buying more shares when market goes down

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buying more shares when market goes down

Postby peter1a » Thu Nov 22, 2012 7:20 pm

Hello,

I am a long term investor who is fully invested in total stock market indexes ,US and world. When market pulls back ,I wish I'd owned more share ,but I cant as I have no more money coming in and I m 100% in stocks. I was wondering if there is a way to benefit from those pullbacks. Every year there are small market correction ,maybe 5 in a year,that I can't benefit from .
It looks like I have only 2 options to acquire more shares or to benefit from market pull backs.


1.Buying more shares on margin (considering very low margin rates)
2.Selling a portion a my portfolio a replacing it with deep in the money call options

My strategy would be as follows:
Every time market falls 5% I will sell 5% of my portfolio and buy call option with strike price DIM that has almost no time value. (if SPY is at 140 then I would buy 70 jan14)
I would own max 10% of my portfolio in options.In case there is a huge pullback ,my portfolio wouldn't be wiped out.By buying DIM i'm getting 2:1 leverage.
When market recovers and goes up 5% I can sell the options ,and buy again stocks.

Could you let me know what do you think about this strategy or if there are any other ways to benefit from market pullbacks .I am a long term investor .30years or more.

thanks



Is is also important to note,that I am not a usa resident so the usa tax code doesnt apply to me. I can sell anytime and still pay the same tax rate.
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Re: buying more shares when market goes down

Postby ofcmetz » Thu Nov 22, 2012 8:15 pm

I don't have all my portfolio in equity, but instead I keep a portion in fixed income investments. This gives me some thing to sell when I need to rebalance into equities after a market correction or crash.
Showing up at the donut shop at 5 am to get them hot out of the oil is an example of successful market timing.
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Re: buying more shares when market goes down

Postby Calm Man » Thu Nov 22, 2012 10:14 pm

OP, I would forget it. All options come with associated risk. You do not want to deal with margin and possible margin calls and please know that 85% of calls expire worthless. The only way I see for you to exercise your strategy is to accumulate cash and wait for a dip to buy. Of course, the dip might occur after a big run up. It probably is not worth your while trying to time the market. Better people then we try all the time and fail most of the time,
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Re: buying more shares when market goes down

Postby Clive » Fri Nov 23, 2012 6:31 am

Go to etfreplay.com, backtesting, ETF portfolio

Plug in SSO 50%, TIP 50%
Period CUSTOM, and start from June 20th 2006 (earliest date for SSO).
Test that strategy and as the free version is buy and hold, compare that progression with SPY (default), and you'll have an idea of how periodic rebalancing back to 50-50 weightings might have relatively performed had you added to stocks after retracements, reduced from stocks after advances, whilst perhaps averaging 50-50 exposure levels overall.

(PS: The right hand drop down includes the option to select individual years and its worth having a look at each year separately to see the relative comparisons i.e. as though you'd rebalanced back to 50-50 once each year).
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Re: buying more shares when market goes down

Postby cjking » Fri Nov 23, 2012 8:08 am

I believe that, realistically, there's little you can do.

Holding some cash so that you can buy at when prices are down may improve your Sharpe ratio but will reduce your expected returns, which you presumably care more about.

I believe if you look closely at the cost of using options you will find it is far higher than the expense ratios you would otherwise encounter, and it makes that route unattractive.

A cheaper (but more dangerous) option would be to get leverage using index futures, however I would not do that either. Once you go over 100% equities you usually open yourself up to risks that don't exist if you stay at 100%. It's not worth it.

I think 100% really is a sweet spot, for a certain type of investor, it doesn't make sense to go below it, but it also doesn't make sense to go above it.

Your best option might be to have a flexible mortgage and a investment account, and rebalance between them. Any credit available on your mortgage account counts as "cash" to the extent it give you buying power for equities, but may not count as "cash" from a psychological point of view when you consider whether you are reasonably maximising your returns, as even a 100% equity investor can consider a paid-for house as an attractive objective. (Note that any debt used for leverage must be non-callable, if this type of mortgage is an option for you, read the small print.)
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Re: buying more shares when market goes down

Postby BL » Fri Nov 23, 2012 9:57 am

Most Bogleheads don't believe in 100% equities, let alone trying to get above that. It is usually suggested that everyone needs some bonds (either age in bonds or up to age - 20) and they would be available to rebalance, that is, buying more equities when prices fall, according to a predetermined plan. Take a look at the Wiki here and/or read some of the recommended books.
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Re: buying more shares when market goes down

Postby staythecourse » Fri Nov 23, 2012 11:06 am

In my short life I have NEVER heard of a long term investor EVER saying that a 100% equity portfolio is not risky/ volatile enough. You either sound like a young investor (without much money in the game), person who has not had much money in the market during a bear market, or a speculator.

If 100% equity is good enough for the 99.9% of all investors that have EVER lived you have to ask yourself why you think it isn't good enough for you?

If you want to be MORE risky just tilt toward small and value. That is at least arguable of a risk that is well compensated.

Good luck.

p.s. If you want the easiest way to make more money that is just save more.
...we all think we're above average investors just like we all think we're above average dressers... -Jack Bogle
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Re: buying more shares when market goes down

Postby EmergDoc » Fri Nov 23, 2012 11:21 pm

I know a Boglehead who made a very persuasive argument for >100% equities. He called it something to the effect of mortgaging your retirement. Here was an article on mortgaging your retirement on Forbes from way back in 2005: http://www.forbes.com/forbes/2005/1114/150.html

It didn't end well in actual practice for various reasons. Read all about it here:

viewtopic.php?t=5934
1) Invest you must 2) Time is your friend 3) Impulse is your enemy | 4) Basic arithmetic works 5) Stick to simplicity 6) Stay the course
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