Author Topic: Buying Stocks Only On 10% Dips  (Read 7014 times)

bootyman

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Buying Stocks Only On 10% Dips
« on: May 30, 2015, 12:18:08 PM »
I know I know timing the market isn't thing around here.  But has anyone ever calculated the returns if you only bought stocks when the market was at least 10% lower then its record high?

waltworks

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Re: Buying Stocks Only On 10% Dips
« Reply #1 on: May 30, 2015, 02:28:42 PM »
This has been extensively discussed, as well as studied academically.

Here's a quick WSJ article on the subject, some googling will turn up lots of further info. The bottom line is that if you have money (and a long term investing horizon) you should invest it immediately to have the best chance for the best returns.

http://www.wsj.com/articles/SB10001424053111904563904576589134168081092

And a good MMM thread with some good links here:
http://forum.mrmoneymustache.com/investor-alley/is-the-stock-market-too-expensive-to-get-back-in/

This assumes you are using some sort of indexing strategy. If you are picking individual stocks (probably a bad idea but not the topic here) it gets a bit more complex, but basically, market timing is a fool's game.

-W

I know I know timing the market isn't thing around here.  But has anyone ever calculated the returns if you only bought stocks when the market was at least 10% lower then its record high?

milesdividendmd

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Re: Buying Stocks Only On 10% Dips
« Reply #2 on: May 30, 2015, 11:55:23 PM »
2 problems.

1.  All of the time that you are not invested as you wait for stocks to drop 10%.

2.  The times when the first 10% drop is just the opening salvo to a subsequent 75% drop. (ie negative momentum.)

Hey It's Me

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Re: Buying Stocks Only On 10% Dips
« Reply #3 on: May 31, 2015, 05:44:21 AM »
One challenge I see with the WSJ article is that it compares the returns of buying on dips to those of very large lump sum investments. Of course if you're comparing the average price of an index someone purchased 50 years ago (as in the example in the article) vs. an index someone bought sporadically over the next 50 years during market dips, the former would be cheaper than the latter. Inflation alone guarantees that.

The problem with that comparison is that it defies reality: most people do not have to choose between the option of investing a large sum once and then leaving it never to invest again or holding it for regular purchases during dips. For the average investor, the real scenario is deciding whether they should set up automatic investments on payday or hold those savings for a few weeks/months until the market "dips" to invest in bulk, then continuously repeat the process. That's the scenario that needs to be run for this to be an effective case study.

samuck

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Re: Buying Stocks Only On 10% Dips
« Reply #4 on: May 31, 2015, 06:11:06 AM »
I invest on a monthly basis without trying to time anything. This has served me well.. However, I also have some extra money on the side for additional investments when such market dips occur. Time will tell if this increases the performance.

waltworks

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Re: Buying Stocks Only On 10% Dips
« Reply #5 on: May 31, 2015, 08:05:38 AM »
Not at all; you are deciding whether or not to invest smaller lump sums over and over. The comparison to a large lump sum is completely apt, the scale is simply different.

Recently, for example, you would have been sitting on cash since 2011 (last time there was a 10% drop) with it literally earning nothing. In the meantime the S&P has almost doubled, so you'd need a ~50% crash just to buy in at that level again. And that's not including the dividends you missed out on in the meantime!

Again, some basic googling will give you lots of academic studies about this. It's market timing. It doesn't work unless you get very lucky or have a crystal ball. There are very long periods where the market doesn't dip 10% at all. There are also crashes where the first 10% is just the beginning of a long downturn. In the meantime, of course, your cash is losing value, whether you have a little of it or a lot.

It's not controversial. It doesn't work.

