Buy/Sell vs. Buy/Hold theory question

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Atticus713
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Buy/Sell vs. Buy/Hold theory question

Post by Atticus713 »

Hi Forum,
An investing theory question my husband asked me that I didn't have a data-driven answer to: What if an investor took the approach of selling their S&P 500 stock position when it hit an all-time-high and then waited for the next correction to buy back in? And then waited until the next all-time-high to sell again, etc.? I'm sure folks have looked at this and compared it to the Boglehead "buy and hold, and stay the course" approach (that my husband and I follow, as you can see by my signature line). What do the numbers say and what would the downside(s) be of the Buy/Sell approach? As always, I'd appreciate your insights!
Thanks!
Atticus713
“Simplicity is the master key to financial success” J.C. Bogle | S&P 500 Index + Total U.S. Bond Index | Age-10 in Bonds at start; 30:70 at retirement | Rebalance Annually | Stay the Course
jebmke
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Re: Buy/Sell vs. Buy/Hold theory question

Post by jebmke »

Atticus713 wrote: Tue Jul 09, 2024 10:24 am Hi Forum,
An investing theory question my husband asked me that I didn't have a data-driven answer to: What if an investor took the approach of selling their S&P 500 stock position when it hit an all-time-high and then waited for the next correction to buy back in? And then waited until the next all-time-high to sell again, etc.? I'm sure folks have looked at this and compared it to the Boglehead "buy and hold, and stay the course" approach (that my husband and I follow, as you can see by my signature line). What do the numbers say and what would the downside(s) be of the Buy/Sell approach? As always, I'd appreciate your insights!
Thanks!
Atticus713
I seem to recall that in 2013 (?) there were 51 all time highs. I don't think there was a single "correction" that year -- I could be wrong
When you discover that you are riding a dead horse, the best strategy is to dismount.
BirdFood
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Re: Buy/Sell vs. Buy/Hold theory question

Post by BirdFood »

Atticus713 wrote: Tue Jul 09, 2024 10:24 am Hi Forum,
An investing theory question my husband asked me that I didn't have a data-driven answer to: What if an investor took the approach of selling their S&P 500 stock position when it hit an all-time-high and then waited for the next correction to buy back in? And then waited until the next all-time-high to sell again, etc.? I'm sure folks have looked at this and compared it to the Boglehead "buy and hold, and stay the course" approach (that my husband and I follow, as you can see by my signature line). What do the numbers say and what would the downside(s) be of the Buy/Sell approach? As always, I'd appreciate your insights!
Thanks!
Atticus713
When it's climbing, it tends to hit an all-time high, then another all-time high, and another, and another. So you'd miss all that upward movement. There's no predicting when it will go down.

I'm sure that someone has specific data/links to offer.
Last edited by BirdFood on Tue Jul 09, 2024 10:31 am, edited 1 time in total.
alex_686
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Re: Buy/Sell vs. Buy/Hold theory question

Post by alex_686 »

Lower returns, higher risk. This is called market timing.

The market follows pretty much a random path. As such, how do you determine when the market is at a high or a low?

When a market hits a new high it is as likely to up as down. When the market goes down, it is as likely to keep on falling.

I could go deep in the math here. There are some interesting developments in AI that allows traders to tactically take advantage. The problem here is that it is a Red Queen’s race. The tactics required just keep on changing.
Former brokerage operations & mutual fund accountant. I hate risk, which is why I study and embrace it.
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windaar
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Re: Buy/Sell vs. Buy/Hold theory question

Post by windaar »

It is amazing how strong the urge and pull of market timing is, even on a Bogleheads forum. If there were a way to consistently beat the market then everyone would already be doing it.
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science_geek_
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Re: Buy/Sell vs. Buy/Hold theory question

Post by science_geek_ »

Atticus713 wrote: Tue Jul 09, 2024 10:24 am Hi Forum,
An investing theory question my husband asked me that I didn't have a data-driven answer to: What if an investor took the approach of selling their S&P 500 stock position when it hit an all-time-high and then waited for the next correction to buy back in? And then waited until the next all-time-high to sell again, etc.? I'm sure folks have looked at this and compared it to the Boglehead "buy and hold, and stay the course" approach (that my husband and I follow, as you can see by my signature line). What do the numbers say and what would the downside(s) be of the Buy/Sell approach? As always, I'd appreciate your insights!
Thanks!
Atticus713
Hi Atticus713,

The strategy of selling S&P 500 positions at all-time highs and buying back after corrections is an attempt to time the market. Historical data and quantitative analysis suggest that market timing strategies often underperform compared to a buy-and-hold approach. Studies consistently show that buy-and-hold strategies outperform market timing over the long term due to compounding and reduced transaction costs.

