Bogleheads are noted for making investment decisions based on reliable academic research.
I have noticed several posters recommending "buy on the dips." Now, Morningstar has done a study of "buying on dips" and this is part of their conclusion:
"Buying the dips hurt returns in stocks, real estate, and currencies, but not long-term U.S. government bonds. The losses are big and exceedingly unlikely to be random events. An investor who bought the S&P 500 on dips and sold into rallies would have lagged the benchmark by 2.3% annualized since 1926."
This is more evidence that Mr. Bogle's "Stay-the-course" advice is the surest route to investment success.
Well, their study didn't look at buying into dips. It looked at buying into dips and selling into rallies. That's very different.
My thought process in 2H 2008 through 2009 was to buy every time it seemed like the fear and panic hit a new level. I don't regret any of those purchases. At the same time I had no illusion that I was going to be able time the bottom perfectly. I just figured that someday the bear market would end and all of my purchases would look cheap.
Bogleheads are noted for making investment decisions based on reliable academic research.
I have noticed several posters recommending "buy on the dips." Now, Morningstar has done a study of "buying on dips" and this is part of their conclusion:
"Buying the dips hurt returns in stocks, real estate, and currencies, but not long-term U.S. government bonds. The losses are big and exceedingly unlikely to be random events. An investor who bought the S&P 500 on dips and sold into rallies would have lagged the benchmark by 2.3% annualized since 1926."
This is more evidence that Mr. Bogle's "Stay-the-course" advice is the surest route to investment success.
I was disappointed that the study did not include the well-defined concept of "worst day" as a buying opportunity.
- DDB
"We have to encourage a return to traditional moral values. Most importantly, we have to promote general social concern, and less materialism in young people." - PB
By definition, my rebalancing bands will have me automatically buying after an asset class dips. Similarly, my rebalancing bands will have me automatically selling after an asset class rallies.
Now I readily admit that my 50/50 buy-hold-rebalance strategy will likely underperform buying and holding 100% S&P 500 benchmark used in the Morningstar study. And that is fine with me.
Ignore the market noise. Keep to your rebalancing schedule whether that is semi-annual, annual or trigger bands.
"Buying on the dips" is absurd. If you wait a day to buy, you've given up a day of expected return. You may feel good because the price is 1% lower today that it was yesterday, but it's 3% higher than last week, so who cares?
livesoft wrote:Does anybody "rebalance on the dips"? Or is that a bad strategy, too? What's a dip anyways?
I call it a dip when my Investment Policy Statement calls for rebalancing. So, yes I effectively rebalance on the real dips - not those little 2% hiccups that would be picked up in the M* "study".
This topic interests me because the concept of "buying on the dips" is one of those mental traps... it sounds so plausible. I'm 100% certain that it doesn't work, but I haven't been able to find a nice, simple convincing explanation of why it doesn't.
The problem is, of course, what's a "dip." Essentially people say "I know one when I see one." But in order to make a test, you need to reduce a definition of a dip to an operational rule, which is what Lee did. The problem is that when you do that, people say "Oh, but that's not the right rule, it picked out things that anyone can see shouldn't have counted as dips."
Annual income twenty pounds, annual expenditure nineteen nineteen and six, result happiness; Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.
This topic interests me because the concept of "buying on the dips" is one of those mental traps... it sounds so plausible. I'm 100% certain that it doesn't work, but I haven't been able to find a nice, simple convincing explanation of why it doesn't.
The problem is, of course, what's a "dip." Essentially people say "I know one when I see one." But in order to make a test, you need to reduce a definition of a dip to an operational rule, which is what Lee did. The problem is that when you do that, people say "Oh, but that's not the right rule, it picked out things that anyone can see shouldn't have counted as dips."
The problem, as I see it, is this: If you plan on having investable money with which to buy on a dip, then that money that does not participate in growth while not invested. Now, the other thing to think about is - what if there are going to be multiple dips in a row? If a dip appears and you have cash reserves, do you plow all your cash reserves in at once? The market could slide downward for the next month.
I think when it comes down to it, "buying on dips" is synonymous with market timing. You have to have non-invested money in order to buy on the dips, which means you have to "not buy" what you would have otherwise bought, which is equivalent to selling at a specific time because you think you can buy at a better time.
bob90245 wrote:By definition, my rebalancing bands will have me automatically buying after an asset class dips. Similarly, my rebalancing bands will have me automatically selling after an asset class rallies.
Now I readily admit that my 50/50 buy-hold-rebalance strategy will likely underperform buying and holding 100% S&P 500 benchmark used in the Morningstar study. And that is fine with me.
Exactly. Isn't the popular 5/25 band rebalancing buying on dips?
