Have a simple rule: If it's more than three then go on a spree.
If on any trading day S&P500 is -ve >3% then buy the index etf. Have done a rudimentary back test during bear markets of 2000, 2008 and 2020..seems to work..
Negative 3% from? Previous day? All time high? Would be interesting to see the backtest.
The 10% threshold was a judgement call this time, but experimenting with other rules to find the best condition to invest with is a good idea to explore as well!
-ve 3% on any trading day..like 18/05 when S&P500 was down 4%..if index falls 5% then you do a higher allocation..it is DCA but on the worst days..
Goes without saying that this may not be an optimal strategy for all indices or investors/traders..but a tool in your toolkit..anyone reading this please DYODD..
Good point, statistically speaking yes .. double your investments in dips... Managing the cash flow is where the challenge is.. if you had planned an investment of $100K , chances are you might have used most of it during the bull phase or bought at near all time highs!! And now with dips, you don't have any cash left to invest ...
If you are really highly risk taking person , take a personal loan of double your invested money and invest it during dips.. not really a sound advise.
So the best strategy is to keep investing a fixed amount regularly and maintain it.. immaterial of the market direction ... Just like the Average Andy in this article.. always the best strategy for retail investors . Fixed amount every month.
Yes, simple DCA came out on top yet again. Will definitely look into the topic of investment amount as a proportion of monthly income instead of an arbitrary amount that is doubled or adjusted - It seems to be a recurring theme in the comments and makes a lot of sense :)
This analysis assumes that the double-down money comes from thin air. If you’re going to invest double in the dip, you needed to NOT invest the equivalent dollars in the initial stages.
Great point. I had assumed that $100 to $200 is not much of a jump, but it definitely makes more sense to define the amount you invest as a proportion of your income. Whether the $100 is 10% of your income or 50% of your income makes a huge difference! I had done a similar analysis in the past where I split the investment between equity and T bills: https://marketsentiment.substack.com/p/dca. Something on those lines would probably be more comprehensive.
Thanks for the idea! I might explore it further.
What I found more surprising was that doubling down gives you just 40% points more returns after 24 years - So it's a rough heuristic that says simple DCA isn't so bad either.
I'd love a follow-up article on cash management strategy comparisons - it could use the buy the dip example referenced "When the market goes below 10% of the previous all-time high (let’s call this the threshold)..." and investing double, but give reference percentages to invest of available cash.
It could compare 1) that vs 2) always being all-in vs 3) holding cash until an even higher cut-off. I tend to have the problem of frequently being all-in, and can't employ a doubling down strategy (without leverage or selling). Thank you for great content!
Thanks for the ideas Andrew! Investment as a proportion of income is a really interesting idea and I might explore it further. One of my earlier pieces on DCA had explored some of these possibilities regarding splitting between equity and bonds and rebalancing. You might find it interesting: https://marketsentiment.substack.com/p/dca
Thank you for another interesting article. Something I've been wondering, but is rarely, if ever discussed: simply opting out of the stock market. Could there be a useful strategy to fully switch back and forth between the stock market and something basic, like a high-interest savings account?
For example, when the S&P 500 drops a few percent from a previous high or dips below a 10-month moving average - or whatever turns out to be the most optimal indication of a dip - the investor might sell their portfolio and move it all to short-term bonds or a savings account with a small, but positive, return and continues to contribute.
When the S&P increases a few percent from the low or rises above a short-term moving average - again, whatever proves to be the most useful indicator - the investor moves their money back into the market.
Of course, this exposes the investor to the first part of the dip and they miss out on the first part of the recovery, so this would require careful choice of the criteria for taking action - and the criteria may not be symmetrical. Still, ignoring tax implications, is there a viable way to simply opt out of the worst of the market's fluctuations?
I have done something very similar using price to earnings ratio and market drops.
Now we have to devise different methods to do the Dollar-cost averaging that will maximize our long-term return. We will have different personas for reflecting different investment styles (all of them would be investing the same amount - $100 every month but following different strategies)
Average Joe: Invests on the first of every month no matter how the market is trending (this would be our benchmark)
Cautious Charlie: Invests in the market only if the Price to Earnings Ratio [2] is lesser than the last 5-year rolling average, else will hold Treasury-Bills [3]
Balanced Barry: Invests in the market only if the Price to Earnings Ratio is within +20% [4] of the last 5-year rolling average, else will hold T-Bills
Analyst Alan: Invests whenever the market pulls back a certain percentage from the last all-time high, else will hold T-Bills [5].
