Monday, October 26, 2020

Buy the Dip (minder-grinder)

Buy the dip. At least in stock markets. But why?

This advice is certainly not sound all the time but has some merit to it.

Markets go up, 75% in time, way more often than they go down, 25% in time.

Governments and Central Banks have a stake in the markets (wealth effect & inflation). They will do everything in their power (monetary and fiscal policies) to either stabilize markets or propel them higher. And people in general are naturally more inclined to optimism (greed or fear of missing out) than to pessimism (fear of loss). And of course one of humanity's main endeavours is to increase wealth (market capital & dividends).

Also bears (swift, violent and erratic) are much more difficult to ride than bulls (slow, mild and grinding).

So it pays to be bullish more often than not. I normally stay bullish as long as the main indexes remain above the 8 day EMA. Below the 8 day EMA and above the 200 day SMA I'm neutral. I only turn bearish when we go below both the 8 day EMA and 200 day SMA, and I remain so, until the indexes move above the 8 day EMA again. This means I'm currently neutral.

If markets consolidate, correct or enter bear market territory it is usually a good idea to start thinking about the levels at which you want to add to the stocks that are already part of your core portfolio. The one you hold for the long term.

For great investors the sun always shines. If markets go up they become more wealthy, if markets go down they are able to buy good stuff more cheaply. So see declines less as a threat and more as an opportunity.

Hopefully this helps to ease the pain and anxiety associated with loss of existing value. 

Furthermore it may make sense to invest a very, very, very small part of your total investment portfolio in gold or bitcoin (for me that is about 1%). See it as an insurance premium for when things really go wrong, and you want to be covered for the consequences of serious currency depreciation and/or financial system reorganisation (general debt rescheduling).

I do not trade or invest according to these views. For that purpose I only use the Trend Trade & Investment Strategies which are explained at the bottom of this blog. Please also read the disclaimer there.