-W

The problem with that comparison is that it defies reality: most people do not have to choose between the option of investing a large sum once and then leaving it never to invest again or holding it for regular purchases during dips. For the average investor, the real scenario is deciding whether they should set up automatic investments on payday or hold those savings for a few weeks/months until the market "dips" to invest in bulk, then continuously repeat the process. That's the scenario that needs to be run for this to be an effective case study.
« Last Edit: May 31, 2015, 08:19:02 AM by waltworks »

aschmidt2930

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Re: Buying Stocks Only On 10% Dips
« Reply #6 on: May 31, 2015, 01:08:19 PM »
The data seems to show that for the general population, this strategy will not pay off.

What muddies the waters are the handful of lucky people who just happened to implement this strategy a few years before a recession, and made out like bandits.  These are the exceptions, not the rule. 

arebelspy

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Re: Buying Stocks Only On 10% Dips
« Reply #7 on: June 01, 2015, 02:16:20 PM »
I like to invest when an individual stock drops 99%.  Then you're practically guaranteed to make money!  :)

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seattlecyclone

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Re: Buying Stocks Only On 10% Dips
« Reply #8 on: June 01, 2015, 05:04:39 PM »
I like to invest when an individual stock drops 99%.  Then you're practically guaranteed to make money!  :)

Just in case anyone doesn't realize you were kidding, I want to be very clear that this is NOT actually true.

forummm

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Re: Buying Stocks Only On 10% Dips
« Reply #9 on: June 01, 2015, 06:53:23 PM »
I like to invest when an individual stock drops 99%.  Then you're practically guaranteed to make money!  :)

Just in case anyone doesn't realize you were kidding, I want to be very clear that this is NOT actually true.

Enron, Worldcom, Fannie Mae, Lehman, etc.

arebelspy

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Re: Buying Stocks Only On 10% Dips
« Reply #10 on: June 01, 2015, 07:44:16 PM »
I like to invest when an individual stock drops 99%.  Then you're practically guaranteed to make money!  :)

Just in case anyone doesn't realize you were kidding, I want to be very clear that this is NOT actually true.

Enron, Worldcom, Fannie Mae, Lehman, etc.

Thanks for the hot tips!  I'll go buy all in on those right now.
We are two former teachers who accumulated a bunch of real estate, retired at 29, and now travel the world full time with two kids.
If you want to know more about me, or how we did that, or see lots of pictures, this Business Insider profile tells our story pretty well.
We (rarely) blog at AdventuringAlong.com. Check out our Now page to see what we're up to currently.

hodedofome

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Re: Buying Stocks Only On 10% Dips
« Reply #11 on: June 01, 2015, 10:05:26 PM »
I do something like this but I have multiple trading systems/strategies that are uncorrelated to the stock and bond markets. So when one of them is in say a 10%+ drawdown I'll put new money into that one. It's only because I have multiple strategies that this works.

For example, I might have a stock momentum strategy, a value stock strategy, and a tactical global momentum strategy. There are times when the value strategy is sucking wind while the other two are doing fine, so I'll put new money into the value strategy. If it's an extreme move, I may take some money out of the other strategies and put even more in. This is rare however (think 2008, 2011, etc).

If I was only investing in 1 strategy (buy and hold a set AA in index funds) I wouldn't do it. You might be sitting on the sidelines for a very long time.

forummm

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Re: Buying Stocks Only On 10% Dips
« Reply #12 on: June 02, 2015, 07:08:03 AM »
I like to invest when an individual stock drops 99%.  Then you're practically guaranteed to make money!  :)

Just in case anyone doesn't realize you were kidding, I want to be very clear that this is NOT actually true.

Enron, Worldcom, Fannie Mae, Lehman, etc.

Thanks for the hot tips!  I'll go buy all in on those right now.

These stocks have such an unusual demand that you won't be able to find anyone selling them (except FM) on the mainstream exchanges.

frugalnacho

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Re: Buying Stocks Only On 10% Dips
« Reply #13 on: June 02, 2015, 09:10:40 AM »
One challenge I see with the WSJ article is that it compares the returns of buying on dips to those of very large lump sum investments. Of course if you're comparing the average price of an index someone purchased 50 years ago (as in the example in the article) vs. an index someone bought sporadically over the next 50 years during market dips, the former would be cheaper than the latter. Inflation alone guarantees that.