Best,
X
steadyosmosis
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Re: Buy/Sell vs. Buy/Hold theory question

Post by steadyosmosis »

One can easily backtest OP's proposed method using historical daily prices of an SP500 fund.
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LongRoad
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Re: Buy/Sell vs. Buy/Hold theory question

Post by LongRoad »

Atticus713 wrote: Tue Jul 09, 2024 10:24 am Hi Forum,
An investing theory question my husband asked me that I didn't have a data-driven answer to: What if an investor took the approach of selling their S&P 500 stock position when it hit an all-time-high and then waited for the next correction to buy back in? And then waited until the next all-time-high to sell again, etc.? I'm sure folks have looked at this and compared it to the Boglehead "buy and hold, and stay the course" approach (that my husband and I follow, as you can see by my signature line). What do the numbers say and what would the downside(s) be of the Buy/Sell approach? As always, I'd appreciate your insights!
Thanks!
Atticus713
So the proposal is to sell to 100% cash today and wait for a correction (10%, 20%...?) before buying stocks again?
Florida Orange
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Re: Buy/Sell vs. Buy/Hold theory question

Post by Florida Orange »

The problem is that you don't know what's going to happen next. If the market is at an all time high, is this the peak or is this just the early stage of a long bull market during which it will climb much higher? If the market is in a valley, is this the bottom or will it go even lower, and if so, how much lower and for how long? Nobody knows the answers to those questions. Or, to put it another way, the market is always at an all time high unless it's in a correction or a bear market. All we know is that so far the market has always gone up over long periods of time which is why stock market investing best rewards those who play the long game. The patient, buy and hold approach almost always rewards investors better than any kind of market timing approach.
MathWizard
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Re: Buy/Sell vs. Buy/Hold theory question

Post by MathWizard »

If you were so good that you could identify these points in the S&P, you would do even better doing this on individual stocks.

In fact, if you were that good, especially in individual stocks, you'd probably be investigated by the SEC.
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retired@50
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Re: Buy/Sell vs. Buy/Hold theory question

Post by retired@50 »

Atticus713 wrote: Tue Jul 09, 2024 10:24 am Hi Forum,
An investing theory question my husband asked me that I didn't have a data-driven answer to: What if an investor took the approach of selling their S&P 500 stock position when it hit an all-time-high and then waited for the next correction to buy back in? And then waited until the next all-time-high to sell again, etc.? I'm sure folks have looked at this and compared it to the Boglehead "buy and hold, and stay the course" approach (that my husband and I follow, as you can see by my signature line). What do the numbers say and what would the downside(s) be of the Buy/Sell approach? As always, I'd appreciate your insights!
Thanks!
Atticus713
Give a listen to the Rational Reminder boys who cover "buying the dip".

Link: https://rationalreminder.libsyn.com/buy ... -dip-ep144

Regards,
"All of us would be better investors if we just made fewer decisions." - Daniel Kahneman
Northern Flicker
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Re: Buy/Sell vs. Buy/Hold theory question

Post by Northern Flicker »

Atticus713 wrote: Tue Jul 09, 2024 10:24 am Hi Forum,
An investing theory question my husband asked me that I didn't have a data-driven answer to: What if an investor took the approach of selling their S&P 500 stock position when it hit an all-time-high and then waited for the next correction to buy back in? And then waited until the next all-time-high to sell again, etc.? I'm sure folks have looked at this and compared it to the Boglehead "buy and hold, and stay the course" approach (that my husband and I follow, as you can see by my signature line). What do the numbers say and what would the downside(s) be of the Buy/Sell approach? As always, I'd appreciate your insights!
Thanks!
Atticus713
After a correction, the next all-time high will be $1 (or $.01) above the previous all-time high. And you will not be able to time the precise bottom, so the strategy will not eliminate downside risk.

