonds.

Oh, we've seen it all before!!

I predict it will only fall as far as 3510!

4spiel 23 May 2012 , 8:33pm

Interesting some people are forecasting a fall - maybe 3510 ! But where does this figure come from ? We have been there before a few times -a bit lower - it just has to be remembered that its a Casino now run by spivs and betting characters. Genuine investors are just traction fodder that are whippped up into a breeze or whirlwind when the machine is fully revved up ! But indeed we have some uncertainties out there and its all convenient at 'Sell in May' time to generate the traction for the negative speculation..Probably they want this out of the way early this year so they are off on the August holidays all sorted by the twenties of July with markets then recovering. P

DashingDave123 23 May 2012 , 8:50pm

AmsterdamGroove It depends how long term you are, what return you will accept and how much paper loss you can stand. It would take a full article to cover all the points but a quick answer would be to look at the FTSE100 price history from the beginning of 1998 to now, the last 14 years, roughly. In 1998 the FTSE was at 5200. Since then it has been up to 7000 in 2000, down to 3500 in 2003, back up to 6800 in 2007, down to 3500 in 2009 and now back up to 5266, roughly where it was in 1998. So, with a tracker, your capital gain would have been nil. You could have made about 3.5% from dividends but lost most or all of that to inflation, fees and tracking error. meanwhile your money has been repeatedly halving and doubling and at risk and you have made nothing in 14 years. Your wife will have asked why you didn't sell when it was high and buy in again when it was low, when are you going to make any money and what's it all for! That's the good outcome.

If you have bought stocks for higher dividends then unlike indices that basically always recover, stocks can and sometimes do, go down and stay down or go to zero. Look at GEC after Weinstock. Simpson killed a brilliant company in a few years. For a modern one look at Man Group (EMG). It was 700 in 2007 and is 73 today and falling. RBS was 250 in 1998 has been 600 in 2007 and is 21 today.

What's that old C&W song? Know when to hold 'em, know when to fold 'em, know when to walk away, know when to run.

4spiel 23 May 2012 , 9:03pm

The thing that is most intriguing is that in theory it could go down and not up come again like a U Boat that goes off the dials and hits bottom with too much water to get up again . But with QE3 the antidote is out there. Its a little matter of how low you dare to go now -the computers can run the ship down to the floor and wait for Uncle Ben with the air hose to pump it up again. What a joy ride may lie ahead !

jaizan 23 May 2012 , 10:27pm

TA? That has about as much relevance as the position of the moon.
However, I am glad that some (other) people use it, as every buyer needs a seller.

dukindiva 24 May 2012 , 11:55am

DashingDave123

"In 1998 the FTSE was at 5200. Since then it has been up to 7000 in 2000, down to 3500 in 2003, back up to 6800 in 2007, down to 3500 in 2009 and now back up to 5266, roughly where it was in 1998. So, with a tracker, your capital gain would have been nil."

To me, that indicates that 'institutional investors' are able to manipulate the market and is the best reason not to invest longer term in a tracker!

However, it is possible to accurately value a share (excluding sentiment) and companies like P&G will still sell soap if the Euro crashes, likewise Shell will always sell oil & utilities will always sell power & water. You can pick up bargains no matter where the FTSE is, its just sometimes there are even better bargains. If your entry point is good then you will make more money but switching costs (even with stop losses, which I agree can be a good idea) eat into portfolios too?

I hate to say it, but luck also plays its part, which is why you should not rely on only stocks to fund your retirement.

amsterdamgroove 24 May 2012 , 11:18pm

DashingDave123 thanks for your comment. I am new to this world of investing and yes, your comment is food for thought... I just cannot reconcile this with one of TMF's most loved from Buffet -- "the ideal holding period is forever"
Well, selling now at a loss to buy it later when the market dips, guess that would be trying to time the market. This is something I simply cannot do. Perhaps I will regret it pretty soon...

goodlifer 25 May 2012 , 12:01am

amsterdamgroove

FWIW, my answers
What does it matter if the market drops to 4000 or even 3000?
Nothing.

Are stop losses a good idea for someone like me?
Perhaps, but probably not.

Am I being too naive?
No

goodlifer 25 May 2012 , 12:11am

Hi globally,
"As a young man, I was taught that the surest way to lose money was on slow horses and fast women."

Farmers used to say that, of the ways of losing money, backing horses is the quickest, wine and women the pleasantest and fattening beef cattle the surest.

Of course that was before they got around to antibiotics, feedlots and imported soya.

OmoOduduwa 01 Jun 2012 , 10:27pm

col99 - wholesale selling as you called it is often not necessarily because people sold their positions willingly, rather it is often because it was forced upon them. Ever heard of margin call?

I bet wholesale selling in the event of FTSE 100 finding itself at 3510 would be no different this time.

I hope you do have cash on the side to take advantage of the opportunity when it comes knocking


goodlifer - Stop loss is a good tool for controlling how far down you ride your losses. Only you can tell whether or not it is a good idea for someone like you

davelewis1 03 Jun 2012 , 7:07pm

I'm completely new to shares full stop, been reading a bit this last year or so and took a punt (gamble) as that is what I think this is all about with some spare cash. I think I've bought OK (BP, Aviva, Astra Zenca, Vodafone, Tesco, BAE, British Land, Lloyds TSB, HSBC, GSK). I've invested approx. £4000 over the year and am down about £900 BUT I haven't sold a single share as I'm waiting for 10 years ish... With any new cash I find I'll be buying more of the same (except Lloyds). I only wish I had more cash to gamble as that way you make more. I use Halifax share dealing which is expensive as it costs £14 a buy, so I try to buy at least £300 each time to minimise % losses. Unfortunately I don't have enough cash to buy more, but what I've decided to do is forget rise and fall of prices over a few months/year and just try to buy when I can afford it and hope for the best ( a great plan I know ;) ). My long term plan is to buy a few grand each of the above shares. The only other shares I've ever bought were £900 Dragon Oil shares years ago which I've made about £4000 on so know it's a long term thing.

davelewis1 03 Jun 2012 , 7:18pm

As a complete novice but someone who works for a living I should say - I think the stock market is due a huge crash in a year or so and share prices will fall. If they do I'll see how much cash I have about to buy more.

Thing is, I'll still be working, earning, buying bread and beans at Tesco, buying petrol, having my pay go into the bank, be giving money to utilities and when I get older will probably need medicines. The world will still be using phones and stuff, and land will be in short supply.

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