How investors buy dips uses checkups, winners on sale and bargain prices to make money during stock market corrections. Savvy investors buy winners in dips adding more profit makers to their portfolios.
Wealth Building Portfolio Management, Lesson 2, teaches how long term investors add dip management and buying to their portfolio management skills used during dips and corrections. Links at the end guide you to related content if you want to learn more.
How sharp investors buy dips has three money making ways to use market dips or corrections. The steps give you a way to turn a stock market correction into a money making opportunity.
When stock market corrections happen, remember they are part of a normal market. When a correction happens, until investors see reasons to change course, we simply continue to own the good quality dividend paying stocks. Quality dividend paying stocks keep paying us even in a correction or downturn.
Should we be speculating, that can be different! Speculations are very different from investments held for income. Any holdings that do not pay dividends quickly eat capital during a downturn. During such times, sell the culprits and do so quickly!
However, be ready to seize opportunity. Downturns can be excellent buying opportunities for both speculations and investments. Speculations that you know and believe in can be bought back once the downturn runs its course. Be careful, patience gets well rewarded. Buying and selling speculations can be a mugs game with many head fakes and false direction signals. It takes experience to consistently play speculations well. Beginners should seek experienced advice if speculations are of interest.
As for investment quality dividend paying stocks, corrections present the opportunity to buy quality at a discount. You get to buy for less and immediately begin getting paid for doing so! Just wait to see market direction is no longer down. Once the trend turns positive, put your capital to work!
Don’t be in a hurry to buy. The investor with patience gets well paid to wait and buy when great companies are on sale! Just be ready. In a few days or even weeks ahead buy at a favorable price and put that cash to work getting you paid! The market will say when it is time. Until then, just sit on your cash.
Homework pays very well for investors. So always do your homework before you invest. Investigate. Question and think. Even your financial advisor will enjoy dealing with a better informed and thinking client.
We can not and do not know what will happen next in stock markets. And we are not alone, nobody and no technology knows. But we can profitably move when a dip happens. We begin by defining a dip or correction.
We define a price drop of 10% as a dip which can apply to a stock or to the market. So when a market index drops 10% that market is in a dip or correction. Should a market index not drop 10%, a stock can still be in a dip and when the market dips any stock may not dip 10%.
We accept the index behavior as indicating what the market is doing. Like all investing topics, this one attracts lots of opinions. However, the loudest voices may not be your best source of information. Loud voices may just be wanting to get you into trading…on their systems…with your money.
Markets, corrections get the attention of technology, geeks and prolific pundit pontification. Corrections can get noisy because people get excited when markets go down. But consider most of the commotion as bullhorn blather. We can safely ignore it.
Our definition is simple and our response to dips a straightforward step by step process. While buying on dips is a trading strategy, it does not work nearly as well as long term investing. However, investors can use stock market dips to add to their long term gains.
Corrections are part of normal and regular stock market behavior. The market has peaks and troughs and always will. A correction happens about once a year but it is not a scheduled event. Just accept them as inevitable stock market events.
Most times corrections are short lived events in rising markets. So, most corrections are over in a matter of a few weeks to three months. Most often 2 to 15 weeks.
The price drop in corrections are usually quick! Prices fall much faster than they rise in most declining market situations.
Investors manage corrections by staying the course rather than taking any defensive action. Corrections should cause investors no undue concern for up to three months.
Corrections can not be predicted by anyone or any technology. Likewise, the cause or timing of corrections can not be predicted. While they do happen about once a year, they can happen sooner. Some have happened a few months apart, others happened several years apart. No reliable correction indicator has been found to point to the next one. Don’t expect one to be found.
Long term investors don’t worry about corrections. Short term traders love them because corrections provide great trading opportunities. Those traders and heavily leveraged margin accounts do need to act during corrections.
Investors have the choice of just waiting. Or they can act and pick up some nice gains. This lesson focuses on investors who are ready to act, not on traders or players on margin.
Note: no beginning investor should consider using margin or short term trading. Both using margin or short term trading can be used to make money. But doing it well requires a considerable amount of knowledge and experience. Be careful out there!
We know corrections happen and will happen again, but we do not know when or what will trigger the next correction. What we can do is be prepared for any money making possibility in the next correction.
Investors use corrections to check that each holding fits as a good long term dividend payer. That means a dip can be a wake up call if you find any holdings that should be weeded out of your portfolio.
Know what you own and why you own each holding. If any investment does not measure up to your expectations or needs, get rid of it. Those holdings that continue to meet your needs are good to keep.
Be ready for the dip by being ready to take action when it happens. No panic is allowed or needed! We have things to do when a correction happens. Remember, investors have a long term view, if you do not have a long term view, you are not investing.
Once you complete the portfolio check and make any needed changes, consider buying opportunities. Those opportunities come in three layers.
Buying more on the dip can be a money making strategy that bulks up positions on stocks that you own. Most consider dip buying trading rather than investing. But this is a case of using part of a trader strategy to add to investing gains. You can fatten returns on stocks you own by buying more at a discount in a dip.
