When the U.S. stock market takes investors on a wild ride, you may end up feeling queasy about investing. But work on developing an iron stomach. Volatility can mean it’s as good a time as any to invest in the market — provided you’re in it for the long haul.
To be clear, no one can tell for certain when a run of market volatility will end. But there are plenty of opportunities to invest in stocks if you’re willing to take a more tactical approach. In practical terms, that means finding attractive investments within specific sectors of the U.S. market or diversifying your portfolio to include smaller companies or international exposure. (New to this? Get some background on how to buy stocks.)
Spoiler alert: We won’t recommend individual stock picks here. Why not? Generally speaking, you should be skeptical of “hot tips” dispensed on the internet. What’s more, it’s important that you believe in the investment merits of any potential addition to your portfolio, as opposed to its get-rich-quick potential. Finally, a mutual fund or exchange-traded fund often is a more efficient way to tackle this strategy for many investors.
Here are some strategies for buying in response to a market dip:
Expect continued economic growth ahead? Try these sectors
Broad market index funds (such as those tracking the S&P 500) are a proven — and successful — way to invest in the stock market over a long time period. But your investment strategy needn’t end there.
The S&P 500 is commonly divided into 11 sectors, such as information technology, health care and energy companies. This can be a starting point for deciding which types of stocks you should invest in.
An easy approach for buying the dip is via mutual funds or ETFs that track specific sectors of the market.
If you believe the U.S. economy will continue to expand, consider investing in companies that will benefit from such growth. Those companies generally fall into sectors referred to as cyclical — demand moves up or down with the economy. Think: retailers, airlines, consumer technology, restaurants, homebuilders and automobile makers, among others. In the wake of a broad market selloff, some of these stocks will be cheaper than they’ve been in months.
An easy approach for buying the dip is via mutual funds or ETFs that track these specific sectors. Alternatively, you can do the due diligence to identify individual stocks within particular sectors. Regardless of the approach you take, do your research and pick investments you believe have long-term potential.
» Ready to begin? Learn how to research stocks
Expect rockier times ahead? Try these sectors instead
If you don’t buy the notion that the U.S. economy, corporate profits and stocks are poised for further growth ahead, there’s another approach: Get defensive. And there’s a bonus: This approach allows you to stay invested in stocks (rather than getting even more defensive and loading up on bonds, for example).
For tactical investors, this strategy focuses on buying sectors that aren’t as economically sensitive because demand for these companies’ products or services remains relatively steady, regardless of what’s happening in the economy. Generally speaking, the defensive sectors are considered to be health care, telecommunication, utilities and consumer staples stocks. Again, you can tackle such an approach with sector-tracking funds or by identifying individual stocks you determine have favorable long-term potential.
» What’s working lately? This year’s best-performing stocks
Go small — or go away from home
A final way to add diversification to your portfolio is by investing in smaller companies — or markets outside the U.S. Such strategies are beneficial for reducing your overall risk, regardless of market turmoil.
The U.S. stock market is divvied up into three major categories — large-caps, mid-caps and small-caps — with the most-widely referenced gauges for each being the S&P 500, the S&P MidCap 400 and the Russell 2000. Dip or no dip, it’s prudent to allocate money in your portfolio to companies of various sizes, and volatility can present an opportunity to increase exposure.
Investing in international stocks can help reduce risk in your portfolio.
Similarly, investing in international stocks can help reduce risk in your portfolio. Even though the world’s economies are very interrelated, the performance of major indices can vary widely across different geographies. When wading into international waters, your best course of action is to buy U.S.-registered mutual funds or exchange-traded funds that track foreign markets.
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Why buy the dip
While experts advise that you don’t try to time the market — guessing when stock prices have bottomed or peaked — that shouldn’t preclude you from grabbing opportunities. The U.S. stock market has proved to be a fantastic long-term investment, offering an average annual return of about 10% over the last century, so don’t let the prospect of more volatility keep you on the sidelines.
The U.S. stock market has proved to be a fantastic long-term investment, offering an average annual return of about 10% over the last century.
Dollar-cost averaging, a strategy of making steady investments in the market at regular intervals, will inherently capture some buy-the-dip opportunities. Or making a conscious decision to dive into the market — say, when you’ve received a bonus or a tax refund, for example — is another way.
No matter what you do, buying when the market has experienced sharp corrections has been a successful strategy based on similar periods going back to 1960, according to data from Fidelity Investments.