> Logically, it seems like Buy the Dip can’t lose. If you know when you are at a bottom, you can always buy at the cheapest price relative to the all-time highs in that period. However, if you actually run this strategy you will see that Buy the Dip underperforms DCA over 70% of the time.
> This is true despite the fact that you know exactly when the market will hit a bottom. Even God couldn’t beat dollar-cost averaging.
> Why is this true? Because buying the dip only works when you know that a severe decline is coming and you can time it perfectly. Since dips, especially big ones, haven’t happened too often in U.S. market history (i.e. 1930s, 1970s, 2000s), this strategy rarely beats DCA. And the times where it does beat DCA require impeccable timing. Missing the bottom by just 2 months lowers the chance of outperforming DCA from 30% to 3%.
The thing about trying to miss the worst days (get out before the dip, get in after), is that the 'best' (recovery) days are often not long after, and if you miss just a few of those your returns get hosed:
> If you missed just the 25 strongest days in the stock market since 1990, you might as well have been in five year treasury notes.
> This is actually a pattern, it turns out. The market’s worst days tend to be followed by its best days, according to research from J.P. Morgan Asset Management.
> If you sell when the markets hit the skids, you’ll likely miss the upside.
[…]
> According to J.P. Morgan’s analysis, the 10 best days over the past 20 years occurred after big declines amid the 2008 financial crisis or the 2020 pullback during the onset of the Covid-19 pandemic.
> This is true despite the fact that you know exactly when the market will hit a bottom. Even God couldn’t beat dollar-cost averaging.
I'm a bit unconvinced by the studies that say this, because I don't think the "buy the dip" strategy they're talking about is the same one that people are running.
The studies describe waiting for a low point in a given year (or even across multiple years!) then lumping in all your money then.
Whereas I think what people actually mean when they talk about buying the dip is shifting their dollar cost averaging buy-in by days, weeks, or at most a few months, while they wait for the market to get spooked.
I don't do this at the moment. I had a "wait for the US president to say something stupid" strategy which seemed to work for a while, but of course I don't really have enough evidence to back that up.
But even if you're just modifying a DCA schedule slightly (buying a little early/more when things feel particularly cheap, or buying a little later/less when things feel expensive) -- doesn't the same problem exist: that those adjustments typically cause a worse outcome than if you didn't apply them?
Maybe some people have a better crystal ball than others, but if we just look at the average case where studies favor vanilla DCA, I have to imagine that the reasons (why DCA wins) will prevail regardless of the extent that they're applied. But if your skill is enough above average that it's helpful to deviate, go for it...
> Logically, it seems like Buy the Dip can’t lose. If you know when you are at a bottom, you can always buy at the cheapest price relative to the all-time highs in that period. However, if you actually run this strategy you will see that Buy the Dip underperforms DCA over 70% of the time.
> This is true despite the fact that you know exactly when the market will hit a bottom. Even God couldn’t beat dollar-cost averaging.
> Why is this true? Because buying the dip only works when you know that a severe decline is coming and you can time it perfectly. Since dips, especially big ones, haven’t happened too often in U.S. market history (i.e. 1930s, 1970s, 2000s), this strategy rarely beats DCA. And the times where it does beat DCA require impeccable timing. Missing the bottom by just 2 months lowers the chance of outperforming DCA from 30% to 3%.
* https://ofdollarsanddata.com/even-god-couldnt-beat-dollar-co...
The thing about trying to miss the worst days (get out before the dip, get in after), is that the 'best' (recovery) days are often not long after, and if you miss just a few of those your returns get hosed:
> If you missed just the 25 strongest days in the stock market since 1990, you might as well have been in five year treasury notes.
* https://theirrelevantinvestor.com/2019/02/08/miss-the-worst-...
> This is actually a pattern, it turns out. The market’s worst days tend to be followed by its best days, according to research from J.P. Morgan Asset Management.
> If you sell when the markets hit the skids, you’ll likely miss the upside.
[…]
> According to J.P. Morgan’s analysis, the 10 best days over the past 20 years occurred after big declines amid the 2008 financial crisis or the 2020 pullback during the onset of the Covid-19 pandemic.
* https://www.cnbc.com/2022/03/09/you-may-miss-the-markets-bes...