Buy on Dip/Sell on Rise

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TimeToThink
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Re: Buy on Dip/Sell on Rise

Post by TimeToThink » Thu Nov 05, 2015 9:22 pm

Livesoft, that increases risk. What if that makes matters worse? In theory one could run out of dough from savings. Then what? A soaking?

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ogd
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Re: Buy on Dip/Sell on Rise

Post by ogd » Thu Nov 05, 2015 9:40 pm

TimeToThink wrote:So,we are faced with a potential problem. How does one deal with it? Does one sit back and have faith that the investment gods will adjust all in their favor so they don't get soaked, or does one take action? If one chooses to act, then what is prudent? I'd like to know. Thanks.
TimeToThink: I second livesoft's recommendation. Reducing expenses is something you can do. Timing the market successfully is something you can't do, in the sense of "are not able to" although you are very much allowed. Deciding to "take action" is no good if the action taken would be futile.

For example, another course of action is to train yourself to play basketball at NBA level and make tons of money. The only difference there is that the futility is much more obvious. So you don't even start.

Yet another course of action would be to play the lottery and hope to win. Like in stock market timing and unlike the NBA proposal, you actually have a chance, it's just a very unwise thing to do.

Here's a fact that makes it obvious for me that the exercise is futile: there are funds in the market who attempt to do exactly this: switch between stocks and fixed income, or adjust proportions, based on indicators and graphs and valuations and any number of things. They are called tactical allocation funds. In practice, they fail miserably. They are much more resource-rich than you: computers, economists, data scientists, long hours, etc. In the NBA analogy, they are the myriad of college players who despite being much younger, physically endowed, dedicated, hardworking and whatnot, than you, fail to make it to the NBA with odds just a little below 100%. This tells you right away that you have no chance at all. It's the same with market timing.

TimeToThink
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Re: Buy on Dip/Sell on Rise

Post by TimeToThink » Thu Nov 05, 2015 9:51 pm

Thanks OGD. What if expenses are already minimized? I don't even know why it was brought up, but I respect the feedback. Does one stick to plan or adjust risk level to help one to arrive at shore at said time? Put another way, what becomes the prudent risk level at a given point in time and plan?

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Maynard F. Speer
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Re: Buy on Dip/Sell on Rise

Post by Maynard F. Speer » Thu Nov 05, 2015 10:10 pm

TimeToThink wrote:Now, fast forward one year. One compares their actual account balances to their projected account balances and finds that the balances are a tad below projections. If this trend continues for too long then the allotted time we have might run out before we can arrive at shore nice and dry. So,we are faced with a potential problem. How does one deal with it? Does one sit back and have faith that the investment gods will adjust all in their favor so they don't get soaked, or does one take action? If one chooses to act, then what is prudent? I'd like to know. Thanks.
Something I feel I've learnt from backtesting and looking at lots of market data, is that any idea that there are 'typical' expected returns from any asset class - at least over the bulk of your career as an investor - is possibly a little optimistic

If you're born in the wrong era, or the wrong region, stocks, bonds or real estate can be a disaster, or at least a disappointment .. We can cite aphorisms about "time in the market", but if you hit the wrong market, or the wrong way to invest in it, you can lose more than you'll recover (if you're too committed)

It took me a while to find an approach that made sense to me, and I found it in the endowment model - essentially diversify (by asset class, region, factor, alpha, beta, etc) and avoid losses ... I'm a defender of (a certain role for) active funds in a portfolio - and in some markets, they are the only things that will generate a satisfactory return ... As a basic concept, that seems robust without being overly cautious, I split my portfolio into 3rds: Market returns (beta); Active returns (alpha); and Hedging (cash, bonds, alternatives) .. And because risk is reduced through diversification, I can tilt quite heavily towards riskier assets
"Economics is a method rather than a doctrine, an apparatus of the mind, a technique of thinking, which helps its possessor to draw correct conclusions." - John Maynard Keynes

john94549
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Re: Buy on Dip/Sell on Rise

Post by john94549 » Thu Nov 05, 2015 10:23 pm

With respect to my "fun money" account, I have done just this. It's not rocket science. The S+P 500 is barely up for the year, my trading account is up 5%. Trading gets "dissed" herein, but well-placed trades can lead to profits. And this from a long-time Boglehead.

Suffice it to say my trading account has exceeded the S+P 500 every year since I established it in 2005. I have but a simple rule: buy low, sell higher.
Last edited by john94549 on Thu Nov 05, 2015 10:28 pm, edited 1 time in total.

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ogd
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Re: Buy on Dip/Sell on Rise

Post by ogd » Thu Nov 05, 2015 10:25 pm

TimeToThink wrote:Thanks OGD. What if expenses are already minimized? I don't even know why it was brought up, but I respect the feedback. Does one stick to plan or adjust risk level to help one to arrive at shore at said time? Put another way, what becomes the prudent risk level at a given point in time and plan?
Just to be clear, we're talking life expenses not investment expenses. There's always something to cut, until way below the Social Security water line.

This is the one sure way to improve your situation. Market timing is no more a way out of your conundrum than would be the lottery or the roulette table.

Remember: it can't be done by people a foot taller than you (metaphorically), dedicated full time, and trying can be expensive. So don't.

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Re: Buy on Dip/Sell on Rise

Post by john94549 » Thu Nov 05, 2015 10:45 pm

ogd, I'm hardly suggesting anyone can reverse a lifetime's worth of bad investments by walking into a casino and putting it all on "red." That said, folks who totally dismiss trading as a way to make money (and they are legion) dismiss the rest of us folks as being on the fringe. Trading is not an either/or proposition. You can have long-term retirement accounts and never touch them. Then, you can set aside a certain amount for "trading" (aka gambling) and actually do quite well.

