Using "dry powder" to buy the dips for a mostly buy-and-holder

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LrngToFly
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Using "dry powder" to buy the dips for a mostly buy-and-holder

Post by LrngToFly » Fri Sep 06, 2019 1:02 pm

Hello. I am wanting to be a generally buy-and-holder with a diversified portfolio of Equity ETFs- large cap growth, large cap blend, small cap value, small cap blend, some REIT, international including emerging markets in addition to bonds. I would like to have some "dry powder" for bear markets and am trying to figure out a strategy for "buying the dips" I plan to have about 15% of my equity portfolio be in Vanguard's Wellesley - VWINX- for this purpose.

I would like to make for myself a set plan for this strategy so that emotion won't play too huge a role during a drawdown/bear market.

This is fairly random, but I am thinking:

when VTI down 10.5% from high put 25% VWINX into VTI
when VTI down 22.5% from high put 2nd 25% VWINX into VTI
when VTI down 34.5% from high put 3rd 25% VWINX into VTI
when VTI down 46.5% from high put final 25% VWINX into VTI

When VTI recovers from one of these levels for one month, return the money (money moved plus gains) to VWINX.

Not including this "buying the dips", I plan to rebalance my portfolio every two years.

I am not seeing strategies like this discussed anywhere, and would love a pointer to any article(s) I can read to help me hone my plan.

Thanks!

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David Jay
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Re: Using "dry powder" to buy the dips for a mostly buy-and-holder

Post by David Jay » Fri Sep 06, 2019 2:08 pm

Welcome to the forum!

At BH we are not big fans of market timing. We prefer to set an Asset Allocation (equity/fixed income) based on personal need, ability and willingness to assume risk.

We maintain that AA using rebalancing when the desired AA has deviated significantly (say, 3% or 5%) from what we have chosen in advance to be our acceptable level of risk. The effect of this maintenance is to exchange stocks for bonds when the market is up and exchange bonds for stocks when the market is down. Here is the Wiki on rebalancing: https://www.bogleheads.org/wiki/Rebalancing

Even if you follow your strategy, purchasing VTI (stocks) using funds from VWINX (roughly 40% stocks) is a diluted strategy. It would seem that your “dry powder” should actually be “dry” - not contain 40% stocks which will also be down after a big market drop.
Last edited by David Jay on Fri Sep 06, 2019 2:11 pm, edited 1 time in total.
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Re: Using "dry powder" to buy the dips for a mostly buy-and-holder

Post by Silk McCue » Fri Sep 06, 2019 2:10 pm

Welcome to Bogleheads!

This is nothing but market timing which isn’t something we recommend.

You can type “dry powder” and review prior threads.

You should simply be in the market with the Asset Allocation that suits you and rebalance as your plan dictates. Designing a complex market timing “dry powder” scheme doesn’t make it better.

Cheers

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Re: Using "dry powder" to buy the dips for a mostly buy-and-holder

Post by MotoTrojan » Fri Sep 06, 2019 2:12 pm

Bad idea made even worse if in taxable. Why not hold a pure bond fund for rebalancing instead of an active equity/bond fund? Why only rebalance every two years if you’ll clearly be watching closely enough to react to these dips?

Pick an AA and rebalance (without paying taxes) when things are 5% out of sync. Cute stuff like this won’t help.

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Re: Using "dry powder" to buy the dips for a mostly buy-and-holder

Post by livesoft » Fri Sep 06, 2019 2:38 pm

One can calculate their portfolio overall asset allocation with this scheme. Since VWINX (Wellesley) is about 58% equities and 42% bonds it is not particularly "dry" in the sense that "dry powder" is knocked around on this forum. Edit: I got stocks:bonds backwards above and below, so re-figure any math yourself. Thanks!

Let me try to do some off-the-top-of-my-head math (meaning that it will probably be wrong):

First, presumably you will be rebalancing the rest of your portfolio whenever and wherever its asset allocation changes.

15% in Wellesley when VTI drops 10.5% goes to something different than 15% just from the action of the drop in the stock market, but let's say it doesn't change. So 25% of 15% is 3.75% of that Wellesley of which say 60% is equities, so you will increase your AA to equities by 2.25% maybe. If VTI recovers by going up by 12%, then that might goose your return by 12% x 2.25% or under 0.3%. That 0.3% is well within the range of noise and a single one-day movement in the stock market. That's OK, but it is nothing to write home about. And if you make the 2 switches (out of VWINX in VTI; out of VTI into VWINX) on less than optimal days, that will just mask any effect.

