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Warren Buffett says he’s happy when the market falls. That’s because it allows the billionaire investor to buy more of the stocks he believes in at lower prices.
So with the FTSE 350 pushing downwards since the height of the summer, here are three reasons to buy the dip.
1. Smaller downside
Investors should consider buying the dip as a strategy to mitigate the risk of substantial losses in their investment portfolios.
While this isn’t always the case, buying stocks that have already shed some value can lower the risks of large losses.
Moreover, in the case of several FTSE 100 stocks, it’s challenging to envision further price declines, given their existing valuations. Barclays currently trades for less than five times earnings.
Conversely, we can see that a surging stock may have greater downside risks, especially if the spike hasn’t been engendered by an improvement in earnings.
By buying the dip, investors can also benefit from the principle of ‘averaging down’, or ‘pound-cost-averaging’. This means acquiring more shares at a lower cost. This, in turn, can lower the average price paid for their overall investment.
Buffett is one of several famous investors who see opportunities in bearish market. His success is built on identifying quality companies with strong fundamentals that are temporarily undervalued.
By following his lead and buying the dip, investors can potentially benefit from attractive entry points. In the long run, this could enhance investment returns.
2. Forecasts are positive
Forecasts are changeable. However, the most recent FTSE 100 forecast I’ve seen shows the index bottoming out in September before rising over the next 12 months.
Of course, this isn’t a given. But we can see some broad macroeconomic trends that might cause the index to push upwards over the next 12 months.
In the coming months, we can expect to see interest rates peak around 6% in the UK and then, hopefully, begin their path downward.
It’s worth recognising that cash and debt become more than attractive when interest rates are high. As such, falling rates should make equities more attractive.
Meanwhile, economic growth is expected to pick up towards the end of the medium term. As investors, we’re always looking six to 12 months ahead, so this should begin to have an impact towards the end of 2023.
3. Locking in dividends
Investors should consider locking in higher dividends when the market or share prices fall, as a strategic move to safeguard their investment returns and enhance further returns.
When prices drop, dividend yields tend to increase, resulting in a higher percentage return on the initial investment.
By locking in these elevated dividend yields, investors can generate a steady income stream even in times of market volatility.
Furthermore, higher dividends can provide a cushion against potential unrealised losses. While share prices might be experiencing a temporary decline, the consistent flow of dividends can help offset those losses. In turn, this can contribute to more stable overall returns.
However, it’s important to carry out thorough research. Some dividend yields are just too good to be true.