Is it worth waiting for the drop?
Updated: Feb 24
I wondered if buy and hold investing can be improved. Maybe hold part of my capital to buy the dips.
Markets have had a tremendous run and some of us including me are left with holding cash. I had been wondering if it is worth it to buy now. Typically my investment philosophy is centered around buy and hold #diamondhands. As a smart analytical guy, at least I assume so, I wanted to know after how much of a drop from the top should I buy.
In my analysis, I took the sample period of SNP500 starting from 1871. An investor can choose to invest $1 in the stock every month or hold it for the next dip. A dip event is when the index has dropped below a certain threshold. A threshold of 0% would mean that you invest at all prices and a threshold of 100% would mean that you invest when the market is down 100%, ie. priced at $0. I wanted to find this threshold that maximizes my returns.
In the above table, I show annualized returns for the whole sample, last 50 yrs, and 25 years.
In the left half, the investor doesn't invest his dividends and in the right half, the investor chooses to invest his dividends as soon as there is a dip.
We see that for someone who never invests his dividends, it might be okay to wait for a 25%-35% drop of SNP500 from the top. However, this investor underperforms investor reinvesting their dividends.
Also what is interesting to see is that if you invest your dividends then it is better to invest your money as soon as possible, ie. at a threshold 0%. This is consistent for all three time horizons. These dividends more than pay for the times you would wait to buy the index. The more you wait for more dividend payments you are missing out. Dividend yields are something I personally feel a lot of retail investors forget about while calculating their returns.
Always reinvest your dividends.
Don't try to time the market. Cause even if you do time it perfectly, you won't make superior returns in the long run. I have another blog about it here.
Let me know what you think. Click here to find my calculations.