TimeToThink
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Re: Buy on Dip/Sell on Rise

Post by TimeToThink » Thu Nov 05, 2015 11:10 pm

Maynard F. Speer wrote:
Something I feel I've learnt from backtesting and looking at lots of market data, is that any idea that there are 'typical' expected returns from any asset class - at least over the bulk of your career as an investor - is possibly a little optimistic

If you're born in the wrong era, or the wrong region, stocks, bonds or real estate can be a disaster, or at least a disappointment .. We can cite aphorisms about "time in the market", but if you hit the wrong market, or the wrong way to invest in it, you can lose more than you'll recover (if you're too committed)
Maynard F. Speer thank you. You've validated what I recognized a long time ago that even with indexing we can't but avoid timing the market. Fact is timing is inherent if only in its most simplistic form where one buys once at Point A and then sells at Point B. Given this thinking one can conclude that all of investing is timing in one sense and that index investing does not prevent it one iota. What index investing does do is reduce the trades done in the fund, and that lessens cost for a given amount of risk. That's the only advantage I can see between an index and an actively traded fund - the number of trades performed and hence the cost to run it.

As for my investing preference I see the virtues of indexing and have used it exclusively for many years now. When I was willing to accept higher risk than I do today I used to adjust my levels between small cap index and s&p500 index exclusively. It was as simple as that. However, for the past couple of years my fear of a pronounced and extended retraction have increased since the rise from the BIG DIP of March, 2009 and I felt given my age it would be prudent to role back my risk accordingly. Luckily, I have access to a fixed fund which has been consistently paying 4.5% for at least the past 15 years or so. I don't know why the fund has been paying 4.5% in a 0% world, but I see it so I'm on it. Based on my research I consider that the fixed fund has a low enough risk to almost treat it as a T-bill, so I've been hedging my investments through that fund.

As for buying dip and selling rise...when I was only investing in small cap and sp500 I noticed that one index would not react as expected on a given day or series of days compared to the other given the risk level. So, and I wish I had documented evidence for this, on the few occasions over the years I noticed what I thought to be an aberration between the two funds I would make a trade with the assumption that the aberration would be short lived - a few days to a few months (this was before 30 days trade restrictions were in vogue) - and course correct to what I perceived to be what the correct relative relationship should be. With this approach I was hoping to making 1 to 2% than I would have otherwise if I did nothing. More times than not it worked within a few months. If not, I ate the slightly lesser return. In a way what I tried could be viewed as foolish in that I might not have been seeing something that was there. But, like I said, I did make out more times than not, so whatever I saw played out as I had envisioned. Do I recommend what I did? Perhaps not for the unsophisticated investor. That said, I'm not all that sophisticated myself and so far I think I'm doing all right.

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Electron
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Re: Buy on Dip/Sell on Rise

Post by Electron » Thu Nov 05, 2015 11:25 pm

Twenty five years ago I tried buying the dip as an experiment and it was successful every time. The strategy was to dollar cost average on a weekly basis following any steep decline and take profits after a reasonable gain was achieved. I had an account at Twentieth Century Investments and bought funds such as Twentieth Century Ultra, Vista, or Select. They had a very flexible arrangement where I could specify the purchase interval and funds were automatically drawn from my bank account.

The technique worked quite well sometimes with profits in a relatively short time. In one instance I had to wait a year before achieving an acceptable return. I remember a few instances where I increased the purchase amount or made additional purchases if the market continued down.

I think we all know that this kind of strategy would work in a generally rising market. In most cases, it would have been better to continue investing and not take profits. In hindsight, I should have used a low cost index fund and continued with the systematic investments.
Electron

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Kevin M
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Re: Buy on Dip/Sell on Rise

Post by Kevin M » Thu Nov 05, 2015 11:51 pm

john94549 wrote:With respect to my "fun money" account, I have done just this. It's not rocket science. The S+P 500 is barely up for the year, my trading account is up 5%.
OK, you made me check ...

Shares of IEMG (iShares emerging markets ETF) I bought on 8/21/15 and 8/24/15 in two IRA accounts are up 8.88% and 13.73%. Bought these shares using the little bits I had sitting in money market funds in those accounts. I liked that EM was down about 30% from 52-week highs.

Note that this represents a tiny, tiny, tiny amount of my portfolio.

Kevin
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ogd
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Re: Buy on Dip/Sell on Rise

Post by ogd » Fri Nov 06, 2015 2:18 am

TimeToThink wrote:Fact is timing is inherent if only in its most simplistic form where one buys once at Point A and then sells at Point B. Given this thinking one can conclude that all of investing is timing in one sense and that index investing does not prevent it one iota.
Here you're using essentially word-play to validate your choice. Just because something has the word "time" and "market" in it does not make it "market timing". That term has a specific meaning, and it ain't investing between A and B without any changes. Yes, "time" passes and we invest in the "market". Does this mean we're all "market timing" if we invest at all? No. The connection is so simplistic as to be devoid of any meaning.

The other form of self-validation you did is to select out of all of the above the reply of Maynard F Speer, who is I would say a bit of a guest star on this forum, as if someone decided to see what happens if investing mythology from market watch and morningstar-style manager worship is dropped into bogleheads for a bit of fun. The fancy strategy words that are all over investment literature are just little pieces of vain hope, none of which work as we can easily see in the aggregate.