Thanks for the response! Correct me if I've misinterpreted: the model in your DCA analysis does not involve pulling all investments out of the market and converting to T-Bills, it just diverts the monthly investment to T-Bills until suitable market conditions are reached, at which point the T-Bills are invested into the market.
If so, the existing investments in the market are still exposed to the major market drops.
"During the last three major drawdowns, semiconductors, tech, and financial stocks were the worst affected. On the other hand, consumer staples, healthcare, and telecom have seen a drawdown much below what the market sees on average. "
Doesn't that mean tech etc are the ones you *should* buy into, rather than consumer staples etc? Not sure I get the conclusion.
Yes, if you're looking to capture growth, you should probably be buying into tech - but the two approaches serve different purposes: Buying the dip is to maximize returns, while buying non-tech stocks limits the amount of money you could lose (if you sell at an uncle point).
A drawdown could last anywhere from 1 to 5 years (or more, we just haven't seen one like that), and we might be in the middle of one right now. Buying into tech as it keeps going down for years together adds a stress factor... In such times, buying into sectors which have historically seen lesser drawdowns could limit the loss and help you sleep better at night.
You could possibly allocate different portions of your portfolio to both strategies, like the usual mix of bonds and equity. Comes down to investing style and risk tolerance... Hope that helps!
Ah yes, downside protection vs upside makes sense. It's a fascinating one because the fact that s'thing has fallen a lot can mean both a) it's now near the bottom, and b) it's the riskier crazier one that'll fall more.
Have a simple rule: If it's more than three then go on a spree.
If on any trading day S&P500 is -ve >3% then buy the index etf. Have done a rudimentary back test during bear markets of 2000, 2008 and 2020..seems to work..
Negative 3% from? Previous day? All time high? Would be interesting to see the backtest.
The 10% threshold was a judgement call this time, but experimenting with other rules to find the best condition to invest with is a good idea to explore as well!
-ve 3% on any trading day..like 18/05 when S&P500 was down 4%..if index falls 5% then you do a higher allocation..it is DCA but on the worst days..
Goes without saying that this may not be an optimal strategy for all indices or investors/traders..but a tool in your toolkit..anyone reading this please DYODD..
Great research, I love how you highlight the power of dollar cost averaging & how difficult it is to actually time the markets.
Yes, the more I explore, the more I realize how well DCA stands up to scrutiny!
Good point, statistically speaking yes .. double your investments in dips... Managing the cash flow is where the challenge is.. if you had planned an investment of $100K , chances are you might have used most of it during the bull phase or bought at near all time highs!! And now with dips, you don't have any cash left to invest ...
If you are really highly risk taking person , take a personal loan of double your invested money and invest it during dips.. not really a sound advise.
So the best strategy is to keep investing a fixed amount regularly and maintain it.. immaterial of the market direction ... Just like the Average Andy in this article.. always the best strategy for retail investors . Fixed amount every month.
Yes, simple DCA came out on top yet again. Will definitely look into the topic of investment amount as a proportion of monthly income instead of an arbitrary amount that is doubled or adjusted - It seems to be a recurring theme in the comments and makes a lot of sense :)
This analysis assumes that the double-down money comes from thin air. If you’re going to invest double in the dip, you needed to NOT invest the equivalent dollars in the initial stages.
Great point. I had assumed that $100 to $200 is not much of a jump, but it definitely makes more sense to define the amount you invest as a proportion of your income. Whether the $100 is 10% of your income or 50% of your income makes a huge difference! I had done a similar analysis in the past where I split the investment between equity and T bills: https://marketsentiment.substack.com/p/dca. Something on those lines would probably be more comprehensive.
Thanks for the idea! I might explore it further.
What I found more surprising was that doubling down gives you just 40% points more returns after 24 years - So it's a rough heuristic that says simple DCA isn't so bad either.
I don´t wanna be the annoying guy. But it would be 40 percentage points more, not 40% more. 40% more would be huge.
Awesome article, btw.
haha No worries. I have edited it :)
I'd love a follow-up article on cash management strategy comparisons - it could use the buy the dip example referenced "When the market goes below 10% of the previous all-time high (let’s call this the threshold)..." and investing double, but give reference percentages to invest of available cash.