Your return from equities will just be part of the recoveries. You will miss most of the bull rallies, and the partial recoveries will not necessarily even exceed the drawdowns that continue after the purchases.

During a bull rally, stocks hit new all time highs regularly. Maybe your husband is thinking that the first all time high is the peak of the bull market. It typically is not (though it can be). Nobody rings a bell at market tops or market bottoms.
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arcticpineapplecorp.
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Re: Buy/Sell vs. Buy/Hold theory question

Post by arcticpineapplecorp. »

jebmke wrote: Tue Jul 09, 2024 10:26 am
Atticus713 wrote: Tue Jul 09, 2024 10:24 am Hi Forum,
An investing theory question my husband asked me that I didn't have a data-driven answer to: What if an investor took the approach of selling their S&P 500 stock position when it hit an all-time-high and then waited for the next correction to buy back in? And then waited until the next all-time-high to sell again, etc.? I'm sure folks have looked at this and compared it to the Boglehead "buy and hold, and stay the course" approach (that my husband and I follow, as you can see by my signature line). What do the numbers say and what would the downside(s) be of the Buy/Sell approach? As always, I'd appreciate your insights!
Thanks!
Atticus713
I seem to recall that in 2013 (?) there were 51 all time highs. I don't think there was a single "correction" that year -- I could be wrong
70 all time highs in 2021.

looks like there was a drawdown of -6% in 2013:

Image

but yeah 2013 was a good year (up 30%).

I remember how many people in 2021 kept saying on bogleheads they couldn't bring themselves to buy at an ATH and then the market would go up the next day, week, etc. If you believe the market will go higher in the future then you buy today if/when you have the money. Pretty simple. Funny how everybody feels some need to overcomplicate things, get cute, think they're smarter or have figured out some magic system that nobody else has ever thought of before.
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alluringreality
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Re: Buy/Sell vs. Buy/Hold theory question

Post by alluringreality »

I think that historically the strategy for the S&P 500 may have resulted in participating in some of the worst market periods and getting out of the better market periods. It could have resulted in higher historical trading costs. If you're using nominal amounts, and are okay with monthly data, the Drawdowns graph from the following might provide buy and sell signals. When the drawdown hits zero that seems like a sell signal for the plan, and when the drawdown hits -10% that might be a correction and buy signal. For example late 1982 (0% drawdown) looks like a sell signal with the next buy signal happening in 1987 (more than 10% drawdown). Likewise early 1991 looks like a sell signal (0% drawdown) and being out of the market for most of the 1990s. It looks like another sell signal in 2012. Essentially my impression is that the strategy seems to be out of the market during much of the most significant periods where the Portfolio Growth chart slopes upwards. Usually those are the periods where people hope to participate. I don't get the impression that using inflation-adjusted amounts or less coarse information would significantly affect the generalizations.
https://www.portfoliovisualizer.com/bac ... KwlcyrhtnU
Last edited by alluringreality on Tue Jul 09, 2024 2:10 pm, edited 2 times in total.
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vv19
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Re: Buy/Sell vs. Buy/Hold theory question

Post by vv19 »

If you are trying to time the market, you need to make 3 decisions often:
1. When to sell
2. What to do with the cash
3. When to buy

Time and time again we have seen it is next to impossible to nail the timing of these decisions to maximize the gains. Just buy & hold and let the markets do the job for you.
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Re: Buy/Sell vs. Buy/Hold theory question

Post by BD w/ Kung-Fu Grip »

Northern Flicker wrote: Tue Jul 09, 2024 1:35 pm
Atticus713 wrote: Tue Jul 09, 2024 10:24 am Hi Forum,
An investing theory question my husband asked me that I didn't have a data-driven answer to: What if an investor took the approach of selling their S&P 500 stock position when it hit an all-time-high and then waited for the next correction to buy back in? And then waited until the next all-time-high to sell again, etc.? I'm sure folks have looked at this and compared it to the Boglehead "buy and hold, and stay the course" approach (that my husband and I follow, as you can see by my signature line). What do the numbers say and what would the downside(s) be of the Buy/Sell approach? As always, I'd appreciate your insights!
Thanks!
Atticus713
After a correction, the next all-time high will be $1 (or $.01) above the previous all-time high. And you will not be able to time the precise bottom, so the strategy will not eliminate downside risk.