I already said exhibit A was the underperformance of asset allocation funds, which clearly shows it can't be done least of all by an amateur investor; if it could, not one or a few but many AA funds would be killing it by now. As exhibit B and somewhat related to your thread title, check out Investopedia's Technical Analysis Glossary, which I hope you find as hilarious as I did. People out there are going nuts trying to find patterns in data, because it's what people are built to do. So now you need to ask yourself, why did the "bullish abandoned baby" ever become a thing, if "buy the dips" is all there ever is to it?
TimeToThink wrote:What index investing does do is reduce the trades done in the fund, and that lessens cost for a given amount of risk. That's the only advantage I can see between an index and an actively traded fund - the number of trades performed and hence the cost to run it.
Yes, and it's one thing that's proven to make you money.
TimeToThink wrote: Luckily, I have access to a fixed fund which has been consistently paying 4.5% for at least the past 15 years or so. I don't know why the fund has been paying 4.5% in a 0% world, but I see it so I'm on it. Based on my research I consider that the fixed fund has a low enough risk to almost treat it as a T-bill, so I've been hedging my investments through that fund.
And this is another (I'm jealous). Small-investor sweetheart deals are another thing that you can provably use to beat the market. Consider using it as much as you can, perhaps using leverage to profit from the difference between this fund and market rates. Do check that it's still paying that much presently, though; 4.5% was not a big deal 8 years ago, but it is now.

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ogd
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Re: Buy on Dip/Sell on Rise

Post by ogd » Fri Nov 06, 2015 2:30 am

john94549 wrote:ogd, I'm hardly suggesting anyone can reverse a lifetime's worth of bad investments by walking into a casino and putting it all on "red." That said, folks who totally dismiss trading as a way to make money (and they are legion) dismiss the rest of us folks as being on the fringe. Trading is not an either/or proposition. You can have long-term retirement accounts and never touch them. Then, you can set aside a certain amount for "trading" (aka gambling) and actually do quite well.
Please don't feel personally insulted -- I'm just stating what I am quite sure is the case, which is that no small investor (or even big ones, for that matter) can expect to make money from this, so it's not "a way to make money". It's a way to have fun, perhaps, or learn useful things about companies or the economy, just like the casino is fun and mainstream and offers great people-watching, but the proposition that roulette is a career or an investment choice would definitely raise eyebrows.

In terms of returns, I see market timing as better than the lottery (whose margins are terrible), but I think worse than roulette when you take into account costs, taxes and (depending on exact strategy) the alternative uses for an increased risk budget on more efficient choices like leveraging an index. Don't think timer vs pure roulette here -- imagine instead an index investment PLUS a single 5% or so bet on red or black, every year. This has positive return expectations, offers the chance to beat the market significantly, but is less efficient than the index investment alone and a bit too costly in pure return as well. Is that not quite similar to the deal that market timers and individual stock pickers are getting?

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Re: Buy on Dip/Sell on Rise

Post by inbox788 » Fri Nov 06, 2015 2:47 am

john94549 wrote:With respect to my "fun money" account, I have done just this. It's not rocket science. The S+P 500 is barely up for the year, my trading account is up 5%. Trading gets "dissed" herein, but well-placed trades can lead to profits. And this from a long-time Boglehead.

Suffice it to say my trading account has exceeded the S+P 500 every year since I established it in 2005. I have but a simple rule: buy low, sell higher.
My fun account is more like chips at a Vegas table. In September, I was down 20%. By October, I was up 10%. You can call my September trades poorly placed, and the October ones well placed. If I only knew ahead of time which way November will go. And as far as exceeding, my trading account has exceeded the sp500 losses in 2008.

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Re: Buy on Dip/Sell on Rise

Post by The Wizard » Fri Nov 06, 2015 4:04 am

rgs92 wrote:Isn't this the exact definition of market timing, the exact opposite of Boglehead best practices?
No.
In fact, when done properly, this is simply rebalancing, which is indeed a best practice...
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Re: Buy on Dip/Sell on Rise

Post by The Wizard » Fri Nov 06, 2015 4:31 am

telemark wrote:
nisiprius wrote:By the way... I think it is best to reserve the phrase "market timing" to mean "the kinds of strategies and investment actions taken by people who call themselves 'market timers.'"
We need a term for the practice of adjusting one's asset allocation in the belief that something will happen in the future, for example reacting to predictions about interest rates or inflation. What do we call this, if not market timing?
Tactical Asset Allocation...
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Clive
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Re: Buy on Dip/Sell on Rise

Post by Clive » Fri Nov 06, 2015 4:47 am

livesoft wrote:Here is what is prudent: Lower expenses and use the savings to invest more in order to deal with the shortfall.
Sage advice. Put into perspective of the impact of minimising costs/taxes - since 1928 the Dow arithmetic averaged close to 11%, discount volatility and the geometric (annualised) came in at around 9%. Taxation historically varied widely and at times was highly punitive (in excess of 90% for some), but let's be conservative and assume a 15% average rate, which if applied to that 9% annualised figure = 1.35%. Again historically costs were much higher, market makers could exploit wide spreads to their benefit, brokers could levy relatively high fees for telephone/postal order placement etc. again a conservative lag figure is perhaps 0.5%/year. A broad indicative figure for human emotional trading, tendency to chase profits, buy when high, sell when low is for as much as a 1.5% lag factor. The above Dow Industrial has bettered both the Dow Transport and Dow Utilitity averages, to some extent that's survivorship bias, without the foresight a investor might have diversified across all three and perhaps seen a 1% lag factor.

