Sitting on too much cash ... while waiting to DCA on market dips ...

[Scuba]

[emoji23]

 

[Koolau]

My neighbor (who is smarter than everyone else...just ask her) cashed out her entire portfolio the third week of February 2009.

When she sells again, that should indicate the bottom of the down period. I'll let everyone here know.

Yep, I did a similar thing back in '75. Fortunately, Megacorp stock continued to pile up in the 401(k) and made my FIRE dreams come true. Sometimes doing everything wrong can still lead to a blessed outcome. I'd rather be lucky than good. Not recommending it, mind you.

 

[audreyh1]

Give up on the dip thing, it is a losing proposition.
-- If it made sense, you could buy on dips and sell on "ups" and make a lot of money. But in reality, a "dip" is only evident in retrospect. In the moment, it is impossible to tell if a 1% dip will correct back the next day, or if it the first day of a 25% decline.
-- You can prove this yourself for free in about an hour. Set up a spreadsheet with your "amount to be invested". Then, go back to a random date in the past and look at the market closing. Then look at the next day. Dip? Ready to put 10% of your dough into the market? No going back. Now, look at the next day's close. Invest (more) now? Keep doing this until all your money is invested. You probably won't even need to do any comparisons to other methods, by the time you are done you'll have seen the problems with this approach.

A problem with this kind of backtesting is that you have to be scrupulously honest with yourself. No cheating! It's easy to fool yourself that somehow you "see" the future in the data and wait simply because you already know that a bigger down day is coming.

If you automate the spreadsheet to use some criteria, then that makes the process honest. But then you get into the "data mining" problem. You tune your criteria to get optimal results for some past period, but that doesn't mean it will be optimal in the future.

It's a tricky business.

 

[LOL!]

I'd suggest dumping it in on a schedule AND buying more on dips. But the OP said they don't want to use a schedule. Oh, well.

I've studied this dip thing and also buy on dips, such as May 17 (see LOL!'s Market Timing Newsletter). Things like May 17th only happen about 3 to 5 times a year or less, so one has to invest on a schedule whether a dip occurs or not.

The thing I bought on May 17 (see http://www.early-retirement.org/forums/f44/lol-s-market-timing-newsletter-57042-73.html#post1882918) is now up 5.8%. It is best to have an Asset Allocation Plan and stick to it with perhaps some fun trading on the dips.

 

[Fedup]

That's what I did, buy a little bit regularly, and buy more when it dips.

 

[jkern]

I see a problem with buying on dips. Let say you start on Jan 1st and plan to buy on a 2% dip. Six months go by and the market increases by 10%. Suddenly, you get a 2% dip and buy. But in reality it's up 8% from Jan 1st. (7.8% to be exact).

 

[rvbound]

To answer your question, if I am holding a large amount of cash that I want to be immediately available at an undetermined future point in time, I park it in a savings account with up to $250,000 per bank. The $250,000 limit per bank is to get full FDIC coverage. So if you have more than that, you need to open an account with more than one bank. Discover, ally, goldman sachs savings bank, and a handful of other banks compete with each other to have the highest savings rate. GSBank is currently offering 1.2%. You just sign up online, transfer via ACH from your current bank, and start collecting interest. When you are ready to use that amount, you transfer out the balance to your bank via ACH, or ask for a check, and close that account. Easy peasy. I stay away from CDs (because they tie up your money) and bond funds (because they can go and probably will go down). Money market funds like the ones at Fidelity and Vanguard are not FDIC insured, but these giants are unlikely to go bankrupt anytime soon, so the difference between 0.8% and 1.2% may not be worth the effort depending on how much you are talking about. But you are still paying fees with money market funds and personally, I loathe paying fees no matter how miniscule, so I have personally gone through the trouble of opening up one or more savings accounts.

With regard to buying the dips, I agree with others, that you should probably not try it unless you know what you are doing. I would say the best course of action is to put a time limit on yourself. So try to "buy the dips" as best you can for the next 12 months, and if you still have anything left after 12 months, commit yourself to putting the remainder in all at once.

