Much like with stock picking, timing the market is generally bad for ones financial health and I stay away. I put in a purchase order of my index funds at the start of every month and don't pay any attention to the daily or monthly fluctuations of the market. Any advantage I might see has likely been arbitraged away by hedge funds and professional traders anyways.
Buying the dip sounds great in theory, but when do you buy? How do you know if the dip is over? What taxes are you incurring by doing all this trading? And probably most importantly to me, what gains are you missing out on by keeping your money on the sidelines waiting for the right time?
Nick Maggiulli has a great personal finance book called Just Keep Buying that dives into a lot of nitty gritty investing stuff, I recommend it. He has a whole chapter on why you shouldn't buy the dip.
Thanks, Tanner. I always appreciate your insight and perspective. I've added "Just Keep Buying" to my list. I'm looking forward to diving in. I've been on a reading kick, and it's been awesome!
As for buying the dip, my mentality is multiple things can be true. As I wrote, I'm a believer in dollar-cost averaging. I'm committed to that approach for myself and for Parker. At the same time, with cash reserves on hand I will always buy as much as I reasonably can whenever there's a correction or pullback. I'm not here to say whether that's right or wrong. But it works for me. I'm really curious to read Maggiulli's logic for not buying the dip unless he's arguing investors shouldn't solely rely on buying the dip.
I skimmed through the chapter and his basic finding is this: if you could go back in history and buy at the absolute bottoms of various crashes, you'd still be behind a simple monthly dollar cost averaging strategy because you miss the effect of compounded gains while your money is waiting on the sidelines. He doesn't mention doing a blend of the two, but my guess is the outcome is the same. The problem with buying the dip is spotting the dip, which people have been trying and failing to do since the stock markets started. If the finance PHDs and teams of MBAs can't do it, I don't trust myself to do it either.
At the end of the day, the stock market is generally trending upwards, so the best thing you can do is put your money to work as soon as possible, giving it more time to grow. Every day it's sitting in a savings account is a day that you're missing out on stock market gains. That compounded growth makes up for getting lucky and buying on a down day.
Excellent stuff, Tanner. I definitely see the downside in solely buying the dip. That’s the epitome of trying to time the market and, as you noted, no one knows where the bottom is.
I also can see buying the dip being a questionable strategy if, say, one isn’t pumping as much money into the market as they could be through DCA-ing.
But if one is regularly investing up to their limit but also keeps non-emergency fund, cash reserves for general purposes (vacations, shopping, hobbies, other investments, etc.), I see corrections as an opportune time to dip into those reserves and add more shares.
We never know the bottom. But just like we can DCA as the market goes up, we can as it’s falling as well. I simply see dip-buying as an additional investment in my portfolios. I’ve recently used the strategy with Nike, Starbucks and Hershey to various degrees of success. I’ve yet to be in position financially at the right times to truly capitalize on pullbacks in my chosen index, VTI.
Here’s an even better video breakdown from Wallstreet Trapper about buying the dip. He presents an easy to understand argument that I agree with for why one should not always buy the dip. I should have used this clip in the column and referenced some of the points he makes: https://youtu.be/zDMDkEPbktU?si=HlQuaBlRa3bJJYVu
Much like with stock picking, timing the market is generally bad for ones financial health and I stay away. I put in a purchase order of my index funds at the start of every month and don't pay any attention to the daily or monthly fluctuations of the market. Any advantage I might see has likely been arbitraged away by hedge funds and professional traders anyways.
Buying the dip sounds great in theory, but when do you buy? How do you know if the dip is over? What taxes are you incurring by doing all this trading? And probably most importantly to me, what gains are you missing out on by keeping your money on the sidelines waiting for the right time?
Nick Maggiulli has a great personal finance book called Just Keep Buying that dives into a lot of nitty gritty investing stuff, I recommend it. He has a whole chapter on why you shouldn't buy the dip.
Thanks, Tanner. I always appreciate your insight and perspective. I've added "Just Keep Buying" to my list. I'm looking forward to diving in. I've been on a reading kick, and it's been awesome!
As for buying the dip, my mentality is multiple things can be true. As I wrote, I'm a believer in dollar-cost averaging. I'm committed to that approach for myself and for Parker. At the same time, with cash reserves on hand I will always buy as much as I reasonably can whenever there's a correction or pullback. I'm not here to say whether that's right or wrong. But it works for me. I'm really curious to read Maggiulli's logic for not buying the dip unless he's arguing investors shouldn't solely rely on buying the dip.
I skimmed through the chapter and his basic finding is this: if you could go back in history and buy at the absolute bottoms of various crashes, you'd still be behind a simple monthly dollar cost averaging strategy because you miss the effect of compounded gains while your money is waiting on the sidelines. He doesn't mention doing a blend of the two, but my guess is the outcome is the same. The problem with buying the dip is spotting the dip, which people have been trying and failing to do since the stock markets started. If the finance PHDs and teams of MBAs can't do it, I don't trust myself to do it either.
At the end of the day, the stock market is generally trending upwards, so the best thing you can do is put your money to work as soon as possible, giving it more time to grow. Every day it's sitting in a savings account is a day that you're missing out on stock market gains. That compounded growth makes up for getting lucky and buying on a down day.
Excellent stuff, Tanner. I definitely see the downside in solely buying the dip. That’s the epitome of trying to time the market and, as you noted, no one knows where the bottom is.
I also can see buying the dip being a questionable strategy if, say, one isn’t pumping as much money into the market as they could be through DCA-ing.
But if one is regularly investing up to their limit but also keeps non-emergency fund, cash reserves for general purposes (vacations, shopping, hobbies, other investments, etc.), I see corrections as an opportune time to dip into those reserves and add more shares.
We never know the bottom. But just like we can DCA as the market goes up, we can as it’s falling as well. I simply see dip-buying as an additional investment in my portfolios. I’ve recently used the strategy with Nike, Starbucks and Hershey to various degrees of success. I’ve yet to be in position financially at the right times to truly capitalize on pullbacks in my chosen index, VTI.
Here’s an even better video breakdown from Wallstreet Trapper about buying the dip. He presents an easy to understand argument that I agree with for why one should not always buy the dip. I should have used this clip in the column and referenced some of the points he makes: https://youtu.be/zDMDkEPbktU?si=HlQuaBlRa3bJJYVu