Inflation - well that varies from one to another. Broad retail/consumper price inflation ran at around 4% over the same period/years, house price inflation outpaced retail price inflation by around 2%/year. Its not unreasonable to split that difference and assume a 5% rate.

Collectively that's pretty close to a 0% net real figure. Discount just the 4% (lower) CPI figure from the gross nominal 9% annualised total return figure and that suggests stocks yielded a 5% net real annualised reward. Include in other costs/taxes etc however and the net real was more like 0% real. In playing that zero sum game there would have been winners and losers according to each individuals time-frame and the circumstances evident at those start and end dates.

On the basis that stocks aren't the sure thing that many through clever marketing believe them to be and might just be another 0% net real investment choice it becomes clearer that striving to keep cost and taxes low and control/manage human emotional trading become paramount factors. That further leads onto alternative assets to stocks (wider diversification). Given three or so assets that each broadly provide 0% net real rewards but individually do so in a volatile manner, then equal weighting and periodic rebalancing when sizeable deviations have become apparent will tend to yield a higher reward than any one of the three alone (assuming mean reversion to broadly pacing inflation over the longer term). For me personally that comprises a combination of stocks, gold and owning a home, supplemented with human capital value (wages/pensions). For other more wealthier individuals the diversification might include landed farm/woodland estates (that can be inheritance/estate tax efficient), artworks/collectibles and precious stones/metals.

Wizard's suggestion of "Tactical Asset Allocation" as being an appropriate term for the process of rebalancing between diverse assets is fitting IMO.

john94549
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Re: Buy on Dip/Sell on Rise

Post by john94549 » Fri Nov 06, 2015 5:31 am

One other note on "fun money" (aka "trading") accounts. I prefer to keep mine at 5% of "tradable" assets. A tradable asset is quite different from equity in one's home or rental property.

Moving right along, since I tend to keep my trading account roughly 50% cash and 50% invested, my real exposure (in my trading account) is closer to 2.5% of tradable assets.

Doing the math: Net Worth minus real estate equity should roughly equate to "tradable" assets. Keep your fun money account to 5% of that, and said fun money account 50/50 (as noted above). You can have fun trading and not worry you are "betting the farm".

As I have noted in other threads, be not ashamed to book green (i.e., sell a trade at a profit). I just try to book a little green as much as I can. And not get greedy. As a wise trader told me many years ago: "never let green fade to red".

All that having been said, we are (at least historically) well beyond "trading season" and into the cusp of the Santa Claus rally. Folks who want to buy on serious dips might have to wait until 2016. Again, at least historically, November through January is "selling season", at least for contrarians. We sell what we bought when the market was down (as it was) to those who bet it would recover (as it did). Then, we contrarians buy when all seem to panic, then we sell back when the panic wears off. Personally, I have been selling back dribs and drabs of VTI purchased in the correction in my trading account. As an aside, if one trades, VTI is an elegant vehicle.

Rinse, wash, repeat.

Mind you, I am not recommending trading as opposed to "investing". I merely suggest both can be done without serious hazard to your health, financial or otherwise.

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Re: Buy on Dip/Sell on Rise

Post by TimeToThink » Fri Nov 06, 2015 10:58 am

ogd wrote:
Do check that it's still paying that much presently, though; 4.5% was not a big deal 8 years ago, but it is now."
Ogd, thank you for all of the feedback...it's well taken and greatly appreciated by me.

W/r/t my 4.5% fund, I have an Excel schedule showing the projected daily increase of my investment in the fund. I check my balance at a minimum once a week, and sometimes everyday. Through that I compare the actual fund balance to my projected daily balance, less the $15.00 quarterly fee which is prorated against other existing balances. If anything is not in conformance with my expected projection, then I could be on it lickedey (is that a word?) split. Thus far, that has not been necessary. Furthermore, the fund states it's annual rate is locked in for each quarter, so, in theory, I really only need to check every three months when they "announce" the coming rate. Isn't it good that I had bosses that trained me to be on top of every detail. Yes, perhaps it's medicine I would rather not take, but with time one adapts to like and cherish it for its good value and who is to say otherwise if it is not interfering or causing harm to anyone else.

Furthermore, if and when t-bill interest rates rise to levels of yesteryear, I intend to be all over them, that is, assuming they remain the standard of near risk free investing. If they are not the standard then may G-d have mercy on our souls, especially for those in the USA.

Thanks again. :happy

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Re: Buy on Dip/Sell on Rise

Post by TimeToThink » Fri Nov 06, 2015 11:13 am

John94549 wrote:
As I have noted in other threads, be not ashamed to book green (i.e., sell a trade at a profit). I just try to book a little green as much as I can. And not get greedy. As a wise trader told me many years ago: "never let green fade to red".
Well said John94549. Thank you for your input.

Many moons ago I used to visit casinos and play blackjack. It soon occurred to me that if I was up that I should leave the table, count my winnings and spend my time doing other non-gambling activities I enjoy. I no longer visit traditional casinos for "the market" is the casino I live in everyday. Only in the current casino, my and my loved ones future livelihoods are on the line, so I proceed cautiously so I can arrive at my and my family's envisioned destinations as planned.

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Re: Buy on Dip/Sell on Rise

Post by feh » Fri Nov 06, 2015 12:53 pm

livesoft wrote:Here is what is prudent: Lower expenses and use the savings to invest more in order to deal with the shortfall.
+1

Live below your means and save as much as you can. If things go well, you reach your destination sooner.

