Author Topic: Buying back stock funds on the dip  (Read 1798 times)

tampaite

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Buying back stock funds on the dip
« on: May 23, 2019, 10:31:48 AM »
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« Last Edit: June 28, 2019, 08:40:57 AM by tampaite »

dandarc

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Re: Buying back stock funds on the dip
« Reply #1 on: May 23, 2019, 10:38:54 AM »
Don't try to time the market. Buy when you have money to invest and hold for the long term.

FIRE 20/20

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Re: Buying back stock funds on the dip
« Reply #2 on: May 23, 2019, 01:20:41 PM »
Trying to understand how buying a dip works.

Let's assume DOW Jones closes at 25,316 the same as when it closed on Jun 8, 2018(see attachment)

If I buy a stock fund that track Dow Jones today say for $100 - would it be the same as buying when it had closed on Jun 8, 2018?

I know I have to factor in dividends so the $100 may have grown to $102 or higher. What else do I have to factor in while buying on the dip ?

To directly answer your questions:
If I buy a stock fund that track Dow Jones today say for $100 - would it be the same as buying when it had closed on Jun 8, 2018?
No - as you mentioned you missed out on dividend growth.

What else do I have to factor in while buying on the dip ?
The main thing to factor in is that it doesn't work in the long term and you can't predict the occasional time it will work in the short term.  The odds are vastly higher that you'll miss out on growth because the market won't return to the low you're targeting - leaving you sitting on cash that would have grown if you had just invested when you could and held for the long term.  Sure, you'll hit once in a while, but the losses that you miss from being out of the market will overwhelm any occasional gains. 

GuitarStv

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Re: Buying back stock funds on the dip
« Reply #3 on: May 23, 2019, 01:27:06 PM »
Trying to understand how buying a dip works.

Over the long term?  It doesn't.

davisgang90

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Re: Buying back stock funds on the dip
« Reply #4 on: May 23, 2019, 02:08:49 PM »
Trying to understand how buying a dip works.

Let's assume DOW Jones closes at 25,316 the same as when it closed on Jun 8, 2018(see attachment)

If I buy a stock fund that track Dow Jones today say for $100 - would it be the same as buying when it had closed on Jun 8, 2018?

I know I have to factor in dividends so the $100 may have grown to $102 or higher. What else do I have to factor in while buying on the dip ?
You might want to do a little more reading before you post timing the market threads.  Not a terribly popular plan here at MMM.

bacchi

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Re: Buying back stock funds on the dip
« Reply #5 on: May 23, 2019, 02:53:20 PM »
Inflation eats away at your "dry powder." $100 kept in cash for a year is worth $98 today.

dandarc

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Re: Buying back stock funds on the dip
« Reply #6 on: May 23, 2019, 03:52:13 PM »
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Great - that's what I thought. As long as I buy back on the dip and factor in the dividend growth, I should be back to square one.

This kind of thinking is why my last trip to the casino cost me $18K. In my case, the lesson to be learned is "don't even go to the casino", which I obviously know on an intellectual level, but just as clearly don't know it in my gut. In your case the lesson is "don't time the market".

This kind of thinking "If I can just quickly get back to where I was" will hurt your investment results.

ChpBstrd

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Re: Buying back stock funds on the dip
« Reply #7 on: May 23, 2019, 09:12:47 PM »
From a trading perspective, you broke even on the decision either to buy on June 8, 2018 or sit in a money market fund earning about the dividend amount.

From an economic perspective, the companies in the DJIA have been buying back stock and increasing earnings since June 8, 2018, so I would argue buying it today is a better deal than buying it last year. You are now buying more EPS per dollar than you could have bought on June 8, 2018. Earnings, not market prices, are the fundamental underlying support for any 30+ year retirement withdraw strategy. The name of the game is to buy as much earnings and earnings growth as you can buy. it's good when stock prices fall because you can buy more earnings for less money.

If you are the type to sell covered calls, for example, you missed out on the money you could have earned that way by not entering your position on June 8, 2018. I don't know what option prices were like back then, but calls on DIA (price: $254.86) expiring March 30, 2020 at the 262 strike price sold today for $10.80/share. In other words, you could get paid 4.2% right now in exchange for being willing to sell your shares for a 2.8% profit, not including another 2% in dividends. So a 9% maximum upside and less downside than if you just owned the shares.

I don't think most people understood your question.

crammarc

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Re: Buying back stock funds on the dip
« Reply #8 on: May 24, 2019, 07:41:08 AM »
If you are the type to sell covered calls, for example, you missed out on the money you could have earned that way by not entering your position on June 8, 2018. I don't know what option prices were like back then, but calls on DIA (price: $254.86) expiring March 30, 2020 at the 262 strike price sold today for $10.80/share. In other words, you could get paid 4.2% right now in exchange for being willing to sell your shares for a 2.8% profit, not including another 2% in dividends. So a 9% maximum upside and less downside than if you just owned the shares.

Interesting idea ChpBstrd!

I wonder if people who retire and keep large percentage in equities take advantage of this.  Would it make sense to sell covered calls on 4% of your index fund shares?  You get a little cash to buffer against short term drops in the market but still retain the unlimited upside for other 96%.  If you are using mostly equity sales to fund your retirement I think using this strategy would lessen the number of shares you would need to sell if the market declines.  If the market goes up and your shares get called away, fine, you were going to have to sell some anyway. 