This topic interests me because the concept of "buying on the dips" is one of those mental traps... it sounds so plausible. I'm 100% certain that it doesn't work, but I haven't been able to find a nice, simple convincing explanation of why it doesn't.
The problem is, of course, what's a "dip." Essentially people say "I know one when I see one." But in order to make a test, you need to reduce a definition of a dip to an operational rule, which is what Lee did. The problem is that when you do that, people say "Oh, but that's not the right rule, it picked out things that anyone can see shouldn't have counted as dips."
The problem, as I see it, is this: If you plan on having investable money with which to buy on a dip, then that money that does not participate in growth while not invested. Now, the other thing to think about is - what if there are going to be multiple dips in a row? If a dip appears and you have cash reserves, do you plow all your cash reserves in at once? The market could slide downward for the next month.
I think when it comes down to it, "buying on dips" is synonymous with market timing. You have to have non-invested money in order to buy on the dips, which means you have to "not buy" what you would have otherwise bought, which is equivalent to selling at a specific time because you think you can buy at a better time.
I agree with your advocacy TL, but think Adrian's buy on the way *way* down was both a gamble and paid off. I too switched some FI @ 7.2k and 7k SP500 in 09. Not the bottom but close to the average of the SP500 in 98"( 11 years earlier prices) but in 09. I do not pay attention to little dips. -JMO-
bob90245 wrote:By definition, my rebalancing bands will have me automatically buying after an asset class dips. Similarly, my rebalancing bands will have me automatically selling after an asset class rallies.
Now I readily admit that my 50/50 buy-hold-rebalance strategy will likely underperform buying and holding 100% S&P 500 benchmark used in the Morningstar study. And that is fine with me.
Exactly. Isn't the popular 5/25 band rebalancing buying on dips?
Not necessarily. If all asset classes go up at varying speeds, you'll still end up needing to rebalance. 5/25 is more of a strategy to reduce the frequency of overbalancing. Eliminates a lot of effort without modifying results very much (compared to, say, monthly rebalancing or a much tighter band).
- DDB
"We have to encourage a return to traditional moral values. Most importantly, we have to promote general social concern, and less materialism in young people." - PB
jon-nyc wrote:Well, their study didn't look at buying into dips. It looked at buying into dips and selling into rallies. That's very different.
My thought process in 2H 2008 through 2009 was to buy every time it seemed like the fear and panic hit a new level. I don't regret any of those purchases. At the same time I had no illusion that I was going to be able time the bottom perfectly. I just figured that someday the bear market would end and all of my purchases would look cheap.
jon-nyc wrote:Well, their study didn't look at buying into dips. It looked at buying into dips and selling into rallies. That's very different.
My thought process in 2H 2008 through 2009 was to buy every time it seemed like the fear and panic hit a new level. I don't regret any of those purchases. At the same time I had no illusion that I was going to be able time the bottom perfectly. I just figured that someday the bear market would end and all of my purchases would look cheap.
I second it.
The study may not apply to those who are in their accumulating phase/stage, those who only buy and do not sell.
If I have no idea which direction market goes, and my routine DCA purchases may fall on dates when S&P price is higher, what is wrong if I buy some extra same shares when price is lower here and there just to lower purchasing cost?
I always try to get extra cash invested as soon as possible, regardless of what the market is doing any day or week. (Though admittedly during major crashes I tend to freeze up and not buy or sell anything).
This is consistent with studies that showing lump sum investing to be generally superior to dollar cost averaging (at least in so far as equities are concerned).
I would expect to to be for the same reason - over a sufficiently long time horizon equity returns have historically been superior to holding cash. DCA delays putting some of your money to work and therefore deprives you of the potential benefits of equities superior returns. While there will be times when this is a good thing, on average it wont be.
bob90245 wrote:By definition, my rebalancing bands will have me automatically buying after an asset class dips. Similarly, my rebalancing bands will have me automatically selling after an asset class rallies.
Now I readily admit that my 50/50 buy-hold-rebalance strategy will likely underperform buying and holding 100% S&P 500 benchmark used in the Morningstar study. And that is fine with me.
Exactly. Isn't the popular 5/25 band rebalancing buying on dips?
Yep. I did this recently. When the Nekkei dropped 20% in 2 days i shored up my EWJ allocation at March 09 prices.
tfb wrote:Isn't the popular 5/25 band rebalancing buying on dips?
Probably, but to my mind (donning my asbestos suit) it is at least open to question whether that works, either.
Let me put it this way. There've been innumerable discussions as to whether or not rebalancing is just for risk control or whether there is really a "rebalancing bonus." The fact that there can even be debate about this suggests that it's just one of those things, one of those bells that now and then rings. People post all these comparative results from different rebalancing strategies but it's all backtesting over a limited period of time.