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Re: Buy on Dip/Sell on Rise

Post by TimeToThink » Fri Nov 06, 2015 1:21 pm

feh, to further your wise point..the richest one is not one who has the most, but the one who needs the least.

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Maynard F. Speer
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Re: Buy on Dip/Sell on Rise

Post by Maynard F. Speer » Fri Nov 06, 2015 2:12 pm

ogd wrote:The other form of self-validation you did is to select out of all of the above the reply of Maynard F Speer, who is I would say a bit of a guest star on this forum, as if someone decided to see what happens if investing mythology from market watch and morningstar-style manager worship is dropped into bogleheads for a bit of fun. The fancy strategy words that are all over investment literature are just little pieces of vain hope, none of which work as we can easily see in the aggregate.

I already said exhibit A was the underperformance of asset allocation funds, which clearly shows it can't be done least of all by an amateur investor; if it could, not one or a few but many AA funds would be killing it by now. As exhibit B and somewhat related to your thread title, check out Investopedia's Technical Analysis Glossary, which I hope you find as hilarious as I did. People out there are going nuts trying to find patterns in data, because it's what people are built to do. So now you need to ask yourself, why did the "bullish abandoned baby" ever become a thing, if "buy the dips" is all there ever is to it?
If you put me on a quant trading forum, I'd be advocating the Three Fund Portfolio

It seems a lot of people are looking for reassurance that they're right; I'm looking for people to convince me I'm wrong ... The irony (considering some of my stances) is that while I'm ahead of both 100% equities and 60:40 portfolios so far this century - the main reason is actually asset allocation

As research suggests asset allocation accounts for over 100% of long-term returns (market timing and fees being negative in aggregate), and as Sharpe suggested: the global market's asset allocation is the most efficient portfolio possible, and the only true passive benchmark, my portfolio's actually inadvertently behaved and returned far closer to the market than you'd have done with a 60:40 or equity-heavy portfolio - largely avoiding two portfolio-quashing drawdowns ... Making me in some ways the most passive investor here :beer
"Economics is a method rather than a doctrine, an apparatus of the mind, a technique of thinking, which helps its possessor to draw correct conclusions." - John Maynard Keynes

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Re: Buy on Dip/Sell on Rise

Post by hafius500 » Fri Nov 06, 2015 4:36 pm

Maynard F. Speer wrote:
Clive wrote:
livesoft wrote:
Clive wrote:... the odds are as good as 50/50 of the next tick being either up or down.
Repeating what you wrote does not make it factual.
Identify one consistent choice that yields better than 50/50 odds and that will be arbitraged out very quickly. There are millions of computers and minds involved, the prospect of livesoft being a exception is frankly unworthy of further comment.
This can be a misconception - in fact the more people who try and exploit these patterns, the more pronounced they tend to become ... This is part of the concern around high-frequency trading: we may see more and more high sigma events

According to Philip Donald, of Bank of America Merril Lynch, the momentum reversal we saw in October should only happen once every 11,000 years .. Clearly there was something else going on

Here's some of my own data looking correlation coefficients between monthly S&P 500 returns since the 1940s - so it's the correlation between a single monthly return, and the 2nd, 3rd, 4th, 5th, etc. month following it

Image

And while most of this is noise, the 2nd month return suggests a statistically significant positive correlation between 1st and 2nd month returns .. So if the market moves -5% this month, there's probably a better-than-chance bet the next month will be below average too .. If people identify this, and decide to sell at the end of the first month, the pattern becomes stronger
The argument of this article is that the knowledge about the momentum effect hasn't eliminated the effect but amplified its downside-risk.

S&P Dow Jones, Oct 2015 - The Persistence of Smart Beta
...we consider attenuated anomalies, the risk-adjusted returns of which diminish as they become more widely known...

[Example:Momentum]

...successes come at an increased cost. As noted in the start of this section, momentum strategies can be initially self-reinforcing. Stocks with strong price performance are bought by momentum followers, which drives up prices further and subsequently provides momentum with an even more compelling track record and more followers...

Experience therefore suggests that as momentum strategies become increasingly popular, their propensity to generate losses during market corrections should increase....

In conclusion, 12M-1M momentum epitomizes the existence of strategies for which research and popularity have not—as yet—triggered a disappearance of returns. On the surface, such persistence would appear attractive. However, the returns have come at an increasing risk, with the current risk profile appearing more elevated than ever...
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telemark
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Re: Buy on Dip/Sell on Rise

Post by telemark » Fri Nov 06, 2015 5:24 pm

Clive wrote:Wizard's suggestion of "Tactical Asset Allocation" as being an appropriate term for the process of rebalancing between diverse assets is fitting IMO.
Um, no. Rebalancing and "Tactical Asset Allocation" are completely different things, which is why neither Wizard nor I (nor Maynard F.) were talking about rebalancing.

Rebalancing maintains your current target asset allocation after your portfolio has drifted away from it: it's a reaction to events that have occurred in the past. "Tactical Asset Allocation" (or whatever we decide to call it) is adjusting your allocation to a new target, in the belief that the new target will perform better in the future. Examples: buy gold now before hyperinflation destroys everything, or get out of bonds now before interest rates rise. Do something now before something happens!

We can argue about which one is better, but we can't pretend they're the same thing, because they aren't.

