Are you in the Accumulation Phase of your investment plan? A Forbes article defined this investment phase this way: “PHASE I: Accumulation: This period begins when you enter the workforce and begin setting aside funds for later in your life, and ends when you actually retire.” If this applies to you, then you will want to see why it’s important to ALWAYS BUY THE DIP! In this article I will demonstrate how you can build wealth when you ALWAYS BUY THE DIP!
The discipline that it takes to ALWAYS BUY THE DIP is not in all of us. When stock markets dip (-5%), go through a correction (-10%) or we enter a bear market (-20%), the daily onslaught of negative financial & economic news will be absolutely overwhelming. Many people will be pulling their money out of stocks as stop-loss orders are tripped, death crosses appear on their stock charts or they just cannot take the pain any longer. If you don’t think you have enough discipline to hold your investments as you watch them lose 20%, 30% or even 50% of their value; this article probably isn’t for you. Instead, you should probably seek a professional investment adviser. But, if you have a stomach for volatility, I invite you to read on.
Since you’re still reading, I will assume that you have conviction about your investment plan and you have a near stoic demeanor. I will also assume that you know that “BUY THE DIP” is a common phrase and the actual percentage drop it represents varies from investor to investor. From here on out, when I refer to a DIP in the market, I will be talking about what most people call a market correction (-10%). I will make evident that BUYING THE DIP even works during recessions. Did you know the last U.S. Bear Market lasted for 66 months from peak to valley to recovery? I will demonstrate how a DIP BUYER could have entered the market, suffer some unrealized losses, and returned to a profitable standpoint in only 22 months, or 1/3 the length of last boom-bust-recovery cycle.
Without further ado, here’s the spreadsheet that shows that ALWAYS BUY THE DIP works, even in Bear Markets. If you click on the spreadsheet, it will open in another tab and be much larger and easier to read. I will provide some more explanation below the spreadsheet.
Source: Yahoo Finance
The blue highlights on the spreadsheet represent some key data points on the SPY ETF. The green highlights represent the key points on our hypothetical BUY THE DIPPER. I’d like to draw your attention to few important points. First, understand that this is just an example of how I invest. I do not own any shares of SPY; I’ve used SPY in this example because of its’ representation of the U.S. Stock Market and its’ broad familiarity. In this scenario, I would have begun accumulating shares of SPY about 3 months after the market topped-out in October 2007. I would have made 9 more purchases over the next 13 months until the market bottomed in March 2009. I would have suffered an unrealized loss of 31% while SPY had dropped 52% from peak to valley. I would have subsequently broke-even only 9 months later in November 2009. SPY broke even 66 months after the peak in 2007. Also note, that had I held the shares until the SPY ETF recovered in March 2013, I would have had a 47% gain. And be aware that I did NOT account for or include trade commissions, taxes or dividends (it’s just a scenario). Although the spreadsheet looks complicated, I was trying to keep it as simple as possible yet still show my method of Deep Value ETF Accumulation. If you have any questions or comments about the spreadsheet, chart or this article, please leave a comment at the bottom of the page.
Here’s a stock chart of the SPY ETF from January 2007 through December 2013. I’ve placed many of the key points from the spreadsheet above on this chart for a better visual representation of the data.
Source: Yahoo Finance
Since SPY doesn’t dip very often, you may be wondering where I invest my monthly contributions while I’m waiting for the next dip in the SPY ETF. Good question, because you can’t build wealth sitting in cash. Through my research, I have found there is always a dip, correction or bear market going on somewhere in the world. Take a look at my Daily Charts and you’ll quickly figure out what I am currently accumulating. You may also want to know at what point I would have started taking some profits off the table. Yet another good question. In this scenario I probably would have sold $1k worth of SPY in April 2010. I never sell my base holdings, but I do take some cream off the top occasionally and move it to some other beaten-up sector or region of the world. I will discuss more on my sell-side methods in a later article.
There, I have let you in on my secret sauce of wealth accumulation. With individual stocks, buying all the way to the bottom like this is both stupid and financially dangerous. This method of investing should strictly be used with index funds or ETFs. I have discovered that this method of investing can work in all types of sectors, countries, cap-weightings, and regions of the stock market. I have successfully deployed it over the last few years in numerous ETFs, including: Mexico (EWW), Healthcare (FBT), Utilities (RYU), Emerging Markets (DGS), Mid-Caps (EZM), China/India (FNI), Real Estate (REZ), and Energy (XLE & PXI).
