Excellent study.Without a concrete rule for what it means to "buy the dip," discussions are inconclusive. Here's one possible example of the result of applying one simple rule.
In this case, it's assumed that an investor commits $100/month, real (increased according to inflation). Every month they invest it into Treasury bills until a -20% dip in stock prices occurs. At that point, the total savings in Treasury bills are used to buy stocks. The orange line shows the savings balance accumulating and then dropping to zero when stocks are purchased. It's referenced to the right vertical axis and is magnified compared to the other plots. The grey line is stock prices, which are the criteria for the "dips." The green dashes identify the highs from which the dip is measured. The red dashes identify the point at which the drip reaches -20% and stocks are purchased.
The blue line represents the mounting value of the stock investment. The dotted blue line represents what it would have been if the stocks has simply been purchased every month rather than waiting for the dip. The semilog chart makes the difference look small. In fact an investor who bought the dips would have ended up $2 million behind the investor who invested monthly. But that's because the effect of compounding over a century makes small differences look big. My own judgement is that the difference is "surprisingly small" and "in the wrong direction."
Here's a summary for different dip criteria:
This isn't as damning as it seems, because the effect of buying the dips is similar to the effect of maintaining a cash allocation, so risk is reduced along with return, but it is a good illustration of how intuition can be misleading.
It is sometimes claimed that it is possible to have a buy-the-dips strategy that never involves holding money back and waiting to invest it, I will leave it to those who make such a claim to present it. To me, it seems that the money to buy the stock must come from somewhere, and when it is not buying stock it must be somewhere, and wherever it is, it is not growing with the market.
Statistics: Posted by gammalaser — Sun Aug 11, 2024 3:31 pm — Replies 62 — Views 4500