Why Buying on the Dips Isn't All It's Cracked Up to Be

[nvboglehead]

Dr. Bernstein finds that putting a lump sum into the market better than buying the dips.

To see how buying the dips may work in practice, I asked William Bernstein, an investment manager at Efficient Frontier Advisors in Eastford, Conn., to look back over the past 10 years using the Vanguard 500 Index Fund...."It's very counterintuitive," Mr. Bernstein says. But a lump-sum investment at the beginning would have earned you an annual average total return of 3%. Buying on the 5% dips would have reduced your return by 0.1 percentage points annually, and buying on the 2% dips would have cut your gains by an annual average of 0.8%, he estimates.

http://online.wsj.com/article/SB10001424053111904563904576589134168081092.html?grcc=88888&mod=WSJ_hpp_sections_personalfinance

Dale

[stratton]

Looks like another form of market timing doesn't work.

Rebalancing is better.

Likewise, Allan Roth, a financial planner at Wealth Logic in Colorado Springs, Colo., calculates that an investor with 40% in U.S. stocks, 20% in international stocks and 40% in U.S. bonds who rebalanced at year end would have earned 5.6% annually over the past decade—versus 4.9% for someone who merely bought and held.

Remember, it's buy, hold and rebalance.

Paul

[redarmymembe]

I read/hear this stuff and understand the premise.

But at the same time, I went "all in" with life savings April of 07. To date I am negative with that initial investment.
If the investment gods had deemed it and I did the same investment late 08, early 09 I would be looking at a +80% or so.

DCA would have been a better deal for me.

"That was then... this is now"

[revelo]

I read/hear this stuff and understand the premise.

But at the same time, I went "all in" with life savings April of 07. To date I am negative with that initial investment.
If the investment gods had deemed it and I did the same investment late 08, early 09 I would be looking at a +80% or so.

DCA would have been a better deal for me.

"That was then... this is now"

You're drawing the wrong conclusion. PE10 was at 26.22 in Mar 2007 and 26.97 in Apr 2007 according to Shiller's spreadsheet(www.econ.yale.edu/~shiller/data/ie_data.xls) , so you probably invested somewhere around 26 to 27. That is high by historical standards. It translates to an expected real return of perhaps 3%. But you could bought 20 year TIPS on Apr 2, 2007 offering 2.31% (http://research.stlouisfed.org/fred2/data/DFII20.txt) and probably more for 30 year TIPS. Stocks weren't offering enough of an advantage to make them worthwhile, and THAT is why you lost money, not because you didn't DCA. DCA over the period 1999 to 2001 would not have worked, for example. You should have waited until stocks were cheaper before buying.

[redarmymembe]

I read/hear this stuff and understand the premise.

But at the same time, I went "all in" with life savings April of 07. To date I am negative with that initial investment.
If the investment gods had deemed it and I did the same investment late 08, early 09 I would be looking at a +80% or so.

DCA would have been a better deal for me.

"That was then... this is now"

You're drawing the wrong conclusion. PE10 was at 26.22 in Mar 2007 and 26.97 in Apr 2007 according to Shiller's spreadsheet(www.econ.yale.edu/~shiller/data/ie_data.xls) , so you probably invested somewhere around 26 to 27. That is high by historical standards. It translates to an expected real return of perhaps 3%. But you could bought 20 year TIPS on Apr 2, 2007 offering 2.31% (http://research.stlouisfed.org/fred2/data/DFII20.txt) and probably more for 30 year TIPS. Stocks weren't offering enough of an advantage to make them worthwhile, and THAT is why you lost money, not because you didn't DCA. DCA over the period 1999 to 2001 would not have worked, for example. You should have waited until stocks were cheaper before buying.

You should have waited until stocks were cheaper before buying.

Exactly.

[dnaumov]

Looks like another form of market timing doesn't work.

Rebalancing is better.

