Should You Buy The Market Dip?
When Wall Street is on a roller-coaster ride, should you buy or sell? We break down your options.
Over the last few months, the U.S. stock market has been on a wild ride due to concerns about the impact of the coronavirus on the economy. Stock prices have been down, then up, and then severely down again. As the U.S. faces a serious threat of another recession, the question on everyone’s mind is whether they should be buying into the market now or waiting to see how this all plays out.
In light of all this market movement, many financial experts have declared that stocks are on sale and you should “buy the dip.” Buying low and selling high is an investment strategy that many experts teach. It might be a good time to buy into the market, depending on your investment plan.
What Is a Market Dip?
A market dip is another way of saying that the market has declined. A dip might last a few hours or a few days. Dips are short-term losses that the market recovers from fairly quickly.
Buy the dip in an investing expression that means to buy an asset after it has declined in price. There are different strategies associated with buying the dip. Usually, it's because investors are hoping to take advantage of lower prices for otherwise strong stocks on an upward trend. Or some may buy in the hopes that those stocks rise in the future, as often is in the case if you have a long-term investing strategy.
What’s a Bear Market?
A bear market happens when stock indexes like the Dow Jones or S&P 500 fall 20% or more from recent highs for two or more months. Generally, it’s accompanied by negative market outlooks and a lack of consumer faith in the market. Bear markets are often the predecessor to a recession.
For the last 11 years, the U.S. stock market has been in a bull market, meaning the market has continually been going up and consumer faith in the market has been high. Since the outbreak of the coronavirus has caused such severe drops in the market, it’s been hovering near and dipping into the bear market territory. It hasn’t been long enough to officially call it a bear market though.
Should Investing Be Your Priority Right Now?
If you are feeling secure in your cash, you have two main options: Buy now, or wait and see if the market goes lower or even recovers.
With COVID-19 infections on the rise, it’s very possible that the market will continue to go down over the next few days and possibly weeks. That means those buying in now will watch their investments continue to lose money.
However, with the Fed making moves to try to stop the market decline and more people taking the threat of coronavirus seriously, it’s also possible that the market will stabilize and recover. That makes buying in earlier more attractive than buying later.
As history teaches us, markets that fall will rise again. Even if stocks continue to fall, they will eventually rise again. If you have the extra cash, now could be a great time to consider investing in stocks.
Common advice is to think long-term for your investments. If you do buy, consider what types of funds and stocks complement your goals and your current portfolio.
What Should You Buy?
Rather than trying to time the market, you might find yourself best served by finding specific stocks or funds that appeal to you.
Travel industries across the board are struggling with travel bans and canceled plans right now. Cruise industries have been hit especially hard with bad press and cancellations. That means that their stocks are lower cost right now and might make a good purchase. Grocery stores and businesses in their supply chains (like companies that make toilet paper) could also be a smart buy right now, as these are products that will remain in demand throughout the life of the pandemic.
You can also consider dividend-paying stocks. Dividend payments would be welcome in a serious market downturn. Also worth considering is that as a stock’s price declines, the yield on the dividend goes up.
Check out our Dividend Aristocrats list for the 57 companies that have increased their yield for at least 25 years straight.
If you are new to investing, now could be the time to take advantage of low prices. You can review our investing guide to find out how to start. And if you're looking for a brokerage firm, check out recommend a company, TD Ameritrade.
Other Investing Options
If you don't want to buy stocks, there are other investment options available.
Real estate investing is one of the safest assets to invest in, especially during a market downturn. Real estate is usually steady and is a good hedge against inflation. It can be a bit complex for the beginning investor, so we recommend reading up on the different real estate investing options available.
Bonds, or debt issued by companies or governments, are considered a bit safer than stocks. U.S. Treasury bonds are among the safest, as you are guaranteed a return on your investment. It's usually a lot lower than you might get when the stock market is high, but it has the advantage of not having the wild swings of Wall Street. Find out more about investing in bonds here.
High-yield Savings Account
If you don't have the money to invest right now, that's okay! There are a number of things you can do to prepare for the day you do start to invest. Open up a high-yield savings account or an independent retirement account with a robo advisor. Check out our recommendations for other ways you can invest with no money.