Want to time the market? Then do it right! Buying on dips is not timing!

Published: December 5, 2018 at 10:48 am

Last Updated on February 12, 2022 at 6:25 pm

Are you interested in timing the market? Then here is how you can do it right. Please do not assume that buying on dips is market timing. It is delusional. In June 2018 I started a market timing aka tactical asset allocation series, and I was surprised by the reactions to it. Most people who wanted to time the market were unwilling to sell existing equity or fixed income investments as per market conditions! This is like wanting to play the piano without touching a key or wanting to swim without getting wet.

In this post, I link to earlier studies on what works and what does not in market timing. There are tens of timing models and I have backtested a few with more to go. The essential message in this post is:

market timing = tactical asset allocation

market timing <> dip buying

1 What is timing the market?

The equity allocation in your portfolio is decided by market conditions, determined either using technical indicators such as these: Are we now in a bear market? Market Analysis (October 2018) or macroeconomic indicators such as this: Term spread as a macroeconomic indicator

2 Why time the market?

For lowering portfolio risk and NOT for getting higher returns. Those who want higher returns by timing have never bothered to study back-tests such as the ones linked here: Is it possible to time the market?

Join over 32,000 readers and get free money management solutions delivered to your inbox! Subscribe to get posts via email!
🔥Enjoy massive discounts on our robo-advisory tool & courses! 🔥

3 Is it possible to time the market? Or Can we time the market?

Of course, it is! Do not listen to “advisors” they are worried about losing commissions if you change equity allocation. Want proof? Read on.

 4 Should you time the market?

That depends on your investment strategy. I have shown that for those with a clear asset allocation plan, and how to changes it year on year as the time for the goal nears, there is  NO need to time the market

5 What do investors want?

As usual nothing realistic! They want to time the market but are worried about tax and exit load. They are unwilling to sell equity when the market is high and re-buy when the market is low. That is just too much work. They want the reward without effort. Very practical indeed!

A few days ago I conducted a poll in FB group, Asan Ideas for Wealth with the following four options for investors who wanted to time the market

  1. I time the market ONLY by buying MORE when the market falls: 107 votes
  2. I am interested in timing ONLY by buying MORE when the market falls: 57 votes
  3. I time the market by selling equity holding when the market is high and re-buying when the market is low: 12 votes
  4. I am interested in timing by selling equity holding when the market is high and re-buying when the market is low: 73 votes

Notice the disparity between choices 1 and 3. So essential only 12 people who participated in the poll are timing the market and 73 want to do so. The 107 (57) who voted for option 1 (2) need to recognise that “dip buying” even with the help of indicators and not random opinions is not market timing.

That is, the effect of “dip buying” on portfolio returns is not significant enough considering the effort and taxes involved.

Want to time the market? Then do it right! Buying on dips is not timing!

6 Proof that dip buying does not work

Over the years I have shown again and again that simply buying on market lows does little to help with returns or risk. What investors simply fail to understand is, that main risk stems from the corpus already in the market and not from when you invest the next time! For example, suppose you have been investing Rs. One thousand a month for say five years and the amount has grown close to one lakh. That one lakh is in the market at all times and can anytime drop in value by 40%. How will it matter if you wait for the right market PE or daily moving average to invest the next few thousands?

Here are the earlier posts

7 Market timing or tactical asset allocation methods (and proof that it works!)

There are dozens of methods and I have only backtested a few.

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

Ten-month moving average (same as a 200-day moving average): Market Timing With Ten Month Moving Average: Tactical Asset Allocation Backtest Part 2 

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

Index PE, PB Dividend Yield Combo: Market Timing with the Motilal Oswal Value Index (MOVI)

Double moving average crossovers: Timing the market by spotting bullish and bearish trends

Other methods that I am aware of include momentum, a combination of long term technical indicators. See: Spotting Market “highs” and “lows” Using Technical Indicators, derivatives (not the investment!), volatility based timing. There should be more.

