Buying on market dips: How effective is it?

One thing is clear from this series on market timing. There is a lot of inertia when it comes to selling equity and moving to debt in the name of timing. Many seem to prefer “buying on dips”. That is whenever they “feel” there is a “buying opportunity”. So for the 4th part in this series, I focus on “buying only market timing”.

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For example, suppose your idea of low PE = 19 and high PE = 24. We consider two ways (among many) of investing: A  you buy only equity when PE < 19. You buy only debt when PE > 24 and in between you invest systematically as per a given asset allocation. B You buy twice as much of equity when PE < 19 and twice as much of debt when PE > 24 and in between as per asset allocation. Let us consider examples.

Example for A. Suppose your monthly investment amount = Rs. 1000 and your asset allocation is 60% equity and 40% debt (codename 60:40). Each month you check the PE. IF PE < 19, you invest Rs. 1000 in equity and none in debt. If PE > 24, you invest Rs. 1000 in debt and none in equity. If PE is between 19 and 24, you invest Rs. 600 in equity and Rs. 400 in debt. Once a year you rebalance the portfolio back to 60:40, unless the PE < 19.

Example for B Suppose your monthly investment amount = Rs. 1000 and your asset allocation is 60% equity and 40% debt (codename 60:40). Each month you check the PE. IF PE < 19, you invest Rs. 1000 + Rs. 1000 in equity and none in debt. If PE > 24, you invest Rs. 1000 + Rs. 1000 in debt and none in equity. If PE is between 19 and 24, you invest Rs. 600 in equity and Rs. 400 in debt. Once a year you rebalance the portfolio back to 60:40, unless the PE < 19.

In this study, I have not considered what happens to that extra Rs. 1000 when PE is between 19-24. Ideally one should assume that it gets stashed in a liquid instrument. For the record, I have already considering that in a previous study: Buying “low” with  “active” cash vs buying systematically: still a surprise!

In what follows, you will see the return (XIRR) comparison between the timing model and the systematic model (invest each month and rebalance each year as per asset allocation). Apologies on the typo on “duration”! Too much work to go back and change in the figures.

Buying on market dips: How effective is it?

photo by Valters Krontals. Concept: Thank to a quote by R. Balakrishnan. Watch his presentation: Video: R. Balakrishnan on “investing for keeps: in equities I trust”

Market Timing and Tactical Asset Allocation Series

Market Timing with Index PE Ratio: Tactical Asset Allocation Backtest Part 1

Market Timing With Ten Month Moving Average: Tactical Asset Allocation Backtest Part 2

Tactical Asset Allocation Backtest Part 3: Short-Term Vs Long-Term

Buy only equity when PE< 15; Buy only Debt when PE >19

In between as per asset allocation (see picture) and rebalance each year if PE is between 15-19. Duration = 10 years; Asset allocation 50% equity.
buying only 15 19 10Y 50 50 - Buying on market dips: How effective is it?

Buy only equity when PE< 15; Buy only Debt when PE >22

In between as per asset allocation (see picture) and rebalance each year if PE is between 15-22. Duration = 10 years; Asset allocation 50% equity

buying only 15 22 10Y 50 50 - Buying on market dips: How effective is it?

Buy only equity when PE< 15; Buy only Debt when PE >24 (50:50)

In between as per asset allocation (see picture) and rebalance each year if PE is between 15-24. Duration = 10 years; Asset allocation 50% equity

buying only 15 24 10Y 50 50 - Buying on market dips: How effective is it?

Buy only equity when PE< 15; Buy only Debt when PE >24 (70:30)

In between as per asset allocation (see picture) and rebalance each year if PE is between 15-24. Duration = 10 years; Asset allocation 70% equity

buying only 15 24 10Y 70 30 - Buying on market dips: How effective is it?

Buy only equity (2X) when PE< 15; Buy only Debt (2X) when PE >24 (70:30)

Here 2X refers to double the investment (that is buying extra). In between as per asset allocation (see picture) and rebalance each year if PE is between 15-24. Duration = 10 years; Asset allocation 70% equity. Note that in this case, due to higher investment, the final value of the timing or tactical approach will be greater, but notice that it does not reflect proportionally in the XIRRs (returns).

buying only 15 24 10Y 70 30 double cash - Buying on market dips: How effective is it?

Buy only equity (2X) when PE< 15; Buy only Debt (2X) when PE >24 (50:50)

Here 2X refers to double the investment (that is buying extra). In between as per asset allocation (see picture) and rebalance each year if PE is between 15-24. Duration = 10 years; Asset allocation 50% equity

buying only 15 24 10Y 50 50 double cash - Buying on market dips: How effective is it?

