It’s a new year. The IRA contribution limit has gone up by $500 to $5,500 ($6,500 if you are 50 or older). Have you made your IRA contribution for 2013 yet?
I haven’t. I’m going to continue with my experiment with buying on a dip. Last year I bought Vanguard Total International Stock Index Fund Admiral Shares on January 6 at $21.93 per share. That was 2% lower than the price I would’ve got if I blindly bought at the first opportunity.
Dollar cost averaging into this fund last year would’ve worked even worse than dropping a lump sum on January 2.
Buying on dip with discipline beat both lump sum and dollar cost averaging. Had I waited until June I could’ve got the price another 5% lower but who knew? I’m not timing the market to hit the lowest point. Just a slightly lower price than the first price I see will do.
My destination for the 2013 IRA contribution is still the Vanguard Total International Stock Index Fund because my 401k plan has good options for US stocks but not as good for international. Let the records show if I bought at the first opportunity on January 2, I would’ve paid $25.53 per share. I will buy when the price goes 2% lower. That would be $25.02 per share.
It’s impossible to predict the net asset value at close for an open-end mutual fund. So I’m going to use the ETF equivalent ticker VXUS as a proxy. I set an alert for VXUS. If it goes below 2% below the closing price on Jan. 2 I will buy the mutual fund.
What do you think my odds of success are? Will the price of an international stocks mutual fund at any point during the year go 2% below its price on January 2?
I think the odds are good. Prices fluctuate. In the grand scheme of things, 2% on $5,500 doesn’t matter. If it goes my way, I save $110. If it doesn’t, it means my existing holdings are going up and up. Either way it will be a good outcome.
This is just me. I’m not recommending that you should do the same.
[Photo credit: Flickr user keltickelton]
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Michael says
Just made my (and my wife’s) traditional IRA contributions yesterday. Temporarily parked it in Prime MMF until we do the backdoor Roth conversion.
Jason says
This plan scares me. There is no guarantee you will ever see a dip to 2% below current market value. You are making a bet with limited upside (2%), and a huge downside (entire gains of market). You are probably correct that this has a high probability of working out for you, but with the size of the downside risk and limited upside, I think this play will have negative expected value. I think straight dollar cost averaging will outperform in the long run, but if you want to go with a plan like this, maybe add a stop loss: invest your money on the last day of the month regardless of the price.
Jason says
Just reread your article and i guess you have an implied stop loss of year end, as I assume you’re not going to skip this years contributions. I still think this play has negative expected value, and would prefer either a first day lump sum or dollar cost averaging over the year instead.
Harry says
Jason – I said I’m not recommending this to others. I have until April next year. Yes there is a risk prices will run away and never go 2% below the price on Jan. 2. As I wrote in the closing paragraph, that would mean my existing holdings in this fund do very well. In that case new dollars should go somewhere else for rebalancing.
Charlie says
I don’t like strategies like this as they aren’t