IT’S notoriously difficult to do, but master the ‘buy the dip’ trick and it could help supercharge your investment savings.
Buying the dip is where you buy a stock at a low price, in the hope it will recover and make you money. So, how do you do it? Our investment whizzes explain the secret formula to spotting a winning stock.
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‘Buying the dip’ is a bit like shopping in the sales.
You’re buying your investment at a lower price than it’s worth – and you’ll bag a profit if the value bounces back.
Analysts often call these ‘undervalued’ stocks – and it can happen when the market overreacts to bad news or temporary drops.
If you want to try the ‘buy the dip’ method, be aware that it works best if you have a lump sum to invest, say £100 or £200.
It won’t work as well for someone who wants to invest little and often.
That’s because you can get a bigger return on your investment with a lump sum.
The idea is that you’ll want to buy a greater portion of shares – but only invest money that you can afford to lose – when they’re at a cheaper price.
So, you get more shares for less money, and when the price goes back up, you’ll make a larger profit.
What are the risks I need to watch out for?
BEFORE you start investing, you need to understand the risks.
The return you make will depend on how much you invest and where you put your money.
As we have seen recently, the stock market can dramatically fall.
The US market last year saw its biggest drop since the start of the Covid pandemic after President Donald Trump announced plans to introduce tariffs on goods imported from other countries.
The UK’s own stock market, the FTSE 100, fell by more than 10 per cent after the news.
You must be prepared for the value of your investment to fall as well as rise – so only invest money you can afford to lose.
You need to be willing to invest cash for at least five years to mitigate any dips in the market and allow your money to recover.
If you can’t afford to lock up your money for this long, investing may not be right for you.
It’s usually better to drip-feed money into your investments instead of putting down a big chunk of money in one go.
Before you start investing, experts say you should have a minimum of six months’ of wages in a savings account for emergencies.
Plus, your lump sum investment spends a longer time in the stock market – and will benefit from something called “compounding”.
This is when the profit you make from your investment snowballs into a bigger pot of cash.
But be warned – investing in individual stocks is a risky strategy.
You are relying on the fortunes of just one company to grow your money.
Experts agree that ‘buying the dip’ is also a risky investment method to use.
The key is to only invest money you can afford to lose, and make sure you are not investing ALL your cash in just one company.
Experts also say investing a lump sum is riskier than investing little and often – because the second strategy means you’re not locking away all your cash in one go.
Finally, a less risky strategy is to invest in funds, which buy you small slices of a variety of different companies.
But if you want to try out the ‘buy the dip’ method, here’s how to do it.
‘Buy the dip’ stocks that made investors thousands
WE’LL reveal later which stocks experts believe could be great ‘buy the dip’ stocks now.
But these are the investments that could have made you a fortune in the past…
Rolls-Royce
Rolls-Royce saw its share price crash during the pandemic as the travel industry took a major hit – but it’s now climbed over 1,200% in the last five years.
That means if you’d invested while the share price was down, you would’ve made a fortune by now.
If you’d invested just £100 in September 2022 when the share price was at rock bottom, you would have £2,140 now, according to WhatifInvest.
Meta
Stocks in social media giant Meta crashed in November 2022.
Investors had panicked after it spent tens of billions of dollars on its VR-led Metaverse, and as it faced rising competition from TikTok.
But it announced massive cost cuts the following year and saw a huge rebound – with its share price rising by over 450%.
If you’d invested £100 in October 2022, you would now have around £640.
Nvidia
AI chipmaker Nvidia is one of the world’s most popular stocks now.
But it crashed in October 2022 after demand plummeted following a post-pandemic slump in computer sales.
However, when OpenAI released ChatGPT the following month, it kicked off the AI boom.
Nvidia’s graphics processors became a red-hot commodity and the stock shot up by over 1,000% over the next two years.
If you’d invested £100 in October 2022, you would now have around £1,662.
Four tricks to spotting a ‘dip’
The trick to this method is knowing how to spot when a stock is in a dip.
This can be difficult to do – and experts spend years training to get clued up on the method.
