Yes, it is a good idea to buy on a dip in the stock market. But how do you know when the market has reached its low?
Well, you don’t, of course. Tip: when it starts back up, give it a couple of days before you jump in. And by all means, don’t jump in now! This market looks like a real correction, not just a hiccup.
Why? The economy is still shaky, in spite of the Fed’s notion that everything is okay enough to start to raise its rates that it charges to banks again after years of almost zero interest.
And why do we care about this? Because, banks took the opportunity to lower the rates they pay depositors, also known as savers, when the Fed began its push to reduce rates.
Remember that when the economy began to tank in 2008 due to a collapsing housing market among other financial disasters, the idea was that interest rates needed to be low to induce businesses to borrow in order to invest in new equipment, etc. That didn’t work, but the Fed kept pushing down anyway.
Banks and government agencies like the US Federal Reserve Bank fiddled around for years trying to find a path out of the economic quagmire.
Part of the fiddling involved keeping interest rates so low that banks were actually paying the Fed to keep their own money on deposit at this huge central bank. Since inflation, even though prices didn’t go up as expected when giant amounts of digital money were allegedly poured in the economy, stayed amazingly low.
Reasons for the low inflation are many and complex, but leaving that aside, the end result of all of the pumping of money, was that stock prices went UP. So, anybody with the courage or blind ignorance (IFO) to invest in the stock market in, say, 2009, is sitting pretty right now.
In IFO’s case, she had come into a nice amount of cash. She despised the low interest rates, since she is a compulsive saver. But reading tons of stuff about the economy and investing led her to develop her current investment philosophy.
She found many good, solid companies paying some 2% to 4% in dividends and began to buy shares in those companies. Some she just loves, because she likes what she reads about the CEO, or loves the products the company makes, or is impressed by their dividend-paying record. Some of those companies have been paying dividends regularly for decades.
Now that Mr. Market is again in a very bad mood, she can look with calm upon her financial situation. Yes, her net worth is shrinking alarmingly. But her income is fine, just fine. In fact, one of her favorites just increased its annual dividend by 8% and now has a yield of almost 4%, four times or more (!) than she’d get in a bank savings account.
Now, it just so happens that IFO has been too busy to do any more stock buying for the past several months. Her cash stash is building up. Yay! However, she’s not about to buy anything right now. She is simply drawing up a list of companies she will buy when she guesses the time is right.
She’s already made a big goof by getting a company recently that has fallen precipitously. She’s going to hang on because it fits her investment model described above, but she feels like an idiot anyway. If only she’d waited! Ach, c’est la vie.