It could compare 1) that vs 2) always being all-in vs 3) holding cash until an even higher cut-off. I tend to have the problem of frequently being all-in, and can't employ a doubling down strategy (without leverage or selling). Thank you for great content!
Follow-up thought: how those strategies would compare if instead of holding cash, you held bonds and sold those to buy into stocks.
Thanks for the ideas Andrew! Investment as a proportion of income is a really interesting idea and I might explore it further. One of my earlier pieces on DCA had explored some of these possibilities regarding splitting between equity and bonds and rebalancing. You might find it interesting: https://marketsentiment.substack.com/p/dca
Wouldn't it make sense for all strategies to have the same total amount invested?
The "Hold" strategy should invest all the savings from the previous 'True' drawdown months once the drawdown reverses back to 'False'.
The "Stay" strategy should actually invest $137/mo. to reach the same invested total of the "Double" strategy.
this is simple and helpful, Thank you
Thank you for another interesting article. Something I've been wondering, but is rarely, if ever discussed: simply opting out of the stock market. Could there be a useful strategy to fully switch back and forth between the stock market and something basic, like a high-interest savings account?
For example, when the S&P 500 drops a few percent from a previous high or dips below a 10-month moving average - or whatever turns out to be the most optimal indication of a dip - the investor might sell their portfolio and move it all to short-term bonds or a savings account with a small, but positive, return and continues to contribute.
When the S&P increases a few percent from the low or rises above a short-term moving average - again, whatever proves to be the most useful indicator - the investor moves their money back into the market.
Of course, this exposes the investor to the first part of the dip and they miss out on the first part of the recovery, so this would require careful choice of the criteria for taking action - and the criteria may not be symmetrical. Still, ignoring tax implications, is there a viable way to simply opt out of the worst of the market's fluctuations?
Hey!
I have done something very similar using price to earnings ratio and market drops.
Now we have to devise different methods to do the Dollar-cost averaging that will maximize our long-term return. We will have different personas for reflecting different investment styles (all of them would be investing the same amount - $100 every month but following different strategies)
Average Joe: Invests on the first of every month no matter how the market is trending (this would be our benchmark)
Cautious Charlie: Invests in the market only if the Price to Earnings Ratio [2] is lesser than the last 5-year rolling average, else will hold Treasury-Bills [3]
Balanced Barry: Invests in the market only if the Price to Earnings Ratio is within +20% [4] of the last 5-year rolling average, else will hold T-Bills
Analyst Alan: Invests whenever the market pulls back a certain percentage from the last all-time high, else will hold T-Bills [5].
You can check out the article below.
https://marketsentiment.substack.com/p/dca?s=w
Thanks for the response! Correct me if I've misinterpreted: the model in your DCA analysis does not involve pulling all investments out of the market and converting to T-Bills, it just diverts the monthly investment to T-Bills until suitable market conditions are reached, at which point the T-Bills are invested into the market.
If so, the existing investments in the market are still exposed to the major market drops.
Of course, no one knows Is the current market close to bottom OR the bottom in still 40% more to go!
Also, not clear in the above graphs: what kind of dips they bought or double down?
"During the last three major drawdowns, semiconductors, tech, and financial stocks were the worst affected. On the other hand, consumer staples, healthcare, and telecom have seen a drawdown much below what the market sees on average. "
Doesn't that mean tech etc are the ones you *should* buy into, rather than consumer staples etc? Not sure I get the conclusion.
Yes, if you're looking to capture growth, you should probably be buying into tech - but the two approaches serve different purposes: Buying the dip is to maximize returns, while buying non-tech stocks limits the amount of money you could lose (if you sell at an uncle point).
A drawdown could last anywhere from 1 to 5 years (or more, we just haven't seen one like that), and we might be in the middle of one right now. Buying into tech as it keeps going down for years together adds a stress factor... In such times, buying into sectors which have historically seen lesser drawdowns could limit the loss and help you sleep better at night.
You could possibly allocate different portions of your portfolio to both strategies, like the usual mix of bonds and equity. Comes down to investing style and risk tolerance... Hope that helps!
Ah yes, downside protection vs upside makes sense. It's a fascinating one because the fact that s'thing has fallen a lot can mean both a) it's now near the bottom, and b) it's the riskier crazier one that'll fall more.