The problem with that comparison is that it defies reality: most people do not have to choose between the option of investing a large sum once and then leaving it never to invest again or holding it for regular purchases during dips. For the average investor, the real scenario is deciding whether they should set up automatic investments on payday or hold those savings for a few weeks/months until the market "dips" to invest in bulk, then continuously repeat the process. That's the scenario that needs to be run for this to be an effective case study.

The size of the investment doesn't matter.  If it was the optimal decision to invest $100k, it will still be optimal regardless of the amount.

Oh but you do.  Every time you have a small sum of cash to invest you have to make the exact same decision: Do I invest this money now, or do I hold on and wait for a dip to buy cheaper? It doesn't defy reality, it mimics it.  Your entire investing career is going to be a long string of making this decision over and over.  The correct decision the vast majority of the time is to invest ASAP.

davisgang90

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Re: Buying Stocks Only On 10% Dips
« Reply #14 on: June 02, 2015, 10:14:04 AM »
I always get a chuckle out of the titles I read in Investor Alley.  Many seem to read like this: "I know it is impossible to time the market, but what if I try to time the market?"

Financial.Velociraptor

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Re: Buying Stocks Only On 10% Dips
« Reply #15 on: June 02, 2015, 12:25:06 PM »
There was some research published recently by Stansberry and Associates that found buying at 52 week highs actually outperforms buying at 52 week lows.  It is counter-intuitive but the data backs it up.  You really do have to respect the trend if you are going to engage in any type of active management.

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Re: Buying Stocks Only On 10% Dips
« Reply #16 on: June 02, 2015, 12:44:27 PM »
I like to invest when an individual stock drops 99%.  Then you're practically guaranteed to make money!  :)

Just in case anyone doesn't realize you were kidding, I want to be very clear that this is NOT actually true.

Enron, Worldcom, Fannie Mae, Lehman, etc.

Thanks for the hot tips!  I'll go buy all in on those right now.

Better keep an eye on RebelSpy, sound like he is getting a little loopy with only 2 days left!

nobodyspecial

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Re: Buying Stocks Only On 10% Dips
« Reply #17 on: June 02, 2015, 12:53:26 PM »
Enron....

These stocks have such an unusual demand that you won't be able to find anyone selling them

That's a pity, it would be cool to have an Enron stock certificate on the wall.

theoverlook

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Re: Buying Stocks Only On 10% Dips
« Reply #18 on: June 02, 2015, 01:12:12 PM »
Enron....

These stocks have such an unusual demand that you won't be able to find anyone selling them

That's a pity, it would be cool to have an Enron stock certificate on the wall.

You're in luck!

http://www.ebay.com/sch/i.html?_nkw=enron%20stock%20certificate&clk_rvr_id=840866399375&mfe=search

foobar

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Re: Buying Stocks Only On 10% Dips
« Reply #19 on: June 02, 2015, 02:18:00 PM »
I always get a chuckle out of the titles I read in Investor Alley.  Many seem to read like this: "I know it is impossible to time the market, but what if I try to time the market?"

It is human nature. We dislike chaos and like to see patterns when non exist. My favorite right now is how long is the bull market: Is it 6 years (since the bottom in 2009) or is 3.5 years (from the drop in late 2011).  A 6 year bull market is long. A 3.5 year one is just average. What is the difference? It is all about if the drop was 19.8% or 20.1% depending on your exact metrics. I think the 19.8% was from closing while the 20.1 was from intraday high to low.

If you go back and look at history, intra year 10% drops happen every other year or so. Odds are the market will do something like go up15%, drop 10% and go back up 15% over that 2 year period and you will lose money. Occasionally you win by having the 10% drop happen early in the period and sometimes you will lose more by having it not happen for 3+ years.