buying after a small (1%) market drop

[Bigdawg]

I have found numerous stories about missing out on the 5, 10, 15 best days of the market each year and how much that would reduce your stash. Time IN the market vs TIMING the market. What I cannot seem to find (please point me in that direction if you can) is what would be your results if you added some cash the day after the market lost 1% or more. So let's say you start on 1 Jan with 100K. On 2 Jan the market drops 1% so you add 1K. Never selling. How would that strategy work? I did a quick (15 minute) internet search and could not find anything like that. Thanks

 

[yhoomajor]

Trick there is to actually be able to buy it next day at the same price as the close of day before.

By the time market opens next day, prices are already either way up or down. Making it a wash most of the time (averages out when you do this enough times).

 

[SecondCor521]

The chart at this article has a graph at the top:

https://www.financialsamurai.com/average-daily-percent-move-of-the-stock-market/

which roughly looks like the number of 1% down days is about 20%.

So it would take about five times as long to invest your money as just investing as soon as possible. Although if you just had a $100K lump sum as you suggest, you'd be fully invested, on average, at the end of the second year (about 250 trading days per year times 2 = 500 days, multiplied by 20% = 100 days = $100K / $1K).

So by definition, after the second year, the return of the portfolio would be identical to just being fully invested.

During the first two years, I think dollar cost averaging fails to beat fully invested about 1/3 of the time, so over 2 years the chance of this beating just being fully invested from day one is about 1 in 9, or a bit less than 10%.

And of course, you'd have to deal with the practical issue raised by the previous poster.

 

[NW-Bound]

Trick there is to actually be able to buy it next day at the same price as the close of day before.

By the time market opens next day, prices are already either way up or down. Making it a wash most of the time (averages out when you do this enough times).

I think one would do better to buy near the end of a down day, and not wait till the next day.

Now that this thread is started, we will all wait to see how the market fares tomorrow.

 

[audreyh1]

1% is just noise.

If you pay attention to the market during the day, you can get an order in for mutual funds say 30 mins before the close and capture the day’s drop.

But I have also seen the market recover loses and even gain during that last 30 mins, or even five mins!

Or use broad ETFs.

By the next day it’s too late.

And this technique requires that you watch the markets all the time. Pretty distracting from the rest of your life.

 

[Lsbcal]

If I wanted to do a study here is the procedure using a spreadsheet:
1) Download daily SP500 data from Yahoo finance. Maybe 10 years worth.
2) Write an if function that selects days where the close is down <-1%
3) Write another function in next column that makes those buys at the opening the next day after a <-1% day
4) Compare the total returns to something like buying all at once

This would be a rough idea of the feasibility of such a scheme. For instance, it may be that you want to select down days <-2% .

 

[NW-Bound]

If I wanted to do a study here is the procedure using a spreadsheet:
1) Download daily SP500 data from Yahoo finance. Maybe 10 years worth.
2) Write an if function that selects days where the close is down <-1%
3) Write another function in next column that makes those buys at the opening the next day after a <-1% day
4) Compare the total returns to something like buying all at once

This would be a rough idea of the feasibility of such a scheme. For instance, it may be that you want to select down days <-2% .

Don't forget to account for dividend payouts, which are not reflected in the historical price quote of the S&P.

 

[Lsbcal]

Don't forget to account for dividend payouts, which are not reflected in the historical price quote of the S&P.

Yes you could do that by using an ETF like SPY which does include dividends.

P.S. I predict nobody here will do such a study. After all, that is work.

 

[NW-Bound]

Yes you could do that by using an ETF like SPY which does include dividends.

P.S. I predict nobody here will do such a study. After all, that is work.

SPY price quote does not include the dividend either. It matches the S&P extremely closely, due to the very small expense ratio.

Total return tools such as Portfolio Visualizer include the dividend gains. However, I do not know how one can get daily returns from these tools.

Back on the topic, I don't think one day variation makes much of a difference either. But of course, that's just guessing.

 

[NW-Bound]

Thinking some more about this, I think one will not do as well as if he buys in all at once.

The reason for this is that the market tends to go up in small steps most days. If you keep waiting to buy on big down days, you will miss out on the numerous small up days. And 1% down is not that big a down anymore.

 

[triangle]

On average I believe it does not really work out, for the reason NW-Bound points out. When I was accumulating I liked to buy on down days, especially after a couple of consecutive down days....after all who does not like to buy things on sale. But if the overall market trend is positive it often does not work as the entry point will move higher. The market might rise 5-10% higher before there is 2% pullback from this higher level. Likewise there might be consecutive down days after buying, leaving one to question why they bought so early.

 

[Sunset]

A person could just set a limit order to buy at 1% below the current price, set good til cancel
Then it's no work.

 

[DrRoy]

In my 401K, I have to put in any orders 1 hour before the close, or they execute at the next day's close.

 

[audreyh1]

A person could just set a limit order to buy at 1% below the current price, set good til cancel
Then it's no work.

Uh, no, that limit number has to track the market each day.

Have to update that daily.