Folks have written that this is cute stuff. Sure it is, but so what? The folks saying don't do this haven't done any backtesting, so they are just bloviating. I am as well. However, we expect that a higher allocation to equities should produce a higher return. If not, then why are we investing in equities in the first place?

Bottom line: If you want to do this, then I don't see ANY problem doing it. You will have some fun and it really won't cost you any money at all. I also predict that if you do this, that you will stop doing it within 3 years anyways.
Last edited by livesoft on Sat Sep 07, 2019 2:59 pm, edited 1 time in total.
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Re: Using "dry powder" to buy the dips for a mostly buy-and-holder

Post by bradinsky » Fri Sep 06, 2019 8:25 pm

From Vanguard:

Portfolio
Vanguard Wellesley® Income Fund seeks to provide long-term growth of income and a high and sustainable level of current income, along with moderate long-term capital appreciation.

Learn more about this portfolio's investment strategy and policy.
Stock style
Large
Medium
Small
Value Blend Growth
Style
Market capitalization
Bond style
Treasury/
Agency
Investment-
grade
corporate
Below
investment
grade
Short Medium Long
Average weighted maturity
Quality
Asset allocation
as of 07/31/2019
37.77% Stocks
58.39% Bonds
3.84% Short-term reserves

Fund characteristics
as of 07/31/2019
Turnover rate (as of fiscal year end September)
Short-term reserves
Fund total net assets
Share class total net assets
Wellesley Income Fund Inv

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Re: Using "dry powder" to buy the dips for a mostly buy-and-holder

Post by abuss368 » Fri Sep 06, 2019 8:44 pm

That is a lot of funds in the portfolio to keep in balance. Consider total market index funds. Develop an asset allocation and then rebalance when underweight by 5% or more. Much easier strategy.
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Re: Using "dry powder" to buy the dips for a mostly buy-and-holder

Post by GrowthSeeker » Fri Sep 06, 2019 9:31 pm

My thought was similar to what livesoft said.
What you’re suggesting is equivalent to a more sensitive rebalancing plan than you were otherwise going to use.
Your current AA is a weighted average of .15 times (40:60) plus .85 times whatever the AA is excluding the VWINX holding. If all of the 85% is in VTI, then your overall AA is 91:9
You could simulate stepwise drops in the stock market (if VTI drops 25% then VWINX drops 10%.) Make simulated buys and sells then bring the market back up. See what your expected profit would be under ideal conditions.
If in taxable there may be some capital gains.
I suspect it wouldn’t be much profit in real life similar to how quicker rebalancing schemes are not as good as less sensitive rebalancing schemes.
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Re: Using "dry powder" to buy the dips for a mostly buy-and-holder

Post by engineerahead » Wed Sep 11, 2019 4:49 am

Hey! Im a newbie, could you, please, explain to me why is it so much market timing and not a preplanned rebalancing strategy?
If I knew in the first place that I:
1) invest for the long term horizon
2) dont plan on using the money anytime soon
3) invest only absolute surplus i wont need in a few years ahead.

Now if the market goes down that X % and I can be pretty sure it will go up someday (yes, the past is not an indicator of the future, yes, there have been times when it took way more than 10 years for stocks to return back to their former high) how is this that bad? Given my investment time is still for years and years into the future, this could be a simple rebalancing at first - stocks lose value, part of bonds move to stocks.
If the stocks move another X % down, I then "rebalance" my asset allocation strategy from example lets say 80/20 stocks and bonds of choice to 85/15; 90/10 if another X% drop for stocks happens.
As a boglehead I've been taught to stay the course, to not sell at lows and to asess my risk tolerance and act accordingly. But also I've been taught that when investing for period of tens of years ahead, I should absolutely look at big drops as a sale instead and from the past 100 years it's not overly optimistic to expect that the market tends to return and go up. The only thing you cant time is when a recession comes and how long will it take. But what you can do is:
1) either plan ahead - I mean asset allocation, risk tolerance; not preparing for black swans buying gold, ammunition and canned food :D
2) plan for adjusting portfolio throughout the journey; stay the course for the most part, buy in sales if I have money to invest (MONEY I CAN LOSE) and create a bond tent before the actual retirement.