Your first step is to look for ‘quality’ stocks – these are companies that are usually financially stable, highly profitable and competitive in their industry.
If you’re going to ‘buy the dip’, you want to choose companies that are established and have previously performed well, but have taken a temporary downturn.
Don’t pick new companies – due to the fact they haven’t proved that they can survive a prolonged downturn.
Second, read about whether a company is currently performing well by reading its company results.
Look at updates in the business sections of newspapers too, and keep tabs on the wider news.
Third, take a look at the share price and its history.
Investment platforms like Hargreaves Lansdown have tools which let you type in a company name, and you can see the live share price.
Don’t just assume a stock is a bargain because it is cheaper than it was six months ago – it could still fall further.
That means you need to move on to step four – which is evaluating whether the stock’s true value is worth more than its current share price.
It can help to check the stock’s Morningstar rating.
Investment research company Morningstar rates stocks out of five stars, based on how well it’s expected to perform.
Stocks with four or five stars are the best to go for as they’re likely to be undervalued and expected to perform above average.
Ian Futcher, financial planner at Quilter, says the ‘buy the dip’ method should never be your entire investment strategy.
That’s because it’s impossible to know when share prices are at their lowest, so you could see your money go down further.
Ian adds: “A falling share price alone does not make a company a bargain. Before investing, it is important to understand why the share price has fallen and whether the underlying fundamentals of the business remain intact.
“A good company experiencing a temporary setback may recover strongly, but a structurally challenged business can continue falling regardless of how cheap it appears.”
Make sure you have investments across different companies, regions and industries, and try to invest small amounts consistently rather than reacting what’s happening in the market.
Three ‘buy the dip’ stocks to consider
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Morningstar is famous for its rating system, which helps evaluate different investments and can help you pick out undervalued stocks.
We asked its experts to pick out the stocks they believe are cheap right now but could rocket up in value – here’s what they said…
1. LVMH
LVMH is the world’s largest luxury goods group, owning brands including Louis Vuitton, Christian Dior, Tiffany & Co and Givenchy.
Jelena Sokolova, senior equity analyst at Morningstar, says it has “some of the strongest brands in the industry”.
However, it has been one of the worst-performing luxury stocks so far this year, with its share price falling by almost 30%.
Morningstar says this is because luxury goods have fallen out of favour with wealthy consumers recently.
But Jelena believes LVMH could still outperform the industry in the long term, if you’re willing to wait out the current dip.
“Louis Vuitton has the number one market share in leather goods, full control over distribution, and the group has leading resources to invest behind its brands, including almost €10billion in marketing spend, which exceeds the annual revenue of many luxury brands,” she says.
2. Reckitt Benckiser
British consumer goods company Reckitt Benckiser is known for huge brands like Dettol, Nurofen, Durex and Vanish.
Diana Radu, equity analyst at Morningstar, says the company’s share price has struggled since late February because of “concerns over slowing growth, input cost inflation, and geopolitical disruption”.
It was also weighed down by a court case in the US involving allegations that its products for premature infants could cause a serious bowel disease.
However a jury ruled unanimously in favour of the company this week, reducing the risk it will need to award any damages.
Diana says she believes the stock is currently trading for 25% less than its true value, meaning it is a bargain right now.
She says there is strong potential for the company to grow its revenue in the long-term.
3. Heineken
Morningstar estimates that beer maker Heineken is 18% undervalued right now.
The company has struggled in recent years with declining sales and it has not performed as well as its international rivals.
However, Verushka Shetty, equity analyst at Morningstar, says: “Heineken has one of the strongest premium beer portfolios globally, and we expect this category to continue gaining share.”
She also points out that it’s been investing in innovating with its alcohol-free and low-alcohol beers.
Verushka adds: “We expect Heineken’s cost-saving initiatives, including planned headcount reductions of 6,000 over two years, to improve profitability.”
Newly appointed chief executive Rafael Oliveira will start in the role next month, bringing two decades of experience in the consumer goods sector.
Still, the company will need to execute its strategies well under the new boss to maintain market share.