Buy only equity (2X) when PE< 15; Buy only Debt (2X) when PE >24 (60:40)

Here 2X refers to double the investment (that is buying extra). In between as per asset allocation (see picture) and rebalance each year if PE is between 15-24. Duration = 10 years; Asset allocation 60% equity

buying only 15 24 10Y 60 40 double cash - Buying on market dips: How effective is it?

PE Bands with systematic asset allocation 70:30

Buy according to following bands suggested by Deepti Bhat FB group Asan Ideas for Wealth

PE <= 12 buy 100% equity and no debt

PE <= 18 buy 75% equity and 25% debt

PE <= 20 buy 60% equity and 40% debt

PE <= 22 buy 50% equity and 50% debt

PE <= 28 buy 25% equity and 25% debt

PE  > 28 buy no equity and 100% debt

Rebalancing is done except when PE <=12

Systematic asset allocation is 70:30

 

Buying only PE bands 10Y 70 30 - Buying on market dips: How effective is it?

PE Bands with systematic asset allocation 50:50

Buy according to following bands suggested by Deepti Bhat FB group Asan Ideas for Wealth

PE <= 12 buy 100% equity and no debt

PE <= 18 buy 75% equity and 25% debt

PE <= 20 buy 60% equity and 40% debt

PE <= 22 buy 50% equity and 50% debt

PE <= 28 buy 25% equity and 25% debt

PE  > 28 buy no equity and 100% debt

Rebalancing is done except when PE <=12

Systematic asset allocation is 50:50

Buying only PE bands 10Y 50 50 - Buying on market dips: How effective is it?

Buy Equity when price > 10MMA; Buy Debt when price < 10MMA; Systematic allocation = 70:30

Here  10MMA is the 10 month moving average. Rebalancing is done once a year regardless of price.

Buying only 10MMA 10Y 70 30 - Buying on market dips: How effective is it?

Buy Equity when price > 10MMA; Buy Debt when price < 10MMA; Systematic allocation = 50:50

Here  10MMA is the 10 month moving average. Rebalancing is done once a year regardless of price.

Buying only 10MMA 10Y 50 50 - Buying on market dips: How effective is it?

Buy Equity (2X) when price > 10MMA; Buy Debt (2X) when price < 10MMA; Systematic allocation = 50:50

Here you buy 2X in equity and X in debt when price > 10MMA and X in equity and 2X in debt when price < 10 MMA

Buying only 10MMA 10Y 50 50 Extra cash - Buying on market dips: How effective is it?

CONTA BUY: Buy Debt (2X) when price > 10MMA; Buy Equity (2X) when price < 10MMA; Systematic allocation = 50:50

This is contra momentum investing. That is you buy 2X debt when markets start to pick up (and X in equity) and buy 2X equity when markets start to dip (and X in debt). Notice how reality does not agree with commonsense in finance!!

Buying only 10MMA 10Y 50 50 Extra cash buy low - Buying on market dips: How effective is it?

CONTA BUY: Buy Debt (2X) when price > 10MMA; Buy Equity (2X) when price < 10MMA; Systematic allocation = 70:30

This is contra momentum investing. That is you buy 2X debt when markets start to pick up (and X in equity) and buy 2X equity when markets start to dip (and X in debt). Notice how reality does not agree with commonsense in finance!!

Buying only 10MMA 10Y 70 30 Extra cash buy low - Buying on market dips: How effective is it?

Overall impressions

The timing model fares well when compared with a systematic model with lower equity (50% and not 70%). You can “get a little extra return” (not always) if you invest “:a little extra” based on timing. Whether that “little extra” is proportional to the time, effort and extra money is something that “dip buyers” will have to worry about. Personally, I think that the extra return is not large enough to lose sleep over.

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7 thoughts on “Buying on market dips: How effective is it?

  1. Hi,

    I could not find a place to contact you personally. I appreciate and understand that you have added Google display network ads to your blog to earn money. But they are very annoying right now. I can send you some screenshots to show you how they are all over the place now.

    Regards,

    Devansh.

      1. Dear Professor,
        This i have also communicated to you on twitter. It is really annoying and using adblock means you sharing or allowing them to access your data. Recent terms and condition for Ad blocker changed and please read on google about recent changes by ad blocker before sharing your presonnel data with them.Just sharing info widout any intention to hurt anyone.
        Thanks

        1. So that leaves you with two options: use the firefox reader mode or avoid the site altogether.

          1. not a big mistake, but unnecessary as each instalment will get locked in for 3Y. So either not use them or invest less often.

    1. I agree. It would be good if you can revisit the page so that the layout is more easier to read your content – particularly on mobile phones.

      Maybe once in the beginning and once at the end?

  2. Dear Professor,
    Thank you for sharing good info and all your efforts for making it conclusive. I also think good sleep is better than little extra when almost equal you can achieve with systematically in auto pilot mode.
    SIP goin on obvious with review at intervals.
    Jig

Comments are closed.