Photo illustration by Barron’s Staff; (reference) Dreamstime (4)
It’s hard at any age to buy stocks when prices are falling, but for retirees it can be especially nerve-racking because their time frame for recovery is shorter if share values continue to fall. But buying a dip prudently can not only boost your returns in the short term but it also can bolster your portfolio’s long-term resilience.
Retirees in their 60s or early 70s with a longer time horizon can benefit from buying beaten-up, high-quality companies and dividend payers, for instance. And with planning and research there are ways to take the emotion out of buying during volatile times.
To paraphrase billionaire investor Warren Buffett, the time to buy is when others are fearful. Here’s how to build a buy-the-dip stock shopping list:
Think Long Term
John Person, president of Persons Planet, who offers investor education and trading courses, says retirees should buy stocks with the idea these will be held for at least three to five years. A longer-term mindset may alleviate any initial buyer’s remorse if prices fluctuate, which inevitably will happen during volatile markets.
For the buy-and-hold investor, he prefers owning stocks that have a good chance of longevity: mature firms have good brands and products, solid earnings and a strong outlook.
Simon Erickson, CEO at 7investing, a stock-picking and advisory service, says don’t just look at a stock’s current valuations, go back in history to see how the company has evolved. Each quarter he looks at valuation multiples to see how the company stacks up against itself. A number of websites, such as Morningstar or Yahoo Finance, offer valuation breakdowns at a glance and may list historical data, too. This lets investors track how fast sales and earnings are growing or operating margins are improving.
But valuations can contract because the stock price is falling for a reason not related to the company’s business model, such as a broad market sell-off, Erickson notes. “There’s a lot of short-term noise and emotions in the market that influences prices. If you’re a long-term investor and the company’s fundamentals are fine, that’s an opportunity for you to buy into,” he says.
Another reason to think long term is that the circumstances driving today’s volatility won’t be around forever. Markets are volatile now because of macroeconomic factors–including high inflation and geopolitical turmoil–and that’s affecting the prospects of a lot of high-growth tech companies that were on a lot of dream shopping lists, says Michael Rosen, chief investment officer of Angeles Investments.
“You may have liked the stock when it was 20% or 30% higher, but that was perhaps a different environment,” he says.
Person says with the Federal Reserve likely to raise short-term interest several times this year to combat inflation, it may be worth looking in the consumer-staples sector for companies that may better ride out any recessionary risks. Pharmacy chain
Walgreens Boots Alliance
(ticker: WBA) remains off its 2022 high and pays a 4% dividend. Person says clothes shopping might be considered a luxury if the economy goes into a recession, but certain segments may do better than others, such as discount retailer TJ Maxx, whose parent
) is also off its 2022 lows.
Do Your Research
Beyond looking at historical valuation metrics, research why the stock has fallen. Was there a broad-based market selloff as there was in January and the stock was caught up or was there a fundamental reason?
Erickson says a company with good fundamentals that fell during early 2022’s selloff was
(TSCO), a retail chain that sells farm supplies and other rural lifestyle products. It fell 20%, but announced during its February earnings call a 77% dividend increase and bought back $2 billion in shares. Since then it has recouped some losses.
Many times, though, stocks fall for a reason. Erickson says shares in
(FB), Facebook’s parent company, are repricing because the company’s business model of personalized advertising is being hurt by industry changes around privacy. Companies like
(GOOGL) are committed to stopping advertisers from tracking users across browsers and apps. Facebook recently said the changes may result in $10 billion of lost sales in 2022.
Rosen and Person also say technical chart analysis, which is the study of price patterns, offers historical guidance for retirees who are still doing their research. Charts offer a visualization of how prices are trending, whether up, down or in a holding pattern. Using simple technical indicators such as 90-day or 200-day moving averages can also highlight trends.
Weekly charts spanning 24 months will show where current prices are in the bigger picture, and investors should note how far a stock is from the lows or highs, Person says.
Key to avoiding heartburn in these markets is to move slowly and have a plan, experts say, especially if an investor is buying a particular stock for the first time. Start by earmarking a budget or a set amount to spend and then determine when to buy. The simplest way is to automate purchases on a monthly basis, although more-tactical retirees could scale-in purchases, that is buying small slices ahead of key planned news events or using price charts to inform decisions.
To make tactical purchases, Person suggests an investor look to Fed meetings this year, which stand to have an impact on markets. Tactical retirees who have their stock picked out can buy a small amount now and see how the market responds to Fed rate decisions. For someone with a budget of $1,000, they can put a third of that toward their preferred stock and hold the rest to buy later to see how markets digest the monetary-policy news.
Retirees who automate purchases for a set day of the month may want to avoid using the first and the 15th of the month since that’s when most institutions put retirement contributions into the market and can lead to slight price rises, Person says. He notes looking at price charts of the past two years markets have tended to dip on the third week of the month. “Rather than joining when everyone else buys, maybe buy when the professionals are taking a little bit of a profit,” he says.
Write to email@example.com