How can I use this information?
If you plan to invest additional funds in the stock market, don't use the Buy On 10% Dip strategy. A three year old
child throwing darts at a calendar would have done a better job at timing the market. Investors who have missed a
rally wish for a chance to get in at a lower price. But a falling market isn't a good sign.
A better way to buy when the market is down is as follows: Invest equal amounts on the first of each month if the
market is at least 10% below the highest close it registered over the previous 5 years. If it turns out to be a bear
market that declines 50% before it recovers, you will have spread your investments evenly throughout the duration of
the bear market instead of loading up at the beginning. Some of your investments will be made near the bottom and
during the recovery. From 1951 through 2007, that strategy showed a 2.2% annualized advantage over the three
year old and his darts. However, during 1901-1950, the three year old was the winner, but only by .38% (annualized).
SignalTrend's unemotional computer timing system is currently bullish, but it may change its buy / sell
signal in the near future. If that happens, SignalTrend will notify you by email. Remember, SignalTrend's
stock market timing system was backtested 100 years with excellent results!
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||This issue of Investment Tips
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● Buy On 10% Dips refers to the practice of buying stocks after a 10% decline in prices.
● Buy On 10% Dips is historically inferior to selecting investment dates randomly.
● Monthly investments made while the market is down have produced superior performance.
|Buy On 10% Dips: Does it Work?
Proprietary Graphs, Tables and Analyses - All Rights Reserved
Buy On Dips Strategy:
At SignalTrend, we often test the advice provided in widely read investment publications to see if suggested
strategies have historical merit. One such popular strategy is the Buy On 10% Dips strategy. The Buy On Dips
strategy refers to the practice of buying stocks after a decline. An investor who plans to buy after a 10% decline in
the Dow is employing a Buy On 10% Dips strategy. The theory is consistent with various investment philosophies
such as... buy at a discount, buy after a correction, buy low and sell high, what goes down must eventually rise and
etc. Followers of this strategy are essentially buying after a correction with the expectation that the market will rise
again. After all, it always has.
We defined Buy On 10% Dips in four ways. 1) Buy the DJIA when it closed at least 10% below its highest close
during the preceding year and hold for the following year. 2) Buy the DJIA when it closed at least 10% below its
highest close during the preceding 5 years and hold for 1 year. 3) Buy the DJIA when it closed at least 10% below
its All Time High and hold for 1 year. 4) Buy the DJIA when it closed at least 10% below its All Time High and hold
for 5 years. The returns from the Buy On Dip strategies were calculated for the DJIA for the following time periods...
1901-2007, 1901-1950, 1951-2007, and 1980-2007. Not one Buy On Dip strategy outperformed typical
returns during any of those time periods. i.e. In every time period, every Buy On Dip strategy under-performed
the returns typical of that time period. Essentially... the strategy sounds good but hasn't held up when put to the test
of history. The only strategy / time period that was close to matching typical period returns was strategy three during
the 1980-2007 period. See (3) above.
If the Dow is purchased when it registers a 10% decline, an investor is guaranteed to participate in all the major
bear markets. So... if the market falls 50%, the Buy On 10% Dip investor will invest near the beginning of the Bear
Market and wait a long time to just break even. He also gets left out of much of the low volatility Super Bull markets
that seldom have 10% declines.
Buy on 10% Dips, or any Buy On Dips strategy is an incomplete system. The strategy bets that an uptrend will follow
a downtrend. Therefore, it is a reversal strategy. A reversal strategy has three features: 1) Downturn, 2) Bottom, and
3) Upturn (reversal). Once completed, its pattern on a graph would resemble a V or a U. The Buy On 10% Dips
strategy has a criteria for identifying a downtrend (the 10% decline criteria). However, it has no criteria for
identifying the second feature… the bottom. Without bottoming criteria, the system makes no attempt to distinguish
between the beginning and the end of a downturn. The most critical feature of SignalTrend’s proprietary Stock
Market Timing Signal is its criteria for identifying major bottoms and tops. You, as a subscriber, will be notified by
email when SignalTrend's signal reverses.