I know Rick Ferri is insistent on "buy, hold, and rebalance" but, just like the performance of "good" actively-managed funds, appetizing 1%, 2% outperformance for a decade doesn't prove much. "Dogs of the Dow" worked for a while, too.
If you want a certain allocation it's common sense that you should rebalance whenever you are way out of whack with that allocation, but I just don't buy the idea that rebalancing is a magic "buy low, sell high" formula.
Annual income twenty pounds, annual expenditure nineteen nineteen and six, result happiness; Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.
Bogleheads are noted for making investment decisions based on reliable academic research.
I have noticed several posters recommending "buy on the dips." Now, Morningstar has done a study of "buying on dips" and this is part of their conclusion:
"Buying the dips hurt returns in stocks, real estate, and currencies, but not long-term U.S. government bonds. The losses are big and exceedingly unlikely to be random events. An investor who bought the S&P 500 on dips and sold into rallies would have lagged the benchmark by 2.3% annualized since 1926."
This is more evidence that Mr. Bogle's "Stay-the-course" advice is the surest route to investment success.
bob90245 wrote:By definition, my rebalancing bands will have me automatically buying after an asset class dips. Similarly, my rebalancing bands will have me automatically selling after an asset class rallies.
Now I readily admit that my 50/50 buy-hold-rebalance strategy will likely underperform buying and holding 100% S&P 500 benchmark used in the Morningstar study. And that is fine with me.
All the study shows is that buying on 3-month dips is a dog. Your bands probably don't have you doing that too often.
The article proposed short-term momentum as the reason for the failure of buying on dips. So, it does not make a general claim against buying on longer dips.
I have read that one should not rebalance more than once per year to avoid the short-term momentum.
The strategy of buying on the dips fails any sort of logical test. To be able to buy on the dips means you have money available to do so. Presumably, you are only buying something which has a positive expected return. As such, you are holding money on the sidelines (missing out on the positive expected return) in order to buy at a later date. Chuck already stated this more eloquently and succintly above, but I think it bears repeating.
Dollar-cost averaging and buying on dips are both forms of market timing which have no place within a static/strategic allocation strategy. I'm not saying they are "wrong" strategies, but rather that they don't fit in at all with the generally-prescribed advice around here.
- DDB
"We have to encourage a return to traditional moral values. Most importantly, we have to promote general social concern, and less materialism in young people." - PB
ddb wrote:The strategy of buying on the dips fails any sort of logical test. To be able to buy on the dips means you have money available to do so. Presumably, you are only buying something which has a positive expected return. As such, you are holding money on the sidelines (missing out on the positive expected return) in order to buy at a later date. Chuck already stated this more eloquently and succintly above, but I think it bears repeating.
Dollar-cost averaging and buying on dips are both forms of market timing which have no place within a static/strategic allocation strategy. I'm not saying they are "wrong" strategies, but rather that they don't fit in at all with the generally-prescribed advice around here.
- DDB
I guess you mean dollar-cost averaging (DCA) a lump sum?
ddb wrote:The strategy of buying on the dips fails any sort of logical test. To be able to buy on the dips means you have money available to do so. Presumably, you are only buying something which has a positive expected return. As such, you are holding money on the sidelines (missing out on the positive expected return) in order to buy at a later date. Chuck already stated this more eloquently and succintly above, but I think it bears repeating.
Dollar-cost averaging and buying on dips are both forms of market timing which have no place within a static/strategic allocation strategy. I'm not saying they are "wrong" strategies, but rather that they don't fit in at all with the generally-prescribed advice around here.
I guess you mean dollar-cost averaging (DCA) a lump sum?
DCA as a result of regular savings rate seems OK.
I do not classify systematic investing as DCA. Systematic savings is lump sum investing, because you are fully investing small lump sums as soon as they are available to be invested.
- DDB
"We have to encourage a return to traditional moral values. Most importantly, we have to promote general social concern, and less materialism in young people." - PB
Some will consider "buying on the dips" a form of market timing.
On the other hand, proponents may consider it a form of "dollar value averaging" (not DCA since that's systematic investments over a period of time regardless of market movement).
Jacotus wrote:you have to "not buy" what you would have otherwise bought, which is equivalent to selling at a specific time because you think you can buy at a better time.
I'm not sure I understand this. Could you elaborate it further?
Taylor, would you be OK with "buy on the dips", and then hold for over 10 years?
Sorry, I am not exactly sure what you are asking.
OK, if I had Just gotten my hands on say $10,000 and wanted to wait a few weeks til the market has a really bad day, then go all in that day when everyone else is selling like hotcakes. If you do that and then sit on the investment for at least 10 years, your buying on the dip, but not selling when they go up the next year.