Having said that, if I did the actions proposed by the OP, there might be a possibility of me losing my job and in the worst case, going through my emergency fund and later having to touch my investment money, if I've sold bonds for additional investment I would now have to sell equities instead, which would be at great loss. That is of course something I understand that can happen in the first place.

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Re: Using "dry powder" to buy the dips for a mostly buy-and-holder

Post by z3r0c00l » Wed Sep 11, 2019 5:03 am

Most of the time, you make more money by investing earlier and not saving dry powder to buy on the dips. Most dips happen after, and are smaller in nature, than long run-ups in price. So you should have just put that money in the market the year before rather than wait for a modest dip to take you back a few months. This is because stocks are up most years and spend most of their time going up.

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Re: Using "dry powder" to buy the dips for a mostly buy-and-holder

Post by pkcrafter » Wed Sep 11, 2019 10:33 am

LrngToFly wrote:
Fri Sep 06, 2019 1:02 pm
Hello. I am wanting to be a generally buy-and-holder with a diversified portfolio of Equity ETFs- large cap growth, large cap blend, small cap value, small cap blend, some REIT, international including emerging markets in addition to bonds. I would like to have some "dry powder" for bear markets and am trying to figure out a strategy for "buying the dips" I plan to have about 15% of my equity portfolio be in Vanguard's Wellesley - VWINX- for this purpose.

I would like to make for myself a set plan for this strategy so that emotion won't play too huge a role during a drawdown/bear market.

This is fairly random, but I am thinking:

when VTI down 10.5% from high put 25% VWINX into VTI
when VTI down 22.5% from high put 2nd 25% VWINX into VTI
when VTI down 34.5% from high put 3rd 25% VWINX into VTI
when VTI down 46.5% from high put final 25% VWINX into VTI

When VTI recovers from one of these levels for one month, return the money (money moved plus gains) to VWINX.

Not including this "buying the dips", I plan to rebalance my portfolio every two years.

I am not seeing strategies like this discussed anywhere, and would love a pointer to any article(s) I can read to help me hone my plan.

Thanks!
Our normal recommendation for rebalancing is to do it when equity allocation drops by 5%, then you buy (reset the allocation) using bonds or cash. If you use Wellesley (40% stock, 60% bonds) you are selling some stock too, and you would have to sell more than 5% Wellesley to increase the overall equity allocation by 5% as you've indicated. Also, when your portfolio begins to drop, how will you know if it's going to drop 10.5%, or how will you know if it's going to drop 46.5%? If you make a move to rebalance at -10.5%, how will the portfolio even get down by 46%?

This is why some aggressive ivestors hold at least some bonds or cash. You don't really want to hold bonds so you used a blended fund, but that creates problems of it's own.

https://www.bogleheads.org/wiki/Rebalancing


Paul
Last edited by pkcrafter on Wed Sep 11, 2019 2:40 pm, edited 2 times in total.
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Re: Using "dry powder" to buy the dips for a mostly buy-and-holder

Post by Brianmcg321 » Wed Sep 11, 2019 11:26 am

Dry powder is just a drag on your return until you get it in the market.
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Re: Using "dry powder" to buy the dips for a mostly buy-and-holder

Post by firebirdparts » Wed Sep 11, 2019 3:18 pm

LrngToFly wrote:
Fri Sep 06, 2019 1:02 pm
I plan to have about 15% of my equity portfolio be in Vanguard's Wellesley
when VTI down 10.5% from high put 25% VWINX into VTI
when VTI down 22.5% from high put 2nd 25% VWINX into VTI
when VTI down 34.5% from high put 3rd 25% VWINX into VTI
when VTI down 46.5% from high put final 25% VWINX into VTI
You are almost 100% equities at all times, so this is going to be a weak hand in a downturn. It'll help you a little bit. The real issue with it is the very high allocation to equities, and if you're young, you may decide you like that.

You might consider getting a bunch of backtesting data in a spreadsheet and see how you do.

I never engage in semantic arguments online, so I will not comment on what market timing is.

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Re: Using "dry powder" to buy the dips for a mostly buy-and-holder

Post by abuss368 » Thu Sep 12, 2019 1:03 pm

We used new contributions and dry powder during the financial crisis. In hindsight it was a very wise decision.
John C. Bogle: "Simplicity is the master key to financial success."

