“Buy the dip”. One of the most common pieces of advice social media influencers parrot when stock and crypto prices are down, is buy the dip. However, if you’ve bought any recent dips, you might have noticed that the dip is still dipping. So what else can you do?
What can you do while stocks are down?
- Know what you own and why
Go back to the beginning. Why do you own the stocks you currently own? Did you buy them because it was recommended by a random person on social media as the next candidate to “go to the moon,” or was there something about the company’s prospects that excited you?
If you did not do due diligence on the stocks you currently own before buying them, now might be a good time to do it. However, we must warn you. When times are hard, believing the bad reports is much easier. Try to be objective when doing your research.
Look for the strengths and weaknesses of the company. Look at the opportunities in the markets and the current threats to their business. Based on your research, do you believe those stocks are likely to recover, or should you cut your losses now?
If you believe the stocks still have good prospects, you can continue to hold them. However, if you think the stock has seen the highest price it will likely ever reach, you should look for good opportunities to sell. Good opportunities often present themselves when the market as a whole is green or when there’s a glimmer of hope. Take those opportunities.
- Buy some dips
If you decide to hold on to the stocks you currently own after doing the research, you should buy some dips. We know you can only buy the dip if you have money to invest. Therefore, we recommend looking out for the sharpest dips to buy. Observe what’s normal for the stocks you currently hold.
The S&P 500 index, for example, tends to trade between -1% to 1% daily. Any day where the stock is down more than 3% is a significant dip that might be worth buying. Look at the stocks you currently hold. What type of dips are normal?
Some stocks can easily go up or down 5% a day. A 5% dip for that stock may not be worth buying. But a 10% might be worth buying.
Also, look at why the stock is dipping. Did the company report disappointing financial results, or is it interest rates? If the reason seems like something that will affect the company for a while, it might be worth waiting a few days before buying the dip. However, if it is a one-off event, you can consider buying that dip.
Alternatively, you can buy on specific days of the week or month. You can buy every Friday or 21st, for example, irrespective of how the market looks that day.
Look at the stocks you currently own. Are they heavily concentrated in just one industry or type of business? E.g., Do you only own tech stocks, growth stocks, or stocks that did well during the pandemic? If your answer is yes, then you should consider diversifying your holdings.
When you hold stocks of companies in the same industry or very similar, your portfolio is likely to suffer greatly when one stock is down. E.g., when Snapchat recently changed its estimates, Facebook and Twitter share prices fell alongside theirs.
Companies in the same industry are exposed to similar risks. To reduce your risk and losses, consider investing in companies completely different from those you currently invest in.
P.S.: Don’t forget to do the due diligence we recommended in the first point for these new companies.
- Take some profit off the table
If you are fortunate to have some profitable holdings, it might be worth thinking about taking some profits. As bad as the stock market looks, the worst might be yet to come. If you see some good profits around the time when you need the cash you invested, you should consider taking some profits. You can use some of those profits to buy future dips.
22 years after the dot com crash, Cisco is yet to recover to the highs it saw in 2000. If you sold Cisco before the end of 2000, you would have sold it at a higher price than it’s currently trading today.
- Think long term
Over a 10-year investment horizon, the stock market has proven profitable for most investors. Good companies will recover if given sufficient time. If you can only afford to invest for a short time, then now might not be the time to invest. But if you are willing to stay invested for the next decade, you can make significant gains.
- Get some help
Navigating the stock market alone can be difficult if you are not trained or willing to put in the time and effort it takes to learn. Seek out a financial advisor that can help you with making investment decisions.
You can also consider Rise. See how we’re helping our investors navigate these uncertain times.