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There’s an old investment saying “buy the dip and sell the rip”. This means that when the stock market falls, I buy. When it tears higher and some UK stocks seem to be overvalued, I might consider selling at a profit. At the moment, it’s more about buying the dip. We are experiencing high volatility in the market at the moment and around individual stocks. So with £ 750 of my excess cash, here’s how I would buy the dip in practice!
The most important way I can benefit from a dip is by being ready in the first place. In the past, declines in UK equities have tended to last only a relatively short period. By the time I’ve seen the move lower and decided what I want to buy, it might already be too late.
Therefore, I always have a list of a dozen stocks that I would like to buy if the stock price were falling. Some of these are quality companies that have been around for decades. They include them as HSBC, BT Group and J Sainsbury. I feel that such companies have proven their business models over a long period of time. I know these companies are profitable as long as their businesses are well run. So in case of a market downturn, I feel like these are examples of where I want to buy the dip.
Also on my shopping list are dividend payers. I must be ready to buy here as a fall in the stock price is helping to boost the dividend yield. So if I am ready and know which companies I want to buy ahead of time, I can benefit from getting a higher return. That is important to me at the moment given the high inflation.
Reduces my risk by buying more UK stocks
One mistake I used to make in the past was to allocate all my free money to a few UK stocks. I thought that because I had a high belief in a particular stock, why only put part of my funds in it? I learned the hard way that when my choice fell in value, I should have spread my risk over more stocks instead.
This is even more true when I try to buy the dip in the market. I can not predict in advance whether this will be a dive or the start of a crash. I also do not know whether a particular UK stock will outperform the broader market movement, or whether it will fall even more. That’s why I split my £ 750 into chunks of £ 150- £ 200 and put each amount in another UK stock.
I feel this is the best way to manage my risk by buying the (potential) dip! On the downside, I could lose some potential gains if a stock really roars back from the dive. But I’m happy to sacrifice this to stay sensible.