Otherwise when many days go by and it doesn’t execute, the person wonders - why didn’t I just buy in the first place?

Even updating the limit daily, there could be a long wait.

 

[Lsbcal]

SPY price quote does not include the dividend either. It matches the S&P extremely closely, due to the very small expense ratio.
...

Just to nail this thought down, the Vanguard VOO etf does include dividends. So hopefully that should work.

 

[Lsbcal]

There is an investor on Bogleheads that tries to buy on "really bad days". I don't know how that system is constructed and whether it has been successful over the long term. I had seen several discussions there

Try something like this in Google: bogleheads.org "really bad days"

 

[Markola]

I have found numerous stories about missing out on the 5, 10, 15 best days of the market each year and how much that would reduce your stash. Time IN the market vs TIMING the market. What I cannot seem to find (please point me in that direction if you can) is what would be your results if you added some cash the day after the market lost 1% or more. So let's say you start on 1 Jan with 100K. On 2 Jan the market drops 1% so you add 1K. Never selling. How would that strategy work? I did a quick (15 minute) internet search and could not find anything like that. Thanks

I think to fairly calculate any advantage, one would have to include the opportunity cost of the stash of cash earning nothing while waiting for the 1% stock market drops.

Better to remain fully invested.

 

[target2019]

It sounds like buying on 1% dips is an example of averaging down (https://www.investopedia.com/ask/answers/04/052704.asp).

 

[NW-Bound]

One day does not make a market. One month may.

Yesterday was a reasonable bad day as nearly everything went down. Of course, I follow the market everyday, looking for opportunities. And I was down a 6-figure loss from the top, so of course I knew the market had been trending down.

And I saw that the two sectors that did quite bad for the last 30 days were financial and industrial metals. Now, I already had some positions there, but I could not help myself despite been telling myself to lighten up on my stock AA.

So, I bought some XLF (financial ETF) at 35.62 and XME (metal ETF) at 41.77. They were down for the month, and were down some more yesterday. As I said, I could not help myself. Thought about selling puts, but nah, I wanted the stocks themselves.

XLF is at 36.48, and XME is at 43.43 at this writing. I hope I have not jinxed it by bragging here. Heh heh heh...


PS. If the market keeps going up in the next week or two, I will look to lighten up my stock AA. I really mean it this time.

 

[Lsbcal]

NW-Bound, you are toast now. Talking up your positions is a sure way to jinx them. Don't you know you are only supposed to talk about successfully closed positions.

 

[NW-Bound]

NW-Bound, you are toast now. Talking up your positions is a sure way to jinx them. Don't you know you are only supposed to talk about successfully closed positions.

I am going to tempt fate here, and do an experiment by mentioning some positions that will be closed out in a few hours.

This being a Friday, it's time for me to count my expiring options.

10 puts: 7 contracts expiring worthless, 3 will be assigned.
9 calls: 8 contracts expiring worthless, 1 will be assigned.

The above is as of this writing. A few contracts have strike prices close to the current price, so may change status when the market closes.

There, I am putting more of my stuff in peril by mentioning them.


PS. By the way, the call that looks to be assigned is for a high-priced stock, and it dwarfs the 3 puts that will make me buy. Net effect is my stock AA decreases a tiny bit (0.2%).

 

[tulak]

I bought equities yesterday and today everything is up. It works! [emoji2]

 

[Bigdawg]

Thanks for all of the responses. Gives me lots to chew on. The reason I asked the question is because periodically I receive $ for various reasons. Like this coming week I will receive my spring baseball officiating $. Probably 3-4k. What usually happens is that I will throw 2-3 of that into the market and low and behold the market goes down 1% the next day. Lately I may find myself with an extra k or 2 in my checking account so I'll dump that into the market (play account) the day after a 1% drop.

 

[Lsbcal]

Thanks for all of the responses. Gives me lots to chew on. The reason I asked the question is because periodically I receive $ for various reasons. Like this coming week I will receive my spring baseball officiating $. Probably 3-4k. What usually happens is that I will throw 2-3 of that into the market and low and behold the market goes down 1% the next day. Lately I may find myself with an extra k or 2 in my checking account so I'll dump that into the market (play account) the day after a 1% drop.

But 1% of 4k is only $40. You don't want to build a strategy around small sums like this. If it really bothers you (I can sympathize), then put 1k in each week.

Good luck.

 

[jollystomper]

I have tried this sometimes, randomly and infrequently. Not as a "strategy", more as a "game" out of curiosity. If I "win" big deal, if I "lose" big deal. The amounts I invest are relatively small. As as been mentioned, with mutual funds you cannot guarantee that %1 loss at 3pm will stay. Last week I got lucky, I moved $1000 in "excess" cash into FZROX on Thursday. My gain on Friday was a whopping $12 and change. Wheeeee!

OTOH, I tried this a few times with Roth contributions earlier this year, and would have been better off just throwing the amount in all at once.

Again, very small amounts, and a "random" game I choose to play sometimes. Hey, I understand it better than puts and calls.