Stock markets around the world have been struggling since the turn of the year. In the UK, the FTSE 100 is down 4% from its January peak, and across the Atlantic in the US, the flagship S&P 500 has fallen 13% since the beginning of the year. Speculation is rife that even more stock market drops could be on the way.
However, according to new research from personal finance comparison website Finder.com, many UK investors actually see the drop as a buying opportunity and are planning to top up their portfolios with more stocks. But is ‘buying the dip’ a good idea? Let’s find out.
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Why are stock markets struggling?
One of the contributing factors is the current conflict in Ukraine, which has created unease and uncertainty among investors.
Investors are also concerned about the prospect of rising interest rates and potentially tighter monetary policies. Here in the UK, the Bank of England is expected to raise interest rates soon to combat inflation, which has recently reached a 30-year high of 5.5%.
A rise in interest rates means higher borrowing costs for businesses, which may have a negative impact on their stock prices.
Will stock markets fall even further?
Of course, nobody has a crystal ball. But there are growing concerns that a full-blown stock market crash could be on the way.
One expert has suggested that the S&P 500 could fall by as much as 80% this year. We’ll have to wait and see if that actually happens.
In the meantime, Finder has created a live chart for S&P 500 investors to compare how the current drop compares to previous crashes in the last 50 years, such as the 1973/74 crash, the dot-com bubble (2000-2002), and the financial crisis (2007-2009).
The chart shows that the worst stock market crash in the last 50 years occurred during the financial crisis of 2007-2009 when the S&P fell by 55.5% after 351 days. If the current drop in the S&P 500 is to become the worst crash in history, it clearly has a long way to go.
How are investors reacting?
According to a new study from Finder, half (48%) of UK investors say they are planning to ‘buy the dip’.
A further 4% of Brits who don’t invest are also planning to buy stocks during the dip. This means that about one in eight Brits (12%), or approximately 6.2 million people in total, intend to ‘buy the dip.’
The research also shows that the younger Brits are, the more likely they are to ‘buy the dip’. Almost one in six young people aged 18-24 are planning to buy the dip, compared to less than one in 10 of those aged 65 and up.
More men than women also plan to buy the drop (15% vs 8%).
Not all Brits plan to invest under current conditions, however. Some 80% of Brits don’t currently invest and won’t be tempted to start by the current dip. And 52% of current investors are not planning to buy any more stocks just because of the current market drop.
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Is ‘buying the dip’ a good idea?
A stock market drop can provide investors with an opportunity to buy additional stocks for their portfolios at a reduced price. But this strategy could also be counterproductive.
Finder.com’s Investing Writer, Zoe Stabler, explains: “It can seem tempting to invest when markets are dropping, but there is no telling when a market crash will end, and you could end up experiencing heavy losses early on if it continues to fall.”
Rather than trying to time the market, which is basically what investors are doing by ‘buying the dip’, Stabler advises that investors should pursue long-term investment strategies.
For example, a much better strategy for investors who are looking to get more value for their money when buying stocks is what is called ‘dollar-cost averaging’.
This is where you invest a set amount of money in stocks at predetermined intervals over time. Most top-rated share-trading accounts and stocks and shares ISAs allow you to set up an automatic plan to buy at regular intervals. Alternatively, you can make your own purchases on a fixed schedule (say, on the first of every month).
By buying stocks at various prices on a regular basis, you increase your chances of paying a lower overall average price for them than you would if you tried to buy them when you think the price is just right, such as during a dip, which could end up working against you.
As Stabler explains, this in theory “means that you aren’t putting all your eggs in one basket and you are likely to end up investing at good times as well as bad times”.
