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Markets:

European stock markets push higher as Omicron strain concerns ease

Why ‘buy the dip’ is the worst stock market advice you can follow

·3-min read
A confused woman (illustration)
A confused woman (illustration)

Market mottos have guided DIY investors’ hands over the years, helping them navigate tough market periods with old adages that have been passed down for generations.

But some famous expressions can do more harm than good to new and experienced investors alike, experts have warned. Telegraph Money rounds up some famous phrases – and why they might be best ignored.

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‘Buy the dip’

Rob Burgeman of the wealth manager Brewin Dolphin warned that while major market downturns could look like the ideal opportunity to invest, it was a risky long-term strategy.

“Growing your money is about time in the market, rather than timing the market,” he said. “It is a very tricky game to try and predict which direction the market will take in periods of volatility.”

While the influx of young investors that joined the market last year had enjoyed strong returns during the post-Covid recovery, he added that significant market downturns only happened once every decade or so.

“Some people have done really well since the Covid bust last year. But sometimes the market does not always come roaring back. In 2002 and 2003, for example, stocks experienced a long drag. Investors should remember that trying to call the bottom is incredibly difficult.”

‘Buy what you know’

Buying shares in companies that are familiar to you can be a good starting point for investors, Mr Burgeman said, but this should always be supported by more thorough research.

“If you are new to investing, and walk into a shop for a product you really like, and all your friends also like that product, it could be a good sign to consider buying shares in that company," he said. “But it can be difficult to look at it without rose-tinted glasses.”

He pointed to Dr Martens, the iconic shoe-maker that listed at the beginning of this year. Its shares have dropped 19pc since it floated.

The "buy what you know" approach could also result in a heavy bias towards buying British.

Mr Burgeman added: “You have to remember that there is a whole world of investment out there – if you only invested in British companies you would struggle. We do not have a particularly strong consumer electronics industry here, compared with America for example.”

'Sell in May and go away'

Making changes to your portfolio every season will rack up transaction fees and make you miss out on market gains over the summer. Jason Hollands, of wealth manager Tilney, warned against the "sell in May and go away" market proverb.

“The saying dates from a time when stockbrokers used to disappear for the summer season of social events,” he said.

“It has now morphed into a theory about market seasonality. While it is true that average returns are lower in the summer – they are still positive and so there is no reason to sell up in a robotic fashion each year.”

...and the market maxim you should follow

While some mottos are best avoided, other investing truisms have served investors well.

Mr Burgeman pointed to star fund manager Terry Smith’s famous rule that you should "buy good companies and do nothing".

The strategy has served his eponymous fund house well, with the Fundsmith Equity fund delivering returns of 113pc over the past five years.

“This is a great lesson for investors to follow,” Mr Burgeman said. “Try to look for companies with a strong track record of growing their market share and entering new businesses.”

He highlighted Coca-Cola, which has seen its market value increase by almost a third over the past five years.

But Mr Burgeman warned that even "doing nothing" had potential downsides.

“Investors are bad at admitting when they are wrong. You can try to order the tide back – but if something has fundamentally changed the investment case for a stock, remember that the first sell will be the cheapest one," he said.

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