My dream is to use Fractal math to model market noise for timing. See:

8 How to time the market?

  1. Ignore all noise, opinion and speculation about the market
  2. Use only hard data: Either long term technical indicators (based on math, not arbitrary lines) and/or macroeconomic indicators
  3. Choose a method from the above or elsewhere.
  4. Use back-testing to find out how often you will need to buy and sell.
  5. Adjust the frequency of monitoring to minimise buy and sell
  6. Understand the impact of actions on returns and risk using the back-test
  7. Execute and shut yourself out from all other information sources. Otherwise, timing will not work.

9 Emotions cannot be backtested!

This is a common criticism of those who oppose market timing (most of whom are advisors with a conflict of interest). The problem is that most people do not understand the difference between,  can we time the market? and do we need to time the market?

Yes, most people have trouble keeping emotions away from investing and are prone to mistake. Hey, that just proves that they are human. Most people can’t climb Everest. Even among those who try, many fail. So does that mean we tell future generations that there is no such thing as Everest so that no one tries and no one fails?

It is human nature to try and model the stock market no matter how hard it is. The only problem is that it has to be executed with the right expectations. Emotions are not as big a problem as laziness is Most people assume what “appears” like common sense to them (e.g. dip buying) must be true and hold on to it like faith without ever finding out if it works or not!

When we dig deep enough, what will work, and what will not, becomes clear sooner or later.  Then it is simply a matter of choosing. Well, simple, but not easy!

So what should I do?

If you want to time the market, do it for reducing risk and not enhancing returns. Do it selling when the market is up and re-buying when low. Recognise that dip buying is a childish pursuit without commensurate reward. If all this confuses you, do not worry about timing. Merely decide on equity: fixed income allocation and decrease it in a stepwise manner regardless of returns and regardless of how close you are to your goals. Use the Freefincal Robo Advisory Software Template to automated this strategy for you and focus on your hobbies!

Do share this article with your friends using the buttons below.

🔥Enjoy massive discounts on our courses, robo-advisory tool and exclusive investor circle! 🔥& join our community of 5000+ users!
Use our Robo-advisory Tool for a start-to-finish financial plan! More than 1,000 investors and advisors use this!
New Tool! => Track your mutual funds and stock investments with this Google Sheet!
We also publish monthly equity mutual funds, debt and hybrid mutual funds, index funds and ETF screeners and momentum, low-volatility stock screeners.
Follow Freefincal on Google News
Follow Freefincal on Google News
Subscribe to the freefincal Youtube Channel. Subscribe button courtesy: Vecteezy.
Subscribe to the freefincal Youtube Channel.
Follow freefincal on WhatsApp Channel
Follow freefincal on WhatsApp
Podcast: Let's Get RICH With PATTU! Every single Indian CAN grow their wealth! 
Listen to the Lets Get Rich with Pattu Podcast
Listen to the Let's Get Rich with Pattu Podcast
You can watch podcast episodes on the OfSpin Media Friends YouTube Channel.
Lets Get RICH With PATTU podcast on YouTube
Let's Get RICH With PATTU podcast on YouTube.
🔥Now Watch Let's Get Rich With Pattu தமிழில் (in Tamil)! 🔥
  • Do you have a comment about the above article? Reach out to us on Twitter: @freefincal or @pattufreefincal
  • Have a question? Subscribe to our newsletter using the form below.
  • Hit 'reply' to any email from us! We do not offer personalized investment advice. We can write a detailed article without mentioning your name if you have a generic question.

Join over 32,000 readers and get free money management solutions delivered to your inbox! Subscribe to get posts via email!