Likewise, Allan Roth, a financial planner at Wealth Logic in Colorado Springs, Colo., calculates that an investor with 40% in U.S. stocks, 20% in international stocks and 40% in U.S. bonds who rebalanced at year end would have earned 5.6% annually over the past decade—versus 4.9% for someone who merely bought and held.

Remember, it's buy, hold and rebalance.

Paul

What if rebalancing doesn't make sense from a taxation point of view due to lack of availability on good tax-sheltered options in one's country? Would you still rebalance once or twice per year and utilize tax-loss harvesting (assume the losses can be utilized for 5 years forward) or would you just buy and hold? What if the capital gains tax was 30%? What if you couldn't specify which lots to sell and had to use FIFO (First In First Out)?

These are serious questions as this is the exact situation I am facing.

[A Devout Indexer]

I read/hear this stuff and understand the premise.

But at the same time, I went "all in" with life savings April of 07. To date I am negative with that initial investment.
If the investment gods had deemed it and I did the same investment late 08, early 09 I would be looking at a +80% or so.

DCA would have been a better deal for me.

"That was then... this is now"

I think it is a mistake to draw a conclusion about your long term decision (to invest in a diversified portfolio) based on a short term outcome of a little more than 4 years.

Hang in there and you'll be fine.

[xerty24]

Dr. Bernstein finds that putting a lump sum into the market better than buying the dips.

This study makes no sense. If you have all your money up front, how much do you buy in on each dip? Where's the rule for the 137 dips, which no doubt could have been more or less in the next decade? If you're in cash at the start waiting to buy, your risk is way less than someone all in equities and the lower risk should be compared to the lost return. If you buy all in on the first dip, when do you sell so you can try to buy the next one?

[banrep]

Yeah, I'm not really following it either. I was thinking they were saying for example if you started with $137,000 and either invested on day one or invested $1,000/day on each of the 137 dips throughout 10 years. And then compare who was up at the end, but that doesn't make any sense because obviously the person who had the money invested for 10 years has more opportunity for growth.

[redarmymembe]

"That was then......This is now"

[grayfox]

Dr. Bernstein finds that putting a lump sum into the market better than buying the dips.

To see how buying the dips may work in practice, I asked William Bernstein, an investment manager at Efficient Frontier Advisors in Eastford, Conn., to look back over the past 10 years using the Vanguard 500 Index Fund...."It's very counterintuitive," Mr. Bernstein says. But a lump-sum investment at the beginning would have earned you an annual average total return of 3%. Buying on the 5% dips would have reduced your return by 0.1 percentage points annually, and buying on the 2% dips would have cut your gains by an annual average of 0.8%, he estimates.

http://online.wsj.com/article/SB10001424053111904563904576589134168081092.html?grcc=88888&mod=WSJ_hpp_sections_personalfinance

Dale

This is not making much sense to me.

Why would you buy every time it went down -2%? Suppose that last week the market rose +10%. Now on Monday it's down -2%. It's still up +8% in a week. That's like a store having a big 50%-Off Sale after doubling their prices the day before.

I don't think you can conclude anything for this simple-mided "study".

[ofcmetz]

This is not making much sense to me.

Why would you buy every time it went down -2%? Suppose that last week the market rose +10%. Now on Monday it's down -2%. It's still up +8% in a week. That's like a store having a big 50%-Off Sale after doubling their prices the day before.

I don't think you can conclude anything for this simple-mided "study".

It is hard to come to any conclusions here.

What about when you put your current years new money in at 52 week lows? Or if you rebalance from bonds to stocks when stocks have slumped and when bonds appear to be at all time high valuations? It would be interesting to see the results of these actions.

I think the point of the article is to just invest the money you have when you have it to invest or in other words to stay fully invested. Its saying to follow your allocation and rebalance. There have been obvious times looking back, like going all in during 2000 or 2007 that would have burned someone. Likewise, 2009 was a great year to put it all in, but only hindsight would showed that.

