There’s an old investing adage to “buy the dip and sell the rip”. What this means is that when the stock market falls, I’ll buy. When it rips higher and some UK stocks appear overvalued, I can consider selling for a profit. At the moment, it’s more a case of looking to buy the dip. We’re seeing high volatility in the market at the moment, and around individual stocks. So with £750 of my spare cash, here’s how I’d buy the dip in practice!
Have a shopping list ready
The main way that I can take advantage of a dip is by being ready in the first place. In the past, dips in UK stocks have tended to only last a relatively short period of time. 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 or so stocks that I’d be happy to buy if the share price was falling. Some of these are quality companies that have been around for decades. They include the likes of HSBC, BT Group and J Sainsbury. I feel that such firms have proved their business models over a long period. I know that those companies are profitable as long as their businesses are well run. So in the event of a market slump, I feel these are examples of where I’ll buy the dip.
Also on my shopping list are dividend payers. I need to be ready to buy here as a fall in the share price helps to boost the dividend yield. So if I’m ready and know which companies I want to buy ahead of time, I can take advantage by getting a higher dividend yield. This is important to me at the moment, given the high rate of inflation.
Reducing my risk by buying multiple UK stocks
A mistake I used to make in the past was allocating all of my free money to just a few UK stocks. I thought that because I had a high conviction about a particular stock, why only put part of my funds in it? I learnt the hard way that when my choice fell in value, I should have spread my risk over multiple stocks instead.
This is even more true when I’m trying to buy the dip in the market. I can’t predict ahead of time if this will be a dip, or the start of a crash. I also don’t know whether a particular UK stock will outperform the broader market move, or if it’ll fall even more. That’s why I’ll be splitting my £750 into chunks of £150-£200 and putting each amount in a different UK stock.
I feel this is the best way of managing my risk of buying the (potential) dip! On the downside, I might lose some potential gains if one stock really roars back from the dip. But I’m happy to sacrifice this in order to stay sensible.