I am currently using this method of accumulation with the South Africa ETF (EZA). If you have read or heard any financial news about South Africa in the last year, you know this country is in absolute turmoil. Many financial pundits are diligently warning people to stay out of South African stocks and emerging market equities altogether. Some are even suggesting that South Africa is in an irrecoverable downward cycle and should be written-off. As of this date, my EZA holdings are down -11%, and is currently -35% below its’ 52-week high, while the broad U.S. Market is continuing its’ bull market run. The reason I point all this negativity out is that this is the type of news you’re going to encounter if you are going to be an authentic BUY THE DIPPER. Can you take this kind of financial punishment when things get rough? The negativity I have been exposed to about South Africa will pale in comparison to the calamitous news we will hear during the next U.S. recession. BUY THE DIPPERS will need every ounce of discipline and steel that they can muster to continue to click that buy order month after month. If you have what it takes to be a true BUY THE DIPPER, this method of investing has proven to be very profitable.
Please don’t misunderstand what I am proposing here. This obviously isn’t some sort of get rich quick scheme. Rather it is simply a blending of two reliable wealth building strategies. One is the trusty dollar-cost-averaging that many people do inside their 401k’s with mutual funds. The other is a lesser known method called value-averaging. Both in the scenario that I painted in the spreadsheet above and in my own personal experience, this BUY THE DIP process tends to last about 18 months ±6 months (from the first DIP purchase to profitability). I have found that when I implement this strategy; I am buying the beaten down security for about 9 to 12 months and I usually return to a profitable standpoint in about 3 to 6 months. By this time most investors perceive that the storm of that market has passed and are now wanting to get in on the action. While these new investors are buying the upward momentum, I’m already beginning to accumulate another sector of the market that has fallen out of favor.
The markets are full of all kinds of investors and traders. Some simply employ a dollar-cost-averaging process; while others may use momentum strategies. Some are day-traders and may only hold a security for a few hours and on the end of the spectrum we have people and institutions that buy their securities to hold “forever”. For me, I’ve built an investment plan that works for me. Look again at the SPY stock chart above and notice the wide “V” shape of this bear market downturn. Momentum traders prefer to buy the right side of that “V”; I buy the left side of that “V”. There are some hard decisions to be made as a momentum trader. Looking back, it’s easy to see when the best entry points were, but things are very different in real-time. Did the momentum trader mistakenly get in the market in April 2008 when the market bounced higher, only to be faked out? Or did they try once again to jump back in, in August 2008, and again find more pain ahead? There wasn’t any good news in the U.S. markets in March 2009; the market simply ran out of sellers. Did the momentum buyers jump in on this market bottom? I doubt it; best case scenario, I suspect they would have waited until about May 2009 to confirm an upward bias. My method requires no decisions about possible future market direction on my part. If the price of an ETF drops significantly, I BUY THE DIP. If it continues to drop in price, I continue to BUY THE DIP, month after month. If the price goes up above my last purchase price, I quit buying that ETF and start buying another ETF that is out of favor. That sounds simple, and it is, but it ain’t always easy. I have a strong stomach for volatility, but I’m not emotionless. Sometimes I get tired of buying the same declining security month after month, but I do it anyways because I know in the long run it is for my own benefit.
I want to reiterate that this BUY THE DIP strategy should not be employed with individual stocks. This method is best employed with ETFs or index funds. Also, you need to know how you normally react when you are losing money. Do you panic sell? Then don’t try this strategy. Additionally, your going to need more than just a couple ETFs on your buy list to employ this strategy. The reason is that the broad market funds don’t have very frequent or deep market corrections. You need somewhere for you monthly investments to go so that you can get them working for you. So, if you think you want to employ a similar strategy, I’d recommend adding some sector, regional, and/or single country funds to your buy list.
And remember, ALWAYS BUY THE DIP, ALWAYS!
Thanks for taking time to read my article. If you enjoyed it, please share it.
Respectfully yours, Micah McDonald, aka the Deep Value ETF Accumulator
Disclaimer: I am not a professional investment advisor. Please perform your own due diligence or seek assistance from a Registered Investment Advisor prior to investing in any fund or strategy mentioned in this article.