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Buying the Stock Market on the Dips

This article was written by in Investing. 44 comments.


It’s now more than a month since I considered taking advantage of a downward market by dollar-cost averaging at specific times. Yes, I’m “timing the market.” After making a few newbie mistakes when buying on the dips, I’ve refined my strategy.

At Vanguard, I have cash in a tax-exempt money market fund, which I will draw from on certain days when the market drops. The cash is what I consider marked for long-term investment. I won’t need to access this money for a while, except if I have a major emergency that depletes my short-term cash. The money market fund, which admittedly is not as great an aption as it was one month ago due to a significant drop in its yield, allows me to quickly transfer small amounts of money to a Vanguard stock market mutual fund when the time is right.

Unfortunately, I don’t have a lot of time to check the market’s performance. After yesterday’s 5% drop in the S&P 500, I thought I had missed my chance to buy another $500 worth of VTSMX.

The market offered me another chance today, falling a further 5%. I happened to check at the right time today and was able to squeak in a purchase of VTSMX in my brokerage account at Vanguard. I may not have the ability to precisely time the bottom, whenever it may come, but strategically buying on poor performing days is one safer way to approach that goal.

So far, this is only my second timing purchase after setting up my Vanguard account properly. I don’t plan on doing this often, but the second day in a row of 5% declines seemed like a fair opportunity.

Updated February 6, 2012 and originally published November 6, 2008. If you enjoyed this article, subscribe to the RSS feed or receive daily emails. Follow @ConsumerismComm on Twitter and visit our Facebook page for more updates.

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About the author

Luke Landes is the founder of Consumerism Commentary. He has been blogging and writing for the internet since 1995 and has been building online communities since 1991. Find out more about Luke Landes and follow him on Twitter. View all articles by .

{ 15 comments… read them below or add one }

avatar Dan

I have been trying to do the same as you since mid-September, buying on the dips from my money market at Vanguard.

Meanwhile, my girlfriend doesn’t have a money market. She ACH’s from her checking to Vanguard, which takes two business days, which eliminates the possibility of trying to time buys with the dips.

Guess which one of us has managed to buy at the lower prices?

Apparently, a monkey throwing darts could do better than I’ve done. I buy on days when the equivalent ETF’s are all going down, and immediately after I place my order they recover at least somewhat. Then the next few days they sink more.

She buys on a day the market’s roaring, and I’m like, “You missed it, baby…” But then the market tanks for two days straight and she gets a way lower price.

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avatar EN

^That’s hilarious Dan! I guess that’s why they say what they say about market timing…..

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avatar Writer's Coin

Why not wait until there is a consensus “comeback” in the market? You won’t buy in at the precise bottom (no one can), but you’ll be in near the bottom and you won’t feel bad about losing a few points right after your purchase. Either way, buying right now is a good call.

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avatar Dan

A “consensus comeback” would be wonderful! Unfortunately, how does one define exactly when that is?

Some might have thought the Election Day rally was it, but nope.

Maybe a 10% one-day gain is the comeback signal? No, wait, that already happened on 10/28, and then 10/13 before that. That’s not it.

I’ve got it – how about three straight days of gains? Darn, that happened too. Nope.

The good and bad thing about the market is, when it comes to a consensus, it’s priced in immediately. Once a consensus has been established, it’s reflected in the price, and the once-cheap price is gone.

One of these days, there will finally be some good news, and I mean good news that sticks about the potential for companies to make money in this economy. When that happens, the market will react immediately and not turn back for any who missed the buying opportunity.

Probably best to keep investing at your normal pace and accept the average share price over any given period rather than trying to time things perfectly. (But I still feel like I gotta try to catch the dips though! I’m my own worst enemy…)

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avatar Jim

Can you do a “buy limit” order on your Vanguard account? If so then you should be able to use that to set it up to buy only when the fund drops to a specified level. So with VTSMX trading at 21.85 right now you could set a buy limit order at 20.75 to catch it when it drops 5%.

I’m guessing you probably are aware of it but they just don’t allow this on Vanguard for some reason.

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avatar Dan

Jim, it sure would be nice if you could do a limit order. But with any mutual funds (not just Vanguard) you either buy or don’t buy at the price of the close of day NAV.

However, many ETF’s (even from Vanguard) follow the same indexes as index funds. These trade like stocks, so limit orders can be used.

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avatar Shadox

It’s really tough to time the market – as Dan’s experience shows – that’s why I am following a different strategy: buy on the 15th of every month, always the same amount, rain or shine.