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Re: Buy on Dip/Sell on Rise

Post by livesoft » Fri Nov 06, 2015 5:43 pm

OK, I have to confess that I actively buy on dips. I think many people on the forum already know this. I wrote a computer algorithm that identifies to me which dips I should buy on. I put into my IPS that I must buy on the signal from the computer algorithm. I do not expect the algorithm to be 100% correct, but I must say the track record is astounding. Here is a chart I posted in another thread:

Image

Note that I make no statement about selling on the rise.

In general, if one follows the forum, such days as those identified in the above chart are discussed in real-time on the forum.
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Re: Buy on Dip/Sell on Rise

Post by Maynard F. Speer » Fri Nov 06, 2015 5:44 pm

hafius500 wrote:
Maynard F. Speer wrote:
Clive wrote:
livesoft wrote:
Clive wrote:... the odds are as good as 50/50 of the next tick being either up or down.
Repeating what you wrote does not make it factual.
Identify one consistent choice that yields better than 50/50 odds and that will be arbitraged out very quickly. There are millions of computers and minds involved, the prospect of livesoft being a exception is frankly unworthy of further comment.
This can be a misconception - in fact the more people who try and exploit these patterns, the more pronounced they tend to become ... This is part of the concern around high-frequency trading: we may see more and more high sigma events

According to Philip Donald, of Bank of America Merril Lynch, the momentum reversal we saw in October should only happen once every 11,000 years .. Clearly there was something else going on

Here's some of my own data looking correlation coefficients between monthly S&P 500 returns since the 1940s - so it's the correlation between a single monthly return, and the 2nd, 3rd, 4th, 5th, etc. month following it

Image

And while most of this is noise, the 2nd month return suggests a statistically significant positive correlation between 1st and 2nd month returns .. So if the market moves -5% this month, there's probably a better-than-chance bet the next month will be below average too .. If people identify this, and decide to sell at the end of the first month, the pattern becomes stronger
The argument of this article is that the knowledge about the momentum effect hasn't eliminated the effect but amplified its downside-risk.

S&P Dow Jones, Oct 2015 - The Persistence of Smart Beta
...we consider attenuated anomalies, the risk-adjusted returns of which diminish as they become more widely known...

[Example:Momentum]

...successes come at an increased cost. As noted in the start of this section, momentum strategies can be initially self-reinforcing. Stocks with strong price performance are bought by momentum followers, which drives up prices further and subsequently provides momentum with an even more compelling track record and more followers...

Experience therefore suggests that as momentum strategies become increasingly popular, their propensity to generate losses during market corrections should increase....

In conclusion, 12M-1M momentum epitomizes the existence of strategies for which research and popularity have not—as yet—triggered a disappearance of returns. On the surface, such persistence would appear attractive. However, the returns have come at an increasing risk, with the current risk profile appearing more elevated than ever...
Of course ... But just think of everyone buying into sectors like Biotech today without stop-losses and sell points - I suspect that's a lot of retail investors buying into the best performing sector over 3-5 years

I think we saw the risk in October this year, with one of the strangest momentum reversals the market's ever seen - I mentioned it should be a 1 in 11,000 year event if markets were a random walk

My advice with momentum is not to see it as a market-beating strategy, but rather a different risk/reward relationship, that will suit some markets more than others
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Re: Buy on Dip/Sell on Rise

Post by GoldenFinch » Fri Nov 06, 2015 5:53 pm

livesoft wrote:OK, I have to confess that I actively buy on dips. I think many people on the forum already know this. I wrote a computer algorithm that identifies to me which dips I should buy on. I put into my IPS that I must buy on the signal from the computer algorithm. I do not expect the algorithm to be 100% correct, but I must say the track record is astounding. Here is a chart I posted in another thread:

Image

Note that I make no statement about selling on the rise.

In general, if one follows the forum, such days as those identified in the above chart are discussed in real-time on the forum.
When you say you actively buy on dips, do you mean rebalance? Sell some bonds and buy some equities? I'm only asking because maybe this is different from doing this with new money (monthly savings for "an accumulator") or maybe it isn't?

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Re: Buy on Dip/Sell on Rise

Post by livesoft » Fri Nov 06, 2015 5:55 pm

GoldenFinch wrote:When you say you actively buy on dips, do you mean rebalance? Sell some bonds and buy some equities? I'm only asking because maybe this is different from doing this with new money (monthly savings for "an accumulator") or maybe it isn't?
I exchange from bond funds to equity funds on such days. I do not wait in cash to buy on dips. I am fully invested except for a few days around dividend payouts.

Per this thread, one might call it tactical asset allocation or market timing. Neither term bothers me in the least.
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Re: Buy on Dip/Sell on Rise

Post by zotty » Fri Nov 06, 2015 6:10 pm

john94549 wrote:
since I tend to keep my trading account roughly 50% cash and 50% invested, my real exposure (in my trading account) is closer to 2.5% of tradable assets.
I presume you are counting your cash when you determine the overall return of your trading? I did growth stocks/breakouts and stuff for a while. I outperformed with the money invested in stocks, but when i averaged in my cash, returns didn't look so good. I could say that my risk was less, but that's not true either. single stock/idiosyncratic risk is serious business and can ruin the small portfolio of stocks thing. Valeant is the latest darling to show.
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Re: Buy on Dip/Sell on Rise

Post by Rodc » Fri Nov 06, 2015 8:28 pm

I don't see any reason why this should work. It is one of those sounds good until you think about type things.

But more importantly, at least done as a rebalancing type thing not enough money is involved to really make much difference. If it turns out to be a good idea you make a little extra. If it turns out to be a bad idea you won't lose much either.