About The Author

Pattabiraman editor freefincalDr M. Pattabiraman(PhD) is the founder, managing editor and primary author of freefincal. He is an associate professor at the Indian Institute of Technology, Madras. He has over ten years of experience publishing news analysis, research and financial product development. Connect with him via Twitter(X), Linkedin, or YouTube. Pattabiraman has co-authored three print books: (1) You can be rich too with goal-based investing (CNBC TV18) for DIY investors. (2) Gamechanger for young earners. (3) Chinchu Gets a Superpower! for kids. He has also written seven other free e-books on various money management topics. He is a patron and co-founder of “Fee-only India,” an organisation promoting unbiased, commission-free investment advice.
Our flagship course! Learn to manage your portfolio like a pro to achieve your goals regardless of market conditions! More than 3,000 investors and advisors are part of our exclusive community! Get clarity on how to plan for your goals and achieve the necessary corpus no matter the market condition is!! Watch the first lecture for free!  One-time payment! No recurring fees! Life-long access to videos! Reduce fear, uncertainty and doubt while investing! Learn how to plan for your goals before and after retirement with confidence.
Our new course!  Increase your income by getting people to pay for your skills! More than 700 salaried employees, entrepreneurs and financial advisors are part of our exclusive community! Learn how to get people to pay for your skills! Whether you are a professional or small business owner who wants more clients via online visibility or a salaried person wanting a side income or passive income, we will show you how to achieve this by showcasing your skills and building a community that trusts and pays you! (watch 1st lecture for free). One-time payment! No recurring fees! Life-long access to videos!   
Our new book for kids: “Chinchu Gets a Superpower!” is now available!
Both boy and girl version covers of Chinchu gets a superpower
Both the boy and girl-version covers of "Chinchu Gets a superpower".
Most investor problems can be traced to a lack of informed decision-making. We made bad decisions and money mistakes when we started earning and spent years undoing these mistakes. Why should our children go through the same pain? What is this book about? As parents, what would it be if we had to groom one ability in our children that is key not only to money management and investing but to any aspect of life? My answer: Sound Decision Making. So, in this book, we meet Chinchu, who is about to turn 10. What he wants for his birthday and how his parents plan for it, as well as teaching him several key ideas of decision-making and money management, is the narrative. What readers say!
Feedback from a young reader after reading Chinchu gets a Superpower (small version)
Feedback from a young reader after reading Chinchu gets a Superpower!
Must-read book even for adults! This is something that every parent should teach their kids right from their young age. The importance of money management and decision making based on their wants and needs. Very nicely written in simple terms. - Arun.
Buy the book: Chinchu gets a superpower for your child!
How to profit from content writing: Our new ebook is for those interested in getting side income via content writing. It is available at a 50% discount for Rs. 500 only!
Do you want to check if the market is overvalued or undervalued? Use our market valuation tool (it will work with any index!), or get the Tactical Buy/Sell timing tool!
We publish monthly mutual fund screeners and momentum, low-volatility stock screeners.
About freefincal & its content policy. Freefincal is a News Media Organization dedicated to providing original analysis, reports, reviews and insights on mutual funds, stocks, investing, retirement and personal finance developments. We do so without conflict of interest and bias. Follow us on Google News. Freefincal serves more than three million readers a year (5 million page views) with articles based only on factual information and detailed analysis by its authors. All statements made will be verified with credible and knowledgeable sources before publication. Freefincal does not publish paid articles, promotions, PR, satire or opinions without data. All opinions will be inferences backed by verifiable, reproducible evidence/data. Contact information: letters {at} freefincal {dot} com (sponsored posts or paid collaborations will not be entertained)
Connect with us on social media
Our publications

You Can Be Rich Too with Goal-Based Investing

You can be rich too with goal based investingPublished by CNBC TV18, this book is meant to help you ask the right questions and seek the correct answers, and since it comes with nine online calculators, you can also create custom solutions for your lifestyle! Get it now.
Gamechanger: Forget Startups, Join Corporate & Still Live the Rich Life You Want Gamechanger: Forget Start-ups, Join Corporate and Still Live the Rich Life you wantThis book is meant for young earners to get their basics right from day one! It will also help you travel to exotic places at a low cost! Get it or gift it to a young earner.

Your Ultimate Guide to Travel

Travel-Training-Kit-Cover-new This is an in-depth dive into vacation planning, finding cheap flights, budget accommodation, what to do when travelling, and how travelling slowly is better financially and psychologically, with links to the web pages and hand-holding at every step. Get the pdf for Rs 300 (instant download)