Investing legend Peter Lynch once said, “Far more money has been lost by investors preparing for corrections, or trying to anticipate corrections, than has been lost in corrections themselves.”
Nick Maggiulli, judging from his latest post, would heartily agree.
“This is the last article you’ll ever need to read on market timing,” the Ritholtz Wealth Management analyst writes on his “Of Dollars and Data” blog. “It’s a bold claim, but I’m not messing around.”
In that “bold” spirit, Maggiulli set out this week to prove dollar-cost averaging (DCA) has historically outperformed the buy-the-dip approach, even when the dip-buyer absolutely nails the timing, which, of course, is next to impossible.
Here’s how he breaks down his research:
Imagine you are dropped somewhere in history between 1920 and 1979 and you have to invest in the U.S. stock market for the next 40 years.
You have 2 investment strategies to choose from:
DCA: You invest $100 (inflation-adjusted) every month for all 40 years.
Or...
Buy the Dip: You save $100 (inflation adjusted) each month and only buy when the market is in a dip... Not only will you buy the dip, but I am going to make you omniscient (i.e. “God”) about when you buy. You will know exactly when the market is at the absolute bottom between any two all-time highs. This will ensure that when you do buy the dip, it is always at the lowest possible price.
The only other rule in this game is that you cannot move in and out of stocks. Once you make a purchase, you hold those stocks until the end of the time period.
Which one’s better? Well, that’s got to be pretty obvious choice, right? The buy-the-dip would seemingly be a slam dunk.
Not so fast, according to Maggiulli’s number-crunching.
“If you actually run this strategy, you will see that Buy the Dip underperforms DCA over 70% of the time,” he explained in his post. “This is true despite the fact that you know exactly when the market will hit a bottom. Even God couldn’t beat dollar-cost averaging.”
Here’s an example of the outperformance for some perspective:
“Buy the Dip, even with perfect information, typically underperforms DCA,” he said. “So if you attempt to build up cash and buy at the next bottom, you’ll likely be worse off than if you had bought every month. Why? Because while you wait for the next dip, the market’s likely to keep rising and leave you behind.”
Maggiulli’s key takeaway: Put your cash to work in the market SPX, -0.28% instead of leaving it on the sideline, missing out on compound growth and waiting for that perfect moment you have virtually no chance of predicting.
“If God can’t beat dollar-cost averaging,” he said, “what chance do you have?”