Also, buying on 2% dips is not a rational strategy for market timing because it is too small of a change. What happens between those 2% dips is likely to be much more significant. Buying on a 10-20% dip is a more rational approach, but you have to recognize you may not see that for years, and in the meantime the market may rise much more than 10% while your cash is sitting in a savings account earning a measly 1.2%. You also need the guts to buy when that dip occurs, because a lot of people will be saying that the market is for sure going to continue going down another 10% at least, and they may be right. If you do want to try to time the market, all that matters is your overall opinion on the direction of the market. If you think it is going down then you wait till it goes down to what you think it should be at. Your opinions need to be based on facts or better yet, numbers, that can be tracked. But above all, you have to recognize that you may be wrong with your opinion. Therefore set a time limit for yourself and keep it. If you are wrong, cest la vie, dump the rest in a low cost index fund and go to the beach.

 

[CRLLS]

I see a problem with buying on dips. Let say you start on Jan 1st and plan to buy on a 2% dip. Six months go by and the market increases by 10%. Suddenly, you get a 2% dip and buy. But in reality it's up 8% from Jan 1st. (7.8% to be exact).

^+1 Exactly what I was thinking.

 

[LOL!]

I think one should be fully invested at all times. When a "dip" comes, then one should exchange from bond funds to equity funds in order to buy low.

When the recovery of the dip happens, then one can reverse the trade. If the dip continues and there is no "recovery of the dip", then one can buy on that dip too, by exchanging more bond fund shares to equity funds.

Backtesting shows this works pretty well most of the time. One just has to stay out of cash.

So buying on the dip does not mean waiting for a dip to buy. Get it?

 

[RobLJ]

Buy a chunk of your AA (say 35-60%; see rvbound's post on the rationale for this), then dollar cost average in. OK to accelerate dca on dips.

 

[ERD50]

OK - OK

Guess I'm gonna have to be non-purist this time.

I'm going to look for 10 down periods and roll 10% or so each time into equities ...

I get it that I need to have my AA all decided ... but, I don't ...

I'm working on it ....

Look back at the previous helpful responses. Can you see that what you just posted makes no sense whatsoever? Future down periods cannot be determined w/o a crystal ball. W/o an AA, where are you going? (Yogi Berra? - "If you don't know where you're going, you might not get there")

You can't be helped here until you decide what you want. Pick an AA, it's not rocket surgery, anything from 40/60 to 95/5 has had similar success rates historically. Then dump the funds there. If that is emotionally stressful, then REALLY DCA in over a year or two, not at perceived 'dips'.

-ERD50

 

[perrytime]

For me MINT has acceptable risk and reward as place to hold cash.

 

[jetpack]

Safest way to keep principle is just put it in high yield online savings. currently 1.3% .. which is better than some of the ideas posted.

 

[REWahoo]

Safest way to keep principle is just put it in high yield online savings. currently 1.3% .. which is better than some of the ideas posted.

With inflation running 2+%, your principal isn't being kept, it is being eroded away.

 

[rayvt]

... where does everyone keep funds they are going to shift to equities, or even long bonds, but haven't, yet?

Nowhere. When I decide to shift into equities, I just do it.

Oh, except when my crystal ball is working. Those times, I look to see when the next future bottom is, and buy then.


Long time ago I was in an investment club, and we had the converse experience. We wanted to sell a stock but it had recently gone down from $7 to $5, so we decided to wait until it got back to 7 and then sell.

When it went to 3, we decided to sell it when it got back to 5.
etc.
at the last step, it went to 3/16 and we decided to sell it when it got back to 1/2.

Moral of the story--you never know what the prices are going to do. Just saying "I will wait for a dip" doesn't mean that a dip will happen.

 

[swguy]

Simple exercise - go backwards in time and pick 10 "dips" you would like to have invested in, choose the amount you would have invested in each and do the math. Now do the math for dumping it all in the day BEFORE the first "dip" you picked. I'm reasonably sure you will find what you are wanting to do is a bad idea. Unless you need the money in the next 5 years, put it where it will work for you.