nisiprius wrote:I believe the idea of "buying the dips" or "buying on RBD's" is flawed.
The dangerous thing about "buying the dips" thinking is that it incorporates assumptions about market behavior, relating to size of movements and time--assumptions that are rarely expressed, let alone tested. The mental danger is the idea that it must be good simply because it's a "dip." The word dip itself is dangerous because implies it is temporary and will not only be followed by a rise, but followed promptly by a rise. Similarly, "really bad day" implies that it's just a day, and that--as with personal mood swings--tomorrow will be better.
It is always possible that you've just sunk your last available dollars into a sudden -2.5% drop that is the start of a 1929-magnitude crash; the only reason for thinking it isn't is that such events aren't frequent, while 2.5% drops are frequent, so most 2.5% drops aren't the start of 90% crashes. The burden of proof on advocates is to show that investing on RBD's isn't going to increase your chances of buying into a crash--to a degree that, in the long run, balances the frequent small gains the strategy gives you.
The mental model of investing on a RBD is a statement about market psychology--the same kind of plausible statement as "a high dividend indicates a well-managed company." Let me see whether I can state it accurately. Those who advocate opportunistic purchases on RBD's, please wordsmith this for me so that it accurately states your point of view.
"There are no rational reasons for the market to drop more than -2.5% in a single day, because fresh information about the market as a whole, of that magnitude, can't possibly be obtained and processed that quickly. The whole stock market today can't possibly really be worth as much 2.5% less than yesterday. Therefore, a movement of about this size is a reliable indicator of an emotional market overreaction, an excessive response to some real news. Such a response is virtually certain to correct itself a few days later when people have had a chance to digest the actual numbers. Therefore, drops of about this size mean-revert quickly, forming a very-short-term "dip," not the start of a "crash." The size of the drop is important, because it is a filter that selectively and accurately signals emotional overreaction. A -0.1% drop doesn't work, because it is just random noise. A -15% drop doesn't work, because is a sign of real trouble, not emotional overreaction. But -2.5% drops are almost always just Mr. Market overreacting, and systematically investing extra amounts just after -2.5% drops will give you a long-term, consistent edge."
Nisi makes a really good point, and I wish I had his wisdom back in 1999 (I think that was the year). Personal anecdote....the day the NASDAQ, which seemed to be perpetually climbing,.dropped from something like 5000 to about 3500 or 4000....people around me were panicking but I saw it as a "buying opportunity". And I kept seeing "buying opportunities" as it subsequently declined. It had to bounce back...always does....and I had a long time to wait. So I sunk a pile of money into the NASDAQ that day. That was about 14 years ago. In 'real" dollars, if I stayed in the NASDAQ, I'd probably still be down 40% or so. I'm not sure of the numbers but you get the general idea.
I still wonder if, statistically, one does well to buy on dips and vice versa. My guess is no, but others here are more well-versed.
Another one of my "brilliant" ideas in the 90s was to follow the closing of the Asian/European markets, which would close well before the NYSE would open. If they went up significantly, I would assume that the NYSE would correlate and follow so I would buy before the opening with the idea of selling in the PM. And vice versa. I didn't really put that into practice often enough to know if it worked or not, but it seemed to make sense to me at the time. Come to think of it, I wonder if that strategy has ever been investigated- maybe somebody here would know.
Anyway, now I am in plain old boring low-cost index funds and CDs, so I don't usually notice the rises and falls unless they smack me in the face....haven't looked at the Wall St Journal in years. Am I missing out on something? Who knows. I certainly have a lot more of my life back, and that is worth its weight in gold.