Have you ever bought an outstanding stock at a wonderful price and been proud of yourself? These are the times when we are happy to be investors.
However, a bit of bad news in the markets turns your premiere investment into a big flash of red. The price plummets, and now you don’t like looking at your stock account as much.
Scenarios like this can happen daily when investing in the stock market. Many people do not fully understand the stock market’s emotional rollercoaster ride.
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Price vs. Value. Many people fail to understand the difference between price and value. You’ll do much better with your investing habits if you grasp this concept. I’ll give you a non-stock market example.
I love to play Pokemon games on my Nintendo Switch. Nintendo sells these games for $60 a pop. When I was younger, I had the time to play these games for 100s of hours; today, I might squeeze out 20 hours of playtime over a month.
The games are worth the $60 price tag; however, I can’t afford to buy them at this price. When the price drops to $30, I still value it at $60. I am getting a fantastic deal, and I can justify this cost to myself.
Stock market sales. Investing in the stock market should function like my Pokemon example. I should be excited if I buy AT&T at $30, and then it goes on sale for $20.
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However, most people think that they lost money—which isn’t the case. As long as the company stays solvent and in good order, you should do fine leaving your money in place.
Now, you should want to research why the price drop occurred. Many times it’s a downgrade in status from ratings companies or analysts. Or the company is having legal or regulation trouble.
Going back to my Pokemon example. If I buy the game for $30 in 2010, what do you think will happen to the price by 2020? That’s right; it’s probably $80 by then. If you can be patient, time will reward you.
What do I do if the price decreases? If you still believe in the company or ETF, it’s time to average down. When you buy stocks, you’ll get an average price of your purchases.
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If I buy 20 shares of AT&T (T) for $600, my average cost for each is $30. When the price of AT&T goes below $30 on the stock market, my collection of stocks will reflect red.
When you see this red inside your portfolio, it’s time to buy more. This will drive your overall cost per share down. We call this averaging down, and it needs to be one of the strategies you employ.
The many strategies of the stock market. Averaging down goes hand in hand with dollar-cost averaging. DCA prevents us from trying to time the markets. You cannot time the market because it functions on emotion.
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Market participants have greedy and fearful days—we call this market sentiment. We have no idea how the market will feel tomorrow, let alone next year.
We use dollar-cost averaging to smooth out our emotions and rationally invest in products we trust. We can also turn on dividend reinvestment that can function simultaneously.
Averaging down is a third strategy to add to your investing repertoire. Because we already have a stable of securities we trust, such as blue chips, closed-end funds, and preferred shares, we prepare ourselves for a price drop.
When price drops happen to good stocks. Buying the dip involves purchasing a larger amount of shares based on fire-sale prices. Let’s go back to my $30/share AT&T example.
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I have 20 shares @ $30. If the price drops to $20, I will buy 20 more shares. The total amount I have invested is $1,000 for 40 shares. My new average cost per share is $25.
If the price of AT&T returns to $30, I now reflect a $5/share profit. Using this strategy makes investing fun, simple, and profitable.
Dividends for the win. Even better, we are investing in dividend-paying companies. This means when the price decreases, our dividend yields increase. We are building bigger paychecks just by buying shares on sale.
Use the dividend yield. Many brokerages show you the dividend yield of each of your investments. You can quickly look at the current yield to see how your stocks are doing in the market.
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Sometimes if your investments do well, you may never see them go red again. How do you know if it’s an excellent time to buy the dip?
You can go off historical dividend yield or set your own buying parameters. Let’s say AT&T averaged a 6% dividend yield for the last ten years. If I see its yield at 8%, it may be a buying opportunity for me.
Similarly, I may set a rule to invest in McDonald’s (MCD) whenever it yields over 3%. My investment may not reflect red because I bought McDonald’s years ago, but I can see when it is a good deal by my standards.
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Don’t fear the news. The news will always keep you frightened and on your toes. Their job is to get clicks. There will always be a new recession to worry about or a new bubble to burst.
Take the headlines and do your own analysis. Understand that the more worried you are, the more money they make. Remove emotion from your investing habits.
If you want emotion, use it in your speculation budget. I recently bought eight shares of Sofi Technologies (SOFI) for $7/share. It is a beaten-down stock, but I feel that it can recover. So I put a few bucks into the stock.
There is no need to back up the truck on an unknown company. I can invest with emotion for a few bucks. When it comes to buying the dip, I am going with my favorite blue-chip stocks like Procter & Gamble (PG), T. Rowe (TROW), and Altria (MO).
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Conclusion. Always have a plan when investing. It’s not an emotional joy ride. If you can remove emotion from 90% of your investing, you should do well in the markets.
Averaging down is a strategy we can employ along with dividend reinvestment and dollar-cost averaging. These concepts help us remove emotion and make sound decisions. Yes, you will build wealth slowly—that’s the point.
You want to build a foundation of great stocks at great prices. Buying the dip and averaging down allows you to get proven companies at huge discounts. Plus, you get to increase the size of your paychecks overnight.
When the news makes you fearful, you must do your due diligence. Is this a long-term headwind (problem) for the company? Do you still have faith in the long-term prospects? If so, you should utilize the principle of averaging down. Good Luck!
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Disclosure: I am not a financial advisor or money manager, and any knowledge is given as guidance and not direct actionable investment advice. I am an Amazon Affiliate. Please research any investment vehicles that are being considered. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article. All Right Reserved Military Family Investing
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