Could ‘buying the dip’ boost your retirement income?

Buy the dip is a phrase commonly used by both professional and retail investors.

Internet chat rooms and forums often discuss the topic when there has been a share market fall. Memes and jokes encourage investors to consider buying the dip when markets are down, based on a view that they have always recovered from temporary falls.

Why have markets fallen?

Global and emerging share markets have had a rough start to 2022. Global technology shares have fallen in anticipation of higher interest rates. Many large technology companies such as Netflix, Zoom and Robinhood are down 75 to 90 per cent from their 2021 highs.

Emerging market shares have also dropped due to the Russia-Ukraine war and weaker Chinese growth.

Australian shares outperforming

It’s not all bad news though. Despite a 9 per cent dip from recent highs, Australian shares are up 1.8 per cent in 2022. Globally, Australia has one of the better performing share markets in 2022.

This is due to its high exposure to banks and resource shares, which benefit from higher inflation, interest rates and commodity prices. Gold is the other asset that has risen in 2022, up 6.2 per cent to the end of April.

Many growth-focused global share funds are down 25 per cent or more over the 12 months to 30 April.

Should you buy the dip?

We’ve recently been asked by a lot of clients who have cash parked on the sidelines whether it’s time to ‘buy the dip’.

Here are two reasons why the Vanguard Australian Shares Index ETF (VAS) may continue to perform well in 2022 despite interest rate worries, the European conflict and falls in global technology shares.

1. Australian shares are fairly valued compared to history

Compared to history, the Australian share market looks quite ‘normally’ priced at the moment based on its ‘earnings multiple’. The market price/earnings multiple (also known as its P/E ratio) measures the market index divided by market earnings. It’s a quick and easy way to see how much people are prepared to pay for earnings.

A higher P/E means people are willing to pay more for earnings. That could be because they’re confident in those earnings growing or simply because other alternative investments (like cash or term deposits) don’t offer much of a return.

The Australian market, measured by the S&P ASX/300 is near its long-term historical average of 14.8x earnings. By comparison, at the peak of the tech boom in 2000, shares were trading as high as 23x earnings. That would translate into a share market that’s 50 per cent higher than today. By this measure, Australian shares have room to grow, especially if they are considered defensive compared to other markets, such as the US, which are dominated with high P/E tech companies.

Source: Stockspot, Market Index, JP Morgan as of April 2022.

2. Australian shares are fairly valued compared to other assets

Compared to the income returns of other investments available to investors, Australian shares still look fairly attractive.

Despite rising interest rate expectations, cash, term deposits and Australian government bonds still only give you a return of 0.5-2.5 per cent per annum.

Residential property rental yields in major Australian cities aren’t much better at 2.7 per cent per annum, according to SQM Research.

Most global share markets are paying only 1-2 per cent in dividend income.

The Australian share market has an attractive dividend yield of 4 per cent, which increases to close to 5 per cent with franking credits.

In fact, the extra dividend return received from investing in Australian indexed shares compared to the RBA interest rate hasn’t looked better for the past 20 years.

That might be another reason Australian shares have outperformed global markets in 2022.

Is it a good time to buy the dip for long-term investors?

For those looking to invest for the long run, I advise to avoid the social media gossip and meme chatter. Speculation and day trading is not something I recommend.

The current sell-off in markets offers an opportunity to invest at reasonable prices. Shares and bonds may continue to be volatile. However, provided your investing horizon is at least a few years, buying the dip and using diversified low-cost ETFs is a sensible strategy to build wealth.

This article first appeared on stockspot.com.au and has been edited and republished with permission.

Chris Brycki is the founder and CEO of Stockspot and has been vocal in calling out industry ‘Fat Cats’. He was an inaugural member of two advisory committees for industry regulator ASIC, and was previously a fund manager at UBS.

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