How many of us bogleheads are sitting with all of our portfolios in cash waiting for a 2% dip to buy in? I personally do try to time my ROTH Deposits for down days or days like this past Thursday. I know others who get their 401K money deposited into money market accounts and then try to time their equity purchases on dips. I can't see either of these things causing much harm, but they are small portions of portfolios.

[allsop]

Looks like another form of market timing doesn't work.

Rebalancing is better.

Likewise, Allan Roth, a financial planner at Wealth Logic in Colorado Springs, Colo., calculates that an investor with 40% in U.S. stocks, 20% in international stocks and 40% in U.S. bonds who rebalanced at year end would have earned 5.6% annually over the past decade—versus 4.9% for someone who merely bought and held.

Remember, it's buy, hold and rebalance.

Paul

What if rebalancing doesn't make sense from a taxation point of view due to lack of availability on good tax-sheltered options in one's country? Would you still rebalance once or twice per year and utilize tax-loss harvesting (assume the losses can be utilized for 5 years forward) or would you just buy and hold? What if the capital gains tax was 30%? What if you couldn't specify which lots to sell and had to use FIFO (First In First Out)?

These are serious questions as this is the exact situation I am facing.

In taxable I rebalance by buying the asset(s) furthest away from the allocation when there is new money available (like salary, for instance), and since we save much of our disposable income and we are far from retirement, this works well. In Sweden there is no carry-over for equity losses, but gains can be offset with losses so can one rebalance this way as well (which I have).

[market timer]

Wait for dips of 40% or more.

[xerty24]

Wait for dips of 40% or more.

That's guaranteed to backtest well - I don't know of very many markets that didn't recover from a 40% drop and are still around. Of course plenty of markets used to exist that fell 40% on the way out, but who worries about countries and currencies that don't exist any more?

[Aptenodytes]

I read/hear this stuff and understand the premise.

But at the same time, I went "all in" with life savings April of 07. To date I am negative with that initial investment.
If the investment gods had deemed it and I did the same investment late 08, early 09 I would be looking at a +80% or so.

DCA would have been a better deal for me.

"That was then... this is now"

There are other strategies that probably would have returned 10,000 percent. The comparison is equally irrelevant. Looking forward, there simply are no sure bets, so you have to play the odds in a way that makes sense to you. The most likely outcome looking forward is the least likely to occur once you get there, so the fact that you don't hit it is simply not relevant. You can count on it ahead of time.

[bmelikia]

Just because something didn't work in the past does not mean that it will not work as a strategy for the future. . .

. . .nothing is set in stone so perhaps taking advantage of dips by choosing to buy a little extra could still prove to be a winning strategy. . .

[Noobvestor]

Wait for dips of 40% or more.

That's guaranteed to backtest well - I don't know of very many markets that didn't recover from a 40% drop and are still around. Of course plenty of markets used to exist that fell 40% on the way out, but who worries about countries and currencies that don't exist any more?

Nope, not necessarily (@ my bold). https://personal.vanguard.com/us/insigh ... ut-emotion



Waiting for 40% drops means being out of the market ... when? Possibly for a long time, or forever. And what if it just drops 39%? Etc...

[grayfox]

Wait for dips of 40% or more.

That's guaranteed to backtest well - I don't know of very many markets that didn't recover from a 40% drop and are still around. Of course plenty of markets used to exist that fell 40% on the way out, but who worries about countries and currencies that don't exist any more?

Nope, not necessarily (@ my bold). https://personal.vanguard.com/us/insigh ... ut-emotion

<<chart>>

Waiting for 40% drops means being out of the market ... when? Possibly for a long time, or forever. And what if it just drops 39%? Etc...

Um, that chart is not showing what market timer suggested which was BUYING after a 40% dip.

That chart shows SELLING out after it is down 40% which is like the exact opposite.

That application is not set up to show what happened with a buying-on-the-dips strategy. It shows what happens if you bail out when the market goes down and get back on after it goes up, which is not the subject of the original article.