Should you buy the dip? Here's what new investors should do

Russia's invasion of Ukraine has spooked the markets around the globe. It has also become one of the reasons for inflation alongside the pandemic. In such a scenario, here are some strategies retail investors can follow

Updated: Mar 9, 2022 02:44:45 PM UTC
Buying the dip can be worthwhile if you are a seasoned investor, but for most, a much simple rupee-cost averaging aiming to create wealth in the long term will be preferable. Image: Shutterstock

"The stock market swings back and forth between unsustainable optimism (which drives up stock prices) and unjustified pessimism" (which makes them too cheap).

"A realist who buys from pessimists and sells to optimists is the intelligent investor."

- From Benjamin Graham's book "Intelligent Investor," published in 1949.

We saw a similar pattern in the two Covid-19-driven years when the pandemic terrified the markets and caused them to plunge by 30-40 percent in less than a month in March 2020. The Sensex had fallen below 26,000 points but then rebounded to almost 61,000 points a few months later. Overall, we saw a shift from gloomy to optimistic times. Before we could even think deeply about it, the stock market has plummeted again because of Russia’s invasion of Ukraine. There is no clarity on when the war will end.

Have you played your cards like an intelligent investor?

You don't always have to buy the dip

It is important to appreciate that we live in a different world than we used to. Investors are evolved and are no longer panicked when they witness a market correction. The exception, of course, is new-age investors who have only experienced one-way travel in the last two years. Ask yourself whether you are trying to profit from the current financial crisis, as Winston Churchill once said, "never let a crisis go to waste". Before you buy the dip or invest while there's blood on the street, consider this: What if it's your blood?

Flaws and assumptions of buying the dip

The concept of buying the dip is based on certain assumptions. For one, it is based on the idea that you have surplus cash available and are confident that you are entering at an optimal price point. I've seen a lot of people, who do not have surplus money, and take out loans and overleverage themselves to buy the dips. This should be avoided.

Focus on fundamentals

The world is already experiencing high inflation and fighting a war. Don't take it lightly. The market will triumph over war and other factors, but don't expect a spectacular bull run every time the market corrects or crashes. Sometimes it can take months and years for the market to recover. It would be terrific if a bull market run, similar to that seen in 2020 and 2021, occurs after the ongoing war and inflationary pressure subsides. But if it doesn't, we must be cautious and prepared. Fortunately, many of us are here to fulfil long-term objectives, so why be concerned about cashing out on every opportunity based on hope rather than fundamentals?

Don't be influenced

Be more aware of your financial objectives and risk tolerance, and invest accordingly. In India, people don't need a qualification to become an armchair expert, a political pundit, or an investment counsellor. With the impact of so many influencers and social media, one might not make the best financial decisions. Many people were advised that FAANG stocks (Facebook, Amazon, Netflix, Apple and others) were the best to invest in, and look at what happened to Facebook and Netflix stock in just two months. I believe that buying exclusively based on social media or under undue influence is a major issue.

Buying the dip can be worthwhile if you are a seasoned investor, but for most, a much simple rupee-cost averaging aiming to create wealth in the long term will be preferable.

What you should do

Rather than following the usual advice of buy and forget, a seasoned investor can strive to buy the dips and be nimbler, especially with their stock portfolio. An investor with a full-time job and a business to operate, on the other hand, should try to rebalance their portfolios to profit from a market downturn and crash. And for those investors, let me share some strategies to be used in the current market conditions:

1) Continue with your SIPs and let dollar-cost averaging assist you in building a healthy portfolio by reducing market volatility.

2) If you have extra cash, invest it gradually and buy the dips, but not without a plan. Stick to your risk profile and asset allocation, or invest in mutual funds and leave the management to fund managers, your advisor or distributor.

3) Mutual funds sahi hai! I'm sure you've seen how volatile direct stock investment can be and how mutual funds can assist you to avoid the direct shock that an individual stock can give. Stocks can give many times the returns of a mutual fund scheme, but they can also deplete your wealth if done incorrectly. Stocks like Yes Bank, Jet Airways, Reliance Communications, Suzlon, and many others, were once the darlings of the stock market, they are nowhere to be seen now. One management blunder or a negative piece of news or an incident might completely shift their fortune, as well as yours.

4) You might try converting liquid funds to equities funds to rebalance and optimise the market correction. If your stock allocation or other investments have become underweight, you can rebalance them. For example, if your stock portfolio has lost 20 percent of its value, you can rebalance by investing in some of the mutual funds or stocks that are available cheap.

5) If you're a risk-averse investor, stick to large-cap mutual funds or index funds, but an investor with a high-risk tolerance can hunt for a good deal in the mid- and small-cap schemes. However, similar to stocks, do not invest all at once. Instead, invest via systematic transfer plans (STPs) that can be set up anywhere from six months to a year.

6) Unless you have a definite goal in mind, it's time to break your fixed deposits.

7) Don't touch your emergency fund, no matter what occurs or what others encourage you to do; it's called an emergency fund for a reason.

 The writer is a chartered accountant and mentor to NRP Capitals. 

The thoughts and opinions shared here are of the author.

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