How to Navigate Market Volatility – Buying on Dips
The stock market goes up 200+ points in one week, then down 300 points the next. Sound familiar? Market volatility can make both the experienced and novice investors squirm when trying to make investment decisions. There is an upside to market volatility however, where specific strategies can pay off significantly.
Have you heard of the saying “buying on dips”? This simply means purchasing stocks or investing your hard earned dollars on days that the stock market dips or goes down. It could either mean the market itself goes down, or a specific stock prices goes down due to global or local news not specifically related to your stock of choice. Stocks tend to get impacted when global or economic events occur which worry investors. People in general are hard wired to buy on good news and positive trends, so it’s difficult to change your mindset to purchase on a downtrend. The benefit is that it can payoff significantly.
Take a recent example by looking at Terra Nitrogen Company (TNH). On August 2011, it peaked around $195 per share. By mid September 2011, it dropped to $139 per share in a matter of 5 days while the overall stock market was down significantly. There was no specific company related news that triggered the sell off, but rather overall market sentiment by the every day investor. Within 30 days of the drop. the stock was already back up to over $170 a share. If one were to purchase this stock around the bottom of the drop, and sell today, they would walk away with over a $30 per share gain in just over a month. Another way to look at this is, within 30 days, an individual investor could of gained overall 20% on their investment. This is just one simple case out of many that occur on a weekly and monthly basis. So as you can see, individual investors can benefit in a volatile market just as much as a bull market. One just needs to reverse their natural trend of buying on upswings and positive news, and instead purchase on the negative news resulting in overall market drops. Happy Investing!