I just spent 2.5 hours to simulate a few scenarios about “buying the dip”, including this proposed strategy and will summarize the methods/results below. As we all know and read many times, it is overall less successful to hold money back for market timing. So if we follow this statement, there should never be the option to “give some extra” into the dip as everything is already invested (aka time in the market > timing the market).
However, reality and the human psychology works often a bit different. If something happens that we suddenly feel more motivated to go a bit “more” into the risk and invest a bit more to “buy the dip” and overperform vs. the market. From this (from a rational standpoint wrong) perspective, we can now compare some scenarios.
Scenario 1: Baseline
- invest 1000$/month into VT (always after salary payment; on 28. of the month)
- no additional investments/adjustments due to market performance
Scenario 2: Immediate Buy-the-Dip
- follow the baseline scenario, but if there is a >=2% drop of VT in one day, then immediately invest another 1000$ on the next day
- maximum 1 additional payment per month (so either we invest 1000 or sometimes 2000$); any following drops of >=2% are ignored because there is no more money available to invest
Scenario 3: Short-Delayed Buy-the-Dip
- follow the baseline scenario, but if there is a >=2% drop of VT within 3 days, then invest another 1000$ on the third day
- could help to avoid buying while market still goes down
Scenario 4 (inspired by @TeaGhost): Cool-Off Buy-the-Dip
- follow the baseline scenario, but if there is a >=2% drop of VT on one day, it waits until at least 3 continuous days there is no more than a 0.2% downturn per day (measure of reduced volatility); if this is the case, buy in with 1000 $
- if this becomes the case but the price is already higher than before the drop (e.g. one day after a -2% you get a +2.2% rebound), it ignores the event and continues with the baseline investing
- max 1 additional event/month (max 2000$ investing/month)
Scenario 5: Baseline 50-50 Dip
- invest 50% of the total investment amount (e.g. 500$ of 1000$) on any day during the month if there is a 2% drop in VT price
- invest the remaining 50% at the end of the month as in the baseline scenario
- if there is no drop during the month, invest the full 1000$ at the end of the month
- every month the same amount is invested; only difference is the timing of 50% of the amount within the month
Scenario 6: Hardcore Buy-the-Dip
- similar to scenario 5, but here we invest the full amount (100%, so 1000$ out of 1000$) as soon as we see a 2% dip
- if there is a dip during the month, no additional payment is made at the end of the month
- if there is no dip, we invest the 1000$ at the end of the month (same as in baseline scenario)
Methods
- simulated over a timespan of 10 years, and starting at each month between 2008 to 2014 (and then 10 years from the start) → total nr of simulated 10-year timeframes = 120
- calculate return in % for each of the 120 timeframes and for each scenario
- get mean % of all timeframes and standard deviation
- return = return of investment → (sum of all investments)/(final value of portfolio)*100 - 100
Results
All results here are only about % return. Absolute return varies due to different amount invested.
Note, for baseline, the return of investment in % would be the same if I invest 1000$ or e.g. 2000$/month (corresponding to 240 buy-events, but 2 on the same day; disregarding fees).
- Baseline - Average 10-y return: 60.7% Std: 14.9% Buy-events (average): 120
- Immediate Buy-the-Dip - Average 10-y return: 63.5% Std: 15.8% Buy-events (average): 160
- Short-Delayed Buy-the-Dip - Average 10-y return: 63.5% Std: 16.2% Buy-events (average): 175
- Cool-Off Buy-the-Dip - Average 10-y return: 62.2% Std: 15.3% Buy-events (average): 131
- Baseline 50-50 Dip - Average 10-y return: 60.7% Std: 14.9% Buy-events (average): 160
- Hardcore Buy-the-Dip - Average 10-y return: 60.6% Std: 14.9% Buy-events (average): 120
Summary
- The strategies are all kind of similar (given that we stick to the baseline investing for each of them)
- Small advantage in return for buy-the-dip strategies (but remember, that technically only works when the money “appears” during a crash and could not have been invested before)
- Immediate Buy-the-Dip was not worse than other strategies such as cool-off or delayed buy-the-dip; but cool-off only needed 11 additional investments (vs 40 for immediate and 55 for delayed) to get the 1.5% edge over baseline (62.2 vs. 60.7)
- Increased return is only visible when adding additional money to the table, while trying to time within a month did not help at all (see scenario 5 and 6)
→ likely because changing the exact day within a month is too small to make a real difference; but profiting of bad months can slightly help - Lots of assumptions went into that calculations. Given that the outcome is similar for all of them, I wouldnt invest more time digging around. But if someone wants to continue, let me know and I’ll share my Jupyter Notebook