I believe the reason that buying on the dip doesn't work, is that most people then turn around and sell on a 10% run up and miss out on a 25% run up.
That's how I understand why timing the market is a losers game. It's a toss of the dice to me.
Even educators need education. And some can be hard headed to the point of needing time out.
Taylor, would you be OK with "buy on the dips", and then hold for over 10 years?
Sorry, I am not exactly sure what you are asking.
OK, if I had Just gotten my hands on say $10,000 and wanted to wait a few weeks til the market has a really bad day, then go all in that day when everyone else is selling like hotcakes. If you do that and then sit on the investment for at least 10 years, your buying on the dip, but not selling when they go up the next year.
I believe the reason that buying on the dip doesn't work, is that most people then turn around and sell on a 10% run up and miss out on a 25% run up.
That's how I understand why timing the market is a losers game. It's a toss of the dice to me.
That and you might be waiting a while for that dip to occur, so you would have gained more by investing right away.
- Scott
"Old value investors never die, they just get their fix from rebalancing." -- vineviz
Jacotus wrote:you have to "not buy" what you would have otherwise bought, which is equivalent to selling at a specific time because you think you can buy at a better time.
I'm not sure I understand this. Could you elaborate it further?
Situation A: Person has cash reserves and is waiting to "buy on a dip".
Situation B: Person has no cash reserves, and wants to buy on a dip, so sells some stocks in order to buy stocks at a later time.
The situations are basically equivalent and come down to market timing.
Asset allocation is 31% US, 31% foreign, 31% bonds, 7% commercial real estate.
Rebalancing bands are set to 2% of total portfolio when the market is doing anything but having a really bad day, Asset allocation is changed on days when the market is having a really bad day to have 2% more in equities (64% instead of 62%) and 2% less in fixed income (29% instead of 31%). This is written in the investment policy statement. This forces rebalancing on really bad days.
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Asset allocation is 31% US, 31% foreign, 31% bonds, 7% commercial real estate.
Rebalancing bands are set to 2% of total portfolio when the market is doing anything but having a really bad day, Asset allocation is changed on days when the market is having a really bad day to have 2% more in equities (64% instead of 62%) and 2% less in fixed income (29% instead of 31%). This is written in the investment policy statement. This forces rebalancing on really bad days.
Well, at least Morningstar won't be able to compute the losses (or gains) of that system...because its too vaguely specified. If "really bad day" was precisely defined, then they could do something with it.
For this discussion, I will define precisely a "really bad day" in an ETF as a drop of at least 2.5% AND greater than the 4th biggest drop in the ETF in the past 150 trading days. That is, the drop would become the 4th biggest drop for the ETF in the most recent 151 days (including the RBD) and would be more than 2.5%.
Eligible ETFs are: VTI, VEU, VXUS, VSS, VBR, VNQ, VWO, DGS, VEA, and a few more.
Take VEA for example.
Last 4 really bad days in the last 150 days occurred on
2010-11-23: -3.1
2011-03-16: -3.02
2011-02-22: -2.88
2010-10-19: -2.72
So any drop greater than 2.72% would be a really bad day for VEA. As time marches on, the 2010-11-23 date would be too old to be part of the "last 150 days", so the threshold could be lower. Note that VEA dropped on 2011-03-10 by 2.41%, on 2011-03-14 by 1.82%, and on 2011-03-15 by 2.21%. None of these were RBDs, but the 3.02% drop on 2011-03-16 was a RBD.
In contrast, VTI has not had a RBD in a while. Its worst one-day drop in the last 150 trading days was 2.14% on 2011-02-22, but that did not exceed 2.5%. One would have to go back to 2010-08-11 to find a day when VTI dropped by more than 2.5%.
Edit to add: Another nuance to this: 2010-11-23 was not a RBD for VEA despite being the worst drop in the last 150 days. Can you tell me why?
Last edited by livesoft on Thu Apr 21, 2011 9:18 pm, edited 1 time in total.
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Jacotus wrote:you have to "not buy" what you would have otherwise bought, which is equivalent to selling at a specific time because you think you can buy at a better time.
I'm not sure I understand this. Could you elaborate it further?
Situation A: Person has cash reserves and is waiting to "buy on a dip".
Situation B: Person has no cash reserves, and wants to buy on a dip, so sells some stocks in order to buy stocks at a later time.
The situations are basically equivalent and come down to market timing.
I'm not sure if A & B are equivalent. B is obviously a market timer and is more determined to gamble with the market, whereas A is more an opportunist that grabs opportunity when it is available. B comes across as more an active trader than A.