Buying dips gets done when we expect an overall uptrend to continue in a few days or weeks. As always, there are no guarantees. So we may expect a return to positive markets but that may not happen. We could be wrong.
To make sure being wrong does not cost us, we wait to buy. We need risk control. That means we have to play with caution as buying the dip may be wrong if it is the beginning of a downtrend.
If so, we are not capturing good value but immediately lose more money! We could suffer the pain of being wrong and the messy pain of trying to catch a falling market. Or recall the old stock market warning, “…don’t catch a falling knife!” Ouch!
To be sure that buying the dip is good, we must have our homework done on any stock we want. To do that, check that there is no good reason why the stock price dropped. Ask questions and get answers.
Have earnings changed? How about the growth prospects? Any change in management, economic conditions, pending business? Have business operation or the outlook changed? Do we have a great company in an awful industry? Or does this look like a good deal.
If we have a good deal in hand we buy it on the upside. That means we wait until the bottom or lowest price has happened. We buy as prices recover and begin climbing back up. That makes sure our dip buying has the best chance to put us in a positive situation. So don’t buy on the way down but buy after the bottom and as the price rebounds. Buy on the upside.
For investors dips provide an interesting way to add to their bottom line. However, buying dips is not core long term investing strategy. Playing dips can be a core trading strategy but few traders use it well. It is a version of market timing.
If you snag a big winner at a bargain price during a dip you may be tempted to seek more of the same. Just don’t get drawn into any market timing strategy. Market timing does not work. All market timing strategies are short term flashes in the pan. They do not work nearly as well as long term investing does, period!
Dips happen and often arrive without making an early announcement. However the are some useful indicators that investors can keep an eye on. Those indicators offer no magic or guarantee as an individual or group of signals. Indicators are signals to pay attention but can not be counted on as a sure indication that a dip or recession looms.
However, paying attention to markets can make you more aware of the next potential dip or recession. These several indicators have regularly flashed useful signals of dips in time for investors to prepare a response. Those indicators are:
How investors buy dips matters because corrections are part of stock markets and present opportunities for sharp investors. Savvy investors need to manage dips to produce their best investing results. Knowing and using the correction management steps covered in this lesson can put money into your pockets.
How investors buy dips finds three money makers during market corrections. Dips hare checkups, winners on sale and bargain buys for savvy investors.
Winston Churchill sees crisis opportunity
Research confirms your investment holdings count
Tapering groupthink costs investors
Investors can deposit and WAIT!
Email me at [email protected].
Subscribe free and get White Top Investor lessons in your inbox!
Make money work for you by knowing how investors think, feel and act. Learn here The Investor Mind.
White Top Investor lessons, website layout and organization: click here.
Use White Top Investor lessons to learn investing. By doing that you can grow into a knowledgeable, comfortable and confident investor. To learn how, you can learn investing one small step at a time at your own pace. Do that and become the master of your financial security and independence. White top Investor never sells or shares our email list. Learn more.
Introduction to portfolio management Lesson 1
Pyramid portfolio wealth building Lesson 2
How investors buy dips Lesson 3
Distracted investing misses profits Lesson 4
Investors never average down Lesson 5
Market patterns repeat repeat repeat Lesson 6
Research confirms investment counts matter Lesson 7
Portfolio measurements to size positions Lesson 8
Growth protects investing profits Lesson 9
Winston Churchill said crisis = opportunity Lesson 10
Weeding your investment portfolio Lesson 11
Have a prosperous investor day!
Bryan
White Top Investor
[email protected] WhiteTopInvestor.com
Let’s connect, follow me; Twitter LinkedIn Facebook
Buttons below let you share this lesson with family and friends!
Image courtesy Unsplash.com
Copyright © 2013-19 Bryan Kelly
WhiteTopInvestor.com
Bryan Kelly uses White Top Investor to share his extensive investment knowledge and experience. He introduces strategies like the No-Worry Investor and the Index-Plus Layered Strategy, which encourage investor growth through personalized investment plans aligned with their unique circumstances and goals. By helping investors make money work for them and avoid common pitfalls, he aims to support the individual growth of wealth-building investors who can create secure, comfortable financial independence. With decades of experience, Bryan is committed to making stock market success accessible to anyone ready to take control of their financial future. The About page shares the story of his daughter's question that inspired the creation of White Top Investor.
Unlocking Wealth: How Balance Sheets Empower Investors
Retirement Plan Essentials: How to Build Your Secure Retirement
Pyramid Portfolios: Build Wealth and Make Money Work for You
Portfolio Optimization: The Importance of Stock Holding Size
Smart Diversification: Optimizing Investment Portfolios for Better Results
Charts Unlock Market Patterns: Finding More Money Making Opportunities
Media Exposes Financial Advisor Incompetence: How to Protect Your Wealth
Wealth Building Made Easy: Using Low Cost, High Return ETFs