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Re: Using "dry powder" to buy the dips for a mostly buy-and-holder

Post by wolf359 » Thu Sep 12, 2019 1:25 pm

LrngToFly wrote:
Fri Sep 06, 2019 1:02 pm
Hello. I am wanting to be a generally buy-and-holder with a diversified portfolio of Equity ETFs- large cap growth, large cap blend, small cap value, small cap blend, some REIT, international including emerging markets in addition to bonds. I would like to have some "dry powder" for bear markets and am trying to figure out a strategy for "buying the dips" I plan to have about 15% of my equity portfolio be in Vanguard's Wellesley - VWINX- for this purpose.

I would like to make for myself a set plan for this strategy so that emotion won't play too huge a role during a drawdown/bear market.

This is fairly random, but I am thinking:

when VTI down 10.5% from high put 25% VWINX into VTI
when VTI down 22.5% from high put 2nd 25% VWINX into VTI
when VTI down 34.5% from high put 3rd 25% VWINX into VTI
when VTI down 46.5% from high put final 25% VWINX into VTI

When VTI recovers from one of these levels for one month, return the money (money moved plus gains) to VWINX.

Not including this "buying the dips", I plan to rebalance my portfolio every two years.

I am not seeing strategies like this discussed anywhere, and would love a pointer to any article(s) I can read to help me hone my plan.

Thanks!
Several comments:

1) What you're really doing is called "Tactical Asset Allocation." You're changing your AA when the market is down. It's a form of market timing. When researching, use that term to help search out relevant strategies.

2) If you're going to do it, game out the different scenarios of what may happen in the market, and what you will do if they occur. Run your plan through tough market patches in the past, using Portfolio Visualizer. (http://www.portfoliovisualizer.com) Once you have a complete plan, write it down concisely, and incorporate it into your Investor Policy Statement. The key is that whatever you reason out while things are calm, guides you when things are rough.

3) The younger I was, the more complex and elaborate strategies I followed. I did use tactical asset allocation in the past. I still use a variant now. However, my current plans are much, much simpler. It's difficult to make the wrong decision if you're buying and holding.

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Re: Using "dry powder" to buy the dips for a mostly buy-and-holder

Post by tesuzuki2002 » Thu Sep 12, 2019 5:43 pm

LrngToFly wrote:
Fri Sep 06, 2019 1:02 pm
Hello. I am wanting to be a generally buy-and-holder with a diversified portfolio of Equity ETFs- large cap growth, large cap blend, small cap value, small cap blend, some REIT, international including emerging markets in addition to bonds. I would like to have some "dry powder" for bear markets and am trying to figure out a strategy for "buying the dips" I plan to have about 15% of my equity portfolio be in Vanguard's Wellesley - VWINX- for this purpose.

I would like to make for myself a set plan for this strategy so that emotion won't play too huge a role during a drawdown/bear market.

This is fairly random, but I am thinking:

when VTI down 10.5% from high put 25% VWINX into VTI
when VTI down 22.5% from high put 2nd 25% VWINX into VTI
when VTI down 34.5% from high put 3rd 25% VWINX into VTI
when VTI down 46.5% from high put final 25% VWINX into VTI

When VTI recovers from one of these levels for one month, return the money (money moved plus gains) to VWINX.

Not including this "buying the dips", I plan to rebalance my portfolio every two years.

I am not seeing strategies like this discussed anywhere, and would love a pointer to any article(s) I can read to help me hone my plan.

Thanks!

just a structured market timing strategy.... Not saying it's bad.. but that is your idea...

I keep a chunk of money in a high interest checking account and when the market dips 10% I invest that cash in the market... When we near all time high like we have now... I fill the checking out back up... It's my 1 year of living expenses / emergency fund... I continue to do this in market volatility...

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Re: Using "dry powder" to buy the dips for a mostly buy-and-holder

Post by PhilosophyAndrew » Thu Sep 12, 2019 6:38 pm

Brianmcg321 wrote:
Wed Sep 11, 2019 11:26 am
Dry powder is just a drag on your return until you get it in the market.
+1

Well — and incisively — said!

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Re: Using "dry powder" to buy the dips for a mostly buy-and-holder

Post by PhilosophyAndrew » Thu Sep 12, 2019 6:38 pm

Brianmcg321 wrote:
Wed Sep 11, 2019 11:26 am
Dry powder is just a drag on your return until you get it in the market.
+1

Well — and incisively — said!

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