So on that basis, if it makes one feel good or is fun or whatever it is likely cheap entertainment so go ahead.

When I took a look at it I did not find a benefit, though tracking it over time day by day there were some subsets of time where it came out ahead by tiny margin vs a standard buy, hold, rebalance strategy, even though over all it did not, though it lost by a tiny margin. This tells me that over the time someone might use it it might come out ahead, but there is no particular reason to think it will.

Unfortunately the paper I wrote up seems to be missing online (from the link near the start of the thread)
We live a world with knowledge of the future markets has less than one significant figure. And people will still and always demand answers to three significant digits.

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Re: Buy on Dip/Sell on Rise

Post by hafius500 » Sat Nov 07, 2015 5:18 pm

ogd wrote:Just because something has the word "time" and "market" in it does not make it "market timing".
IMO. it does:

"Yearly rebalancing is better than monthly rebalancing".
"You don't need international securities because they will not outperform the domestic market during your accumulation and withdrawal phase."
"You should invest in bonds according to your life-expectancy".
"You should not time the market" (!).

Unless our time horizon is unlimited all of these rules predict risks and returns over a limited time period that is precisely defined.
ogd wrote:That term has a specific meaning, and it ain't investing between A and B without any changes. Yes, "time" passes and we invest in the "market". Does this mean we're all "market timing" if we invest at all? No. The connection is so simplistic as to be devoid of any meaning.
Even Wikipedia couldn't create an article that does not 'have multiple issues': https://en.wikipedia.org/wiki/Market_timing
Proponents of market timing counter that market timing is just another name for trading. They argue that "attempting to predict future market price movements" is what all traders do, regardless of whether they trade individual stocks or collections of stocks, aka, mutual funds. Thus if market timing is not a viable investment strategy, the proponents say, then neither is any of the trading on the various stock exchanges.
IMO this is correct.
Those who disagree with this view usually advocate a buy-and-hold strategy with periodic "re-balancing"
This is nonsensical. A buy-and-hold strategy with rebalancing is not a buy-and-hold strategy (without rebalancing)!

A rebalancer predicts a particular dispersion of the future returns of markets, subclasses or individual securities. Markets wouldn't clear if this rebalancer couldn't trade against another investor (momentum investor) who predicts a different future dispersion of returns or if the two parties agreed on the expected risks and returns and did not want a fully complementary exposure to these risks and returns.

Investopedia - Definition of market timing
1. The act of attempting to predict the future direction of the market, typically through the use of technical indicators or economic data.

2. The practice of switching among mutual fund asset classes in an attempt to profit from the changes in their market outlook.
Assume you defined your asset-allocation in the year 1900 (which had investments in Russia, Egypt, Hungary, etc.), wouldn't it have been wise to proft from the changes in their market outlook and change the asset-allocation ?

I still think that everybody who does not hold the market portfolio of investable assets is and needs to be a market-timer.
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Re: Buy on Dip/Sell on Rise

Post by TimeToThink » Sat Nov 07, 2015 5:30 pm

On market timing...I think if you trade or rebalance it is being done, or it would be to your advantage, and wish it could be maximized by such action.

However, I think, market timing vis a vis trading, rebalancing or other mechanism should not be one's focus. One's primary focus should be one's own tolerance for risk given their time horizon and then adjusted for their wants and needs. It's that simple. That said, over the course of one's life, for most, it's much easier said than done..even for some Bogleheads.

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Re: Buy on Dip/Sell on Rise

Post by Pizzasteve510 » Sat Nov 07, 2015 6:01 pm

A broader term for this behavior is "Active Management." Studies suggest this activity fails to outperform, after management costs, fees, and commissions.

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Re: Buy on Dip/Sell on Rise

Post by Rodc » Sat Nov 07, 2015 6:08 pm

A rebalancer predicts a particular dispersion of the future returns of markets, subclasses or individual securities.
Recognizing that stocks and bonds are likely to have rather different amounts of dispersion is not a prediction of any specific dispersion and more to the point is not a prediction as to when one will outshine the other. One does not even have to believe in reversion to the mean for example to think rebalancing to help keep risk in check is a good idea. (believing that rebalancing will both control risk and improve returns may require believing in mean reversion, but does not require any specificity in when. In general rebalancing is not a method to improve return even though there are some who think it is).

One can if they wish to define buy and hold as never ever trading (including as one approaches retirement, when desire for risk changes due to material life changes, etc) and define absolutely everything else as market timing, but that is a definition that lumps such widely different types of investing in the same bucket that the definition has no practical value.
We live a world with knowledge of the future markets has less than one significant figure. And people will still and always demand answers to three significant digits.

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Re: Buy on Dip/Sell on Rise

Post by ogd » Sat Nov 07, 2015 6:13 pm

hafius500 wrote:
ogd wrote:Just because something has the word "time" and "market" in it does not make it "market timing".
IMO. it does:


"You should invest in bonds according to your life-expectancy".
"You should not time the market" (!).
No, I don't think it does. The bond recommendation has to do with personal circumstances, not the state of the market. Here, I'll give you another one:

"I expect to be in a high tax bracket for the next two years. I will sell my taxable bonds and replace them with munis."

