LOL!
Give me a museum and I'll fill it. (Picasso) Give me a forum ...
- Joined
- Jun 25, 2005
- Messages
- 10,252
I wrote this thread partly to put down somewhere what I am doing which will tend to make me follow it, but also to see if anyone else has a short-term buy-on-the-dips strategy and how you implement it. Thanks!
As part of my investment policy statement, I must buy on the dips. My strategy stems from those "best days / worst days" articles. If you miss the N worst days in the market over the last M years, you make out like a bandit.
It is very easy to figure out what a worst day is because the media has reports of "worst day since" all over the place before the stock market closes for that day. Or one simply looks within 30 minutes of the market close (I have a single button F4 on my powerbook that does this). Thus about 15 minutes before the market closes, I will buy some equities without regard to my asset allocation. I usually don't have any cash on hand, so I just exchange from bonds to equities in an IRA or 401(k). The idea is to profit from the inevitable pop back up from the dip by exchanging back in a day or so after the market recovers.
Sure there is all sorts of danger in this strategy, but so what? The issue is what constitutes a dip that signals a buy. I would like to make 2 to 6 of these kinds of buying on the dips each year, so a dip has to be some intraday percentage drop that would occur only a few times a year. A 2-day or multi-day drop does not count for this strategy. In this Vanguard paper
( https://institutional.vanguard.com/iam/pdf/HAS09.pdf ) on page 8 it is written:
Although it goes on to say that 2008 had much more of these days than that.
So there is a number to use that seems suitable: A dip is a 3% or more drop in one day in the S&P500 or other index. I like to look at VTI, VEU, VBR, and VSS to see if any of them have dropped below signal levels. An example of a dip occurred on August 17, 2009 where things dropped about 4%. Indexes recovered to August 14th levels (pre-dip levels) by August 20th. A smaller dip occurred on September 1st, but VBR did drop about 3% that day and will probably close today about 1.5% above that.
So both 8/17 and 9/1 were actionable days and both days I exchanged from a bond fund to a stock fund. Today, i will exchange the other way to complete this short term trade to get back to my desired asset allocation.
Now one problem is that one cannot do these short term trades in many mutual funds. I got a wrist-slap letter from Fidelity for doing a round-trip in my 401(k) and my account is being monitored. The way I get around this is to use 2 separate accounts. My spouse's 401(k) has the same bond fund as my 401(k), so if I exchange out of the bond fund in my 401(k), I can exchange back into the bond fund in her 401(k) the next day or within a short time. Of course, I don't expect to buy on the dip more than about once a quarter, so I should not run into early redemption fees doing it this way. If so, I have his and her IRAs that I can use as well in a pinch. The amount I exchange is such that I expect to increase my yearly return by 0.1% per dip-buy which is about the same as my monthly mortgage payment. I wouldn't do this with just a few thousand dollars because the possible gains would only be enough to buy one lunch. I would also not do this with more than about 5% of my total portfolio.
I repeat what I wrote at the start: I wrote this thread partly to put down somewhere what I am doing which will tend to make me follow it, but also to see if anyone else has a short-term buy-on-the-dips strategy and how you implement it. Thanks!
As part of my investment policy statement, I must buy on the dips. My strategy stems from those "best days / worst days" articles. If you miss the N worst days in the market over the last M years, you make out like a bandit.
It is very easy to figure out what a worst day is because the media has reports of "worst day since" all over the place before the stock market closes for that day. Or one simply looks within 30 minutes of the market close (I have a single button F4 on my powerbook that does this). Thus about 15 minutes before the market closes, I will buy some equities without regard to my asset allocation. I usually don't have any cash on hand, so I just exchange from bonds to equities in an IRA or 401(k). The idea is to profit from the inevitable pop back up from the dip by exchanging back in a day or so after the market recovers.
Sure there is all sorts of danger in this strategy, but so what? The issue is what constitutes a dip that signals a buy. I would like to make 2 to 6 of these kinds of buying on the dips each year, so a dip has to be some intraday percentage drop that would occur only a few times a year. A 2-day or multi-day drop does not count for this strategy. In this Vanguard paper
( https://institutional.vanguard.com/iam/pdf/HAS09.pdf ) on page 8 it is written:
Historically, changes in stock prices of plus or minus 3% have occurred on 1% of trading days—or 1 out of every 80 days
Although it goes on to say that 2008 had much more of these days than that.
So there is a number to use that seems suitable: A dip is a 3% or more drop in one day in the S&P500 or other index. I like to look at VTI, VEU, VBR, and VSS to see if any of them have dropped below signal levels. An example of a dip occurred on August 17, 2009 where things dropped about 4%. Indexes recovered to August 14th levels (pre-dip levels) by August 20th. A smaller dip occurred on September 1st, but VBR did drop about 3% that day and will probably close today about 1.5% above that.
So both 8/17 and 9/1 were actionable days and both days I exchanged from a bond fund to a stock fund. Today, i will exchange the other way to complete this short term trade to get back to my desired asset allocation.
Now one problem is that one cannot do these short term trades in many mutual funds. I got a wrist-slap letter from Fidelity for doing a round-trip in my 401(k) and my account is being monitored. The way I get around this is to use 2 separate accounts. My spouse's 401(k) has the same bond fund as my 401(k), so if I exchange out of the bond fund in my 401(k), I can exchange back into the bond fund in her 401(k) the next day or within a short time. Of course, I don't expect to buy on the dip more than about once a quarter, so I should not run into early redemption fees doing it this way. If so, I have his and her IRAs that I can use as well in a pinch. The amount I exchange is such that I expect to increase my yearly return by 0.1% per dip-buy which is about the same as my monthly mortgage payment. I wouldn't do this with just a few thousand dollars because the possible gains would only be enough to buy one lunch. I would also not do this with more than about 5% of my total portfolio.
I repeat what I wrote at the start: I wrote this thread partly to put down somewhere what I am doing which will tend to make me follow it, but also to see if anyone else has a short-term buy-on-the-dips strategy and how you implement it. Thanks!