Your return from equities will just be part of the recoveries. You will miss most of the bull rallies, and the partial recoveries will not necessarily even exceed the drawdowns that continue after the purchases.

During a bull rally, stocks hit new all time highs regularly. Maybe your husband is thinking that the first all time high is the peak of the bull market. It typically is not (though it can be). Nobody rings a bell at market tops or market bottoms.
Agree with this. To put some figures behind it, say you bought in when the market dipped 10% in February 2020. VTI had peaked at 163, so you bought in at 147. You then sold when it hit 163 again in July 2020, a gain of 11.1%. You then stayed out until March of 2022, when after a peak of 241, it dropped 10% to 217. You missed the 48% run-up in between peaks. Oops. You sold again at the 241 peak in January 2024, another 11.1% gain. (Mathematically, this method can only ever pay out 11.1% each cycle.)

Total gain on price, excluding dividends: 23.5%. VTI price appreciation over the same period: 63.9%. You missed all the gains the market ever made above its most recent pre-correction peak.
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arcticpineapplecorp.
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Re: Buy/Sell vs. Buy/Hold theory question

Post by arcticpineapplecorp. »

Atticus713 wrote: Tue Jul 09, 2024 10:24 am Hi Forum,
An investing theory question my husband asked me that I didn't have a data-driven answer to: What if an investor took the approach of selling their S&P 500 stock position when it hit an all-time-high and then waited for the next correction to buy back in? And then waited until the next all-time-high to sell again, etc.? I'm sure folks have looked at this and compared it to the Boglehead "buy and hold, and stay the course" approach (that my husband and I follow, as you can see by my signature line). What do the numbers say and what would the downside(s) be of the Buy/Sell approach? As always, I'd appreciate your insights!
Thanks!
Atticus713
if you're out of the market on some of the best days, it could cost you bigly:

Image

some other thoughts based on your questions above...

how do you define a correction?

10%?

or are you hoping for a larger decline?

You first have to really, really, really define your terms. Most don't. That's why they think they have a plan/strategy but they don't. It's murky. They don't know what to do. They agonize. They second guess. Because they don't have a well thought out plan that's simple to execute. See this all the time. This incidentally can be avoided just by having an IPS

Image

look at the chart I posted showing the intrayear declines and annual gains/losses. While the average intrayear loss is -14%, you can see there were years where the market went down only 3%, 7% or 9% and you wouldn't have bought it because you were waiting for greater losses. And then the market recovered, went higher and you missed out.
It's hard to accept the truth when the lies were exactly what you wanted to hear. Investing is simple, but not easy. Buy, hold & rebalance low cost index funds & manage taxable events. Asking Portfolio Questions | Wiki
bberris
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Re: Buy/Sell vs. Buy/Hold theory question

Post by bberris »

vv19 wrote: Tue Jul 09, 2024 1:59 pm If you are trying to time the market, you need to make 3 decisions often:
1. When to sell
2. What to do with the cash
3. When to buy

Time and time again we have seen it is next to impossible to nail the timing of these decisions to maximize the gains. Just buy & hold and let the markets do the job for you.
I don't disagree but let's not overstate the case. You don't need to "nail" each timing decision in order for timing to beat buy and hold. You don't need to maximize the gains, a tall order. You don't need to call precise tops and bottoms.
vv19
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Re: Buy/Sell vs. Buy/Hold theory question

Post by vv19 »

bberris wrote: Tue Jul 09, 2024 3:44 pm
vv19 wrote: Tue Jul 09, 2024 1:59 pm If you are trying to time the market, you need to make 3 decisions often:
1. When to sell
2. What to do with the cash
3. When to buy

Time and time again we have seen it is next to impossible to nail the timing of these decisions to maximize the gains. Just buy & hold and let the markets do the job for you.
I don't disagree but let's not overstate the case. You don't need to "nail" each timing decision in order for timing to beat buy and hold. You don't need to maximize the gains, a tall order. You don't need to call precise tops and bottoms.
You don’t need to? Sure, probably. But how many people can do that consistently over a long period of time?
gtrplayer
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Re: Buy/Sell vs. Buy/Hold theory question