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avatar Writer's Coin

@Dan: I agree that defining a “consensus comeback” is tough, but I was thinking something much broader than any one-day gains or string of days. I’m thinking more along a month of stability where, not only the stock market, but important numbers like job data and earnings start to take a turn for the better. Sure, it may be tempting to try to jump in beforehand and buy as low as possible, but you’ll still be buying low when you compare to where the market was a few weeks ago.

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avatar GE Miller

I have never ‘timed the market’ before, but now really seems like the time to do it with volatility being so high. There is room to make some games. I recently opened an account that gets me 10 free trades so that I can hone in on a volatile, yet solid stocks and buy and sell with every 10% movement. Not the most ‘sound’ strategy, I realize, but I have some cash to play with.

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avatar Ian

My opinion is that it is way too early to be looking for a consensus comeback, or even capitulation. The way the economy looks to be going, we’re in for several years of tough economic times. The market will stagnate, people will get bored, we’ll slog along for a year or so, and then we’ll get some good news and it will go back up. The markets have just now hit fair value on the basis of cyclically adjusted PE, and they’re only “fair value” because they’ve spent half the time below this mark, so we can expect to see some further losses. People are way too eager to buy the bottom. I say throw small chunks of money into a passive fund over the next few years, and you won’t have to worry about market timing.

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avatar Jim

Thanks Dan. I figured I was missing something.

Another alternative is to setup an “alert” on the value of the mutual fund so that you get an email or cell phone text message notice if the fund hits a certain level. You can use Yahoo to do so at alerts.yahoo.com I’m sure there are other services out there that will send you a notice. At least that way you won’t have to watch the prices every day and you can get an automatic notice if the fund hits a certain trigger point (high or low).

Jim

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avatar Katie

I used Ameritrade for a while, and you can set trade triggers to buy ETFs or individual stocks when they hit certain points. There are several ETFs that trade like very liquid index funds, including Powershares QQQ (or QQQQ, I forgot!), amongst others. There are more commissions, but you gain liquidity and easier trading.

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avatar Dan

@ Writer’s Coin, I hear you. But consider this.

If you look up VTSMX on finance.yahoo.com and click on the graph, and then change the dates to display from 2000 to 2004, you get a pretty good look at the bottom of the last bear market.

I’m not sure there was such a point in early 2003 – even if you consider looking at broader time periods – that I would have been able to distinguish the genuine comeback from all of the upward “dead cat” bounces that had occurred from 2000-2002.

And by the time we’d have had the advantage of hindsight to know a bottom really had passed, (1) we’d already be a good part of the way back to 2000 numbers and (2) there still would never be a guarantee the market wouldn’t just drop back down at any point. In fact, you could say that the market did just that in 2008, several years later.

My personal opinion is that I will do better regularly investing and accepting the average price over the entire period the market falls rather than trying to wait for some signal. Others may be better at finding the “consensus comeback” signal than I am, but my preference is to take that average price on the way down.

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avatar shaam

hello Dan, I am planning to buy about $10K worth of vtsmx and was planning how to stagger my investment to take advantage of dollar cost averaging. Your method of trying to time the market during drops looks promising and I was wondering how it has worked for you in the past year. Also, it seems like you have been tracking the performance of VTSMX for the past year and do you have any insights with regard to its performance in 2010. Is the current price at about $27 a low enough price to invest or do you feel it will get lower still? thanks!

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avatar Dan

Hi Shaam,

Well, I had fun *trying* to time my periodic purchases with the dips. However, per my first post in this thread, I was actually less successful with my attempts to time my purchases every week to two weeks than my girlfriend, who invested sporadically and made no such attempt to time her purchases.

The end result was that I benefited purely from sticking to investing aggressively throughout the crash, and the failed attempts to pick out the very best days to buy didn’t really matter much in the long run. I really don’t think there’s any way to time your purchases successfully; it’s just more important to stick with your investing plan and keep making the purchases through thick and thin. (But if you have fun trying to time them, no harm done, as long as you’re not holding out a very long time waiting for the market to tank to buy.)

As far as timing those VTSMX purchases in 2010: I’m afraid I have no reliable crystal ball, but you can think of it as having two options. (1) You can go all-in with your $10k at the start of the year, and put your trust in the fact that, on average, two out of every three years the market ends higher, so the odds are in your favor. Or (2) you can alleviate any worry about the risk of the market tanking right after you invest by staggering your purchases, either on a set schedule or attempting to buy on the dips as I did.

The important thing, however, is to actually invest. Thirty years down the road, it won’t matter if you managed to catch a one or two day dip, just that you consistently invested when you could.

Best,
Dan

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