ChpBstrd

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Re: Buying back stock funds on the dip
« Reply #9 on: May 24, 2019, 11:01:49 AM »
If you are the type to sell covered calls, for example, you missed out on the money you could have earned that way by not entering your position on June 8, 2018. I don't know what option prices were like back then, but calls on DIA (price: $254.86) expiring March 30, 2020 at the 262 strike price sold today for $10.80/share. In other words, you could get paid 4.2% right now in exchange for being willing to sell your shares for a 2.8% profit, not including another 2% in dividends. So a 9% maximum upside and less downside than if you just owned the shares.

Interesting idea ChpBstrd!

I wonder if people who retire and keep large percentage in equities take advantage of this.  Would it make sense to sell covered calls on 4% of your index fund shares?  You get a little cash to buffer against short term drops in the market but still retain the unlimited upside for other 96%.  If you are using mostly equity sales to fund your retirement I think using this strategy would lessen the number of shares you would need to sell if the market declines.  If the market goes up and your shares get called away, fine, you were going to have to sell some anyway.

Itís actually a risky strategy that Iíve had little luck with during the past few boom years.

First of all, you have no downside protection other than the small premium you received from selling the call. This makes corrections and bear markets only slightly less damaging (e.g. maybe 1%) than buy-and-hold.

Second, there is a risk that the share price will zoom up above your strike price, your shares will be called away for a lot less than their market price, and you will not be left with enough cash to buy back the same number of shares again - maybe never again.

Third, options prices (calls and puts) are influenced down when volatility falls, and volatility tends to fall as stock prices go up. So in 2018-19 when prices were at what turned out to be peaks, that ideal time to sell calls was also generally the time when you would have earned the least selling at any given strike price $X out of the money. The inverse was also true - you got paid more for selling calls during the corrections but then lost piles of money on the rebound. So a choppy market works against the strategy. In the example above, the timing and pricing were just right so that a near-the-money call with a duration of one year would have been profitable, but many other covered call configurations would have lost.

Joe Schmo

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Re: Buying back stock funds on the dip
« Reply #10 on: May 25, 2019, 06:36:16 AM »
I remember when the market hit 12k, up from 6k after the crash. I was sure thereíd be a big dip. Of course Iím a simpleton so I know nothing.

Itíll be interesting to track your ďIím buying on the dipĒ thread when you start it.

FIREstache

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Re: Buying back stock funds on the dip
« Reply #11 on: May 25, 2019, 06:46:30 AM »

Instead of timing the market, go for time in the market.

CoffeeR

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Re: Buying back stock funds on the dip
« Reply #12 on: May 25, 2019, 06:47:26 AM »
My understanding is market timing doesn't work over long term but BUT if you were sitting on the sideline and you had an opportunity to BUY on the dip, it would be the same as buying at a certain past date.
Define "dip" please. What algorithm/mechanism are you using to identify the dip? It is my contention that it is impossible to identify the dip except in hind side. Show me wrong and I will be extremely grateful to you. Heck, I do not need you be be 100% accurate... 60% accuracy will make us all very rich.


FLOW

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Re: Buying back stock funds on the dip
« Reply #13 on: May 25, 2019, 07:10:28 AM »
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Say I had $100 to invest in June 2018 and I didn't invest and the value of a mutual fund was $100 in June 2018 and it went up to $120 in Apr 2019 but it's back to $98 now.  If I invest now the full $100 at $98 price point, wouldn't it be the same as purchasing in June 2018. Again, mutual fund was used metaphorically.

My understanding is market timing doesn't work over long term but BUT if you were sitting on the sideline and you had an opportunity to BUY on the dip, it would be the same as buying at a certain past date.

Yes, you would be buying the dip, but of course you would miss out on any dividends paid out between June 2018 and when you bought back in.  Not sure why everyone is being so coy about what buying the dip means, and what market timing means... This reminds me of the Jim Gaffigan bit where he talks about everyone getting so coy when there is cake at the office, ie, "What is this called?  Cake?"

About a month ago, VTI was at 151.  At that point, I decided to move a substantial part of my equities (about 170K) to cash.  And then I bought back the VTI I sold when it hit 143. I turned 170K in cash into 170K in VTI: I bought the dip.  I was lucky to buy the dip, and foolish to buy the dip, but yes I bought the dip.  I successfully timed the market.  This means that when VTI eventually reaches 151, I'll have more money than I would have if I hadn't timed the market. 

We all know what cake is.  We all know what buying the dip means (except for OP maybe?).  Like buying a lottery ticket, it's generally best to avoid trying to buy the dip, or time the market, but people win the lottery all the time.  They get good outcomes all the time.  You can make a bad decision and get a good outcome.  Okay, dead horse beat.  Have a nice day. 

Dabnasty

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Re: Buying back stock funds on the dip
« Reply #14 on: May 28, 2019, 02:40:48 PM »
My understanding is market timing doesn't work over long term but BUT if you were sitting on the sideline and you had an opportunity to BUY on the dip, it would be the same as buying at a certain past date.
Define "dip" please. What algorithm/mechanism are you using to identify the dip? It is my contention that it is impossible to identify the dip except in hind side. Show me wrong and I will be extremely grateful to you. Heck, I do not need you be be 100% accurate... 60% accuracy will make us all very rich.

Did you even read my first post? I just showed you the "dip". If am accurate, how will it make you rich??  Q was buying on a dip and not selling and unless you sell you won't get rich.

You've said a lot of these responses aren't answering your question but I think that's because your question is confusing and the thread title is misleading.

Correct me if I'm wrong, but I think what you're asking is "if I buy a DOW index fund today at $X, would this be any different than buying on a previous day when the cost was also $X?" Aside from dividends which you already mentioned, I believe the answer is no.

Whether or not prices were higher between those two dates is irrelevant to your question so it seems odd to ask about buying "on the dip". I think that's where most of the don't time the market responses are coming from.