The dreaded “C” word is starting to rear its ugly head again. On Twitter and elsewhere, people are beginning to speak of a “crash” in stocks, owing mainly to fears that the COVID-19 Delta variant will plunge the world into another recession. In recent weeks, media reports have been hinting at the possibility of renewed lockdowns in the fall if Delta keeps rising. This has predictably spooked markets, which have sold off.
It’s true that some stocks would be hit hard by a major outbreak of COVID-19 if one occurred — airlines, hotels, and retailers, in particular. These industries are highly vulnerable to COVID-19 safety measures like travel restrictions and lockdowns and really do lose money when such measures are enacted.
Nevertheless, as we learned in March 2020, not all industries are super vulnerable to pandemic restrictions. Tech — particularly e-commerce — made out fine during the lockdowns. Stocks like Shopify (TSX:SHOP)(NYSE:SHOP) rocketed to new highs amid the pandemic, and other stocks recovered from their March losses quickly. Given that these kinds of stocks make up a huge percentage of the major indexes, there is reason to believe there will not be any massive crash in the markets as a whole. But even if there is, you can make the most of it by using it as an opportunity to buy stocks at lower prices than you could before. In this article, I’ll review two strategies that enable you to do just that.
Dollar-cost averaging (DCA)
DCA is a strategy that allows you to capitalize on market crashes by buying no matter what the stock price is. You just pick a regular schedule (say, once a month) and buy no matter what the price is. With this strategy, you’ll get some of your buys in when stocks are high and some when stocks are low. So, you’ll never be the bag holder who went all in at the top.
Buying the dip
A more aggressive strategy for capitalizing on market crashes is buying the dip. This is where you wait for stocks to go down before buying. This is riskier than DCA, because you may never actually get prices as low as you sought and could miss out on a rally. The upside is that when this strategy works, it pays off massively.
Let’s imagine that you’d bought Shopify stock in March 2020. At its lowest that month, it was at $495. Before the crash, it sat at $704. Buying such an extreme dip may have been a scary experience. But if you bought and held to today, you’d be up almost $1,400 — a 278% gain!
To a lesser extent, you’d have had a similar experience buying the broad TSX index through the iShares S&P/TSX 60 Index Fund (TSX:XIU). Like Shopify, XIU dipped in March 2020. In this case, the dip was 32.4%. It may have been a scary time to be holding XIU. But if you bought right at the bottom and held to today, you’d be up 65%. This just goes to show that, if you buy stocks low, you can realize huge gains on the leg up — whether it be high-risk assets like Shopify or broad market indexes like XIU.
This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.
Fool contributor Andrew Button has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Shopify and Twitter. The Motley Fool recommends the following options: long January 2023 $1,140 calls on Shopify and short January 2023 $1,160 calls on Shopify.