Post by gtrplayer »

All time highs happen often, and how low do you need it to go to buy back in? I don’t think the numbers work in this plan’s favor, and I also don’t think it would be easy to do in practice even if attempted.
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Re: Buy/Sell vs. Buy/Hold theory question

Post by firebirdparts »

Atticus713 wrote: Tue Jul 09, 2024 10:24 am Hi Forum,
An investing theory question my husband asked me that I didn't have a data-driven answer to: What if an investor took the approach of selling their S&P 500 stock position when it hit an all-time-high and then waited for the next correction to buy back in?
The answer is, this is murderous. Really really really murderous. You will miss out on most of the growth.

Buying is easy, obviously. The problem is the selling. You're out of the market most of the time. Stocks go mostly up. All time high is most of the time. You're out of the market when it moves from one all time high to the next all time high. Like now, for instance, you're out. If you just look at the simplest chart, you'll see that you sold back in December of 23. Market's up 16% since then and you missed it.
This time is the same
vxdx
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Re: Buy/Sell vs. Buy/Hold theory question

Post by vxdx »

The main question to illustrate the difficulty is how you define a correction.

All-time high is well defined but is not a peak value (which cannot be known in the moment).

But basically this works out to, when the market is rising you sell and when it’s starting to fall you buy.

If you sell during a fall and buy at the next all time high you may as well have just stayed in the market and you’d be better off long term. In a rising market you’ll sell potentially early in a run up and buy back in after some correction from the peak.

So I can’t answer the question directly, but logically it would be worse than buying and holding in general.
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Re: Buy/Sell vs. Buy/Hold theory question

Post by livesoft »

arcticpineapplecorp. wrote: Tue Jul 09, 2024 2:01 pm if you're out of the market on some of the best days, it could cost you bigly:
But if you're out of the market on some of the worst day, you make out like bandit.

https://awealthofcommonsense.com/2018/10/big-down-days/

Can you tell that I hate, Hate, HATE when someone posts that meme about being out of the market on some of the best days?
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arcticpineapplecorp.
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Re: Buy/Sell vs. Buy/Hold theory question

Post by arcticpineapplecorp. »

livesoft wrote: Wed Jul 10, 2024 8:48 am
arcticpineapplecorp. wrote: Tue Jul 09, 2024 2:01 pm if you're out of the market on some of the best days, it could cost you bigly:
But if you're out of the market on some of the worst day, you make out like bandit.

https://awealthofcommonsense.com/2018/10/big-down-days/

Can you tell that I hate, Hate, HATE when someone posts that meme about being out of the market on some of the best days?
sure but since you can neither tell which are going to be the best, nor worst days until after the fact, it's best not to attempt to time the market, which is what the OP is asking to do.
It's hard to accept the truth when the lies were exactly what you wanted to hear. Investing is simple, but not easy. Buy, hold & rebalance low cost index funds & manage taxable events. Asking Portfolio Questions | Wiki
livesoft
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Re: Buy/Sell vs. Buy/Hold theory question

Post by livesoft »

arcticpineapplecorp. wrote: Wed Jul 10, 2024 9:09 amsure but since you can neither tell which are going to be the best, nor worst days until after the fact, it's best not to attempt to time the market, which is what the OP is asking to do.
That's the beauty of the RBD method: One makes no prediction ahead of time. You wrote yourself "until after the fact", so the RBD method works on that premise. You know when an RBD has occurred and can act on that information -- there is no predicting an RBD at all. But you are correct in that you cannot predict what will happen after an RBD.
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Atticus713
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Re: Buy/Sell vs. Buy/Hold theory question

Post by Atticus713 »

Hi Forum,
I just wanted to say thanks and express our appreciation for the time all of you took to answer the question and share your collective wisdom. We really appreciate it! In response, we will continue to “stay the course.”
Peace,
Atticus713
“Simplicity is the master key to financial success” J.C. Bogle | S&P 500 Index + Total U.S. Bond Index | Age-10 in Bonds at start; 30:70 at retirement | Rebalance Annually | Stay the Course
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