At no point did I look at the yields on the two types of bonds or the state of municipalities. I made a decision based on my personal circumstances. I timed my tax situation, if anything.
hafius500 wrote:Unless our time horizon is unlimited all of these rules predict risks and returns over a limited time period that is precisely defined.
The rule doesn't predict risk and return, it merely points out the changing importance of risk when portfolio withdrawals approach, or perhaps more importantly, when more vs less of one's earnings are in the future.
hafius500 wrote:"Yearly rebalancing is better than monthly rebalancing".
"You don't need international securities because they will not outperform the domestic market during your accumulation and withdrawal phase."
I don't agree with either of these two. If the reason for the yearly recommendation is taxes, then there's something to it and it falls under "personal circumstances". If it's technical analysis, it's just as bogus as that entire field. Similarly, if the reason for the second recommendation is risk, it's a "personal circumstance" just like bonds.
hafius500 wrote:
ogd wrote:That term has a specific meaning, and it ain't investing between A and B without any changes. Yes, "time" passes and we invest in the "market". Does this mean we're all "market timing" if we invest at all? No. The connection is so simplistic as to be devoid of any meaning.
Even Wikipedia couldn't create an article that does not 'have multiple issues': https://en.wikipedia.org/wiki/Market_timing
Proponents of market timing counter that market timing is just another name for trading. They argue that "attempting to predict future market price movements" is what all traders do, regardless of whether they trade individual stocks or collections of stocks, aka, mutual funds. Thus if market timing is not a viable investment strategy, the proponents say, then neither is any of the trading on the various stock exchanges.
IMO this is correct.
The Wikipedia article does spend almost the entirety of its ink talking about the term as we understand it, as opposed to ... well, nothing.

I honestly don't understand why we're arguing about this. You want to make the term meaningless? We'd just come up with a more precise one and move the "prohibition" there. But why strip words of their meaning to argue against a recommendation that pertains to that specific meaning? It's just pointless word play.
hafius500 wrote:I still think that everybody who does not hold the market portfolio of investable assets is and needs to be a market-timer.
Can't possibly agree with this. Consider munis and taxable bonds -- should everyone hold them in market proportions, regardless of tax situation? That would be silly. It's the same with risky assets and currency-sensitive assets: you look at what risk and volatility mean for you, and you pick what fits.

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Re: Buy on Dip/Sell on Rise

Post by itstoomuch » Sat Nov 07, 2015 6:38 pm

I only do buy or sell when I think it is in my best interest in our trading accounts. Never do I sell-buy-sell on the Indexes. I am gradually selling off Indexes since they are not ETF s.. Debating whether to liquidate all the Indexes, hold in taxable, then reinvest in ETF s. Yes this is "timing" and tax planning. YMMV :annoyed :oops:
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Re: Buy on Dip/Sell on Rise

Post by hafius500 » Sat Nov 07, 2015 6:50 pm

livesoft wrote:I rebalance when things drop and rebalance when they go back up.
Rebalancing can decrease performance:

The Telegraph - Fund managers get most of their bets wrong – but still make millions. Here's how..., Oct, 30, 2015
Mr Freeman-Shor[author of the new book 'The Art of Execution'], still working as a fund of funds manager for Old Mutual Global Investors, analysed 1,866 investments made by the managers whose funds he put his customers’ money into, who included some of the biggest names in asset management.

These investments were the “best ideas” of those managers yet the research showed that just 49pc of them rose in price after the manager invested – slightly worse than a 50pc success ratio.
...
Mr Freeman-Shor identified both good and bad habits and divided managers into group – Rabbits, Assassins, Hunters, Raiders and Connoisseurs.
...
His review of trades showed that 66pc of all investments that rose in value were sold for a profit of 20pc or less. Yet, of these, 61pc kept going up in value. This was critical, Mr Freeman-Shor said.

“The most successful investors I worked with, those who made the most money, all had one thing in common: the presence of a couple of big winners in their portfolios. Any approach that does not embrace the possibility of winning big is doomed.”
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Re: Buy on Dip/Sell on Rise

Post by Maynard F. Speer » Sat Nov 07, 2015 8:48 pm

hafius500 wrote:
livesoft wrote:I rebalance when things drop and rebalance when they go back up.
Rebalancing can decrease performance:

The Telegraph - Fund managers get most of their bets wrong – but still make millions. Here's how..., Oct, 30, 2015
Mr Freeman-Shor[author of the new book 'The Art of Execution'], still working as a fund of funds manager for Old Mutual Global Investors, analysed 1,866 investments made by the managers whose funds he put his customers’ money into, who included some of the biggest names in asset management.

These investments were the “best ideas” of those managers yet the research showed that just 49pc of them rose in price after the manager invested – slightly worse than a 50pc success ratio.
...
Mr Freeman-Shor identified both good and bad habits and divided managers into group – Rabbits, Assassins, Hunters, Raiders and Connoisseurs.
...
His review of trades showed that 66pc of all investments that rose in value were sold for a profit of 20pc or less. Yet, of these, 61pc kept going up in value. This was critical, Mr Freeman-Shor said.

“The most successful investors I worked with, those who made the most money, all had one thing in common: the presence of a couple of big winners in their portfolios. Any approach that does not embrace the possibility of winning big is doomed.”
Very interesting article - have to admit I've been a Rabbit over a few investments (not selling when they went south, but also not buying at lower prices) .. Turkey's an example - and it does stem from lack of conviction, or lack of a clear plan

Soros (maybe the greatest of all time) has a quote along similar lines:

"It's not whether you're right or wrong that's important, but how much money you make when you're right and how much you lose when you're wrong"
"Economics is a method rather than a doctrine, an apparatus of the mind, a technique of thinking, which helps its possessor to draw correct conclusions." - John Maynard Keynes

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