Buying the dip – what you need to know

By Paul Familiaran, Head of Southeast Asia at eToro

There are a few things that, at the moment, may strike you as unwise to even contemplate: international travel, moving house or investing in global stock markets.

With two of these, you could be right, especially under government guidelines, but there are no restrictions on investing, and now might be a good time to buy.

Then people look at stock markets in the news – showing dramatically downward-pointing charts and stressed-looking traders – many assume it would be madness to invest right now. However, with long-term investment, there’s actually a strong case for doing so.

It’s called ‘buying the dip’ and essentially refers to investing in stocks after they have suffered a sharp drop. It is what many Malaysians did when Walt Disney’s stock fell by 18 percent in March, and in the same month, it became the most popular stock in Malaysia to buy on the online investment platform, eToro.

Here are just some reasons why it can work as a strategy for long-term investors.

  • Take advantage of price discounts

Remember that just because a share price falls doesn’t mean the inherent value of that company has suffered to the same extent. The main reason stock markets are falling is because people are panicking, so investors are moving money into different asset classes or parts of the market to try and protect it.

And even though in some sectors the virus means fundamental challenges to how businesses operate (for example, airlines and restaurants), others might be less impacted and well-positioned for future growth. Being able to buy good companies at a lower price means forward-thinking investors could access this future growth from a discounted position.

  • Recovery rallies

Stock markets have fallen but there have also been big rises, as investors respond to good news and the panic begins to fade. For instance, after the US Senate signed off on a USD 2 trillion coronavirus stimulus package, the Financial Times Stock Exchange 100 (FTSE100)– which had lost significant value in the preceding weeks – experienced its biggest one-day surge since 2008 by over 9 percent.

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 in the long term if and when they happen.

  • Better placed for long-term

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 as time as any for investors to position themselves for long-term upward trends.

  • Invest in what you know

While the Covid-19 pandemic has undoubtedly impacted the stock markets, there are still some relatively healthy stocks that show there could still be good news among the panic. For example, Netflix and Zoom are benefiting from the fact that more than half the world’s population is in containment and require their streaming entertainment and teleconferencing services respectively.

There has also never been a greater demand for medicines as well the need for utilities, thus investors can also consider stocks in pharmaceuticals and utility companies.

Ultimately, there is no way of knowing what is ahead in this fast-moving crisis, and investors should do their research on all companies before buying in. But by assessing the situation regularly, investors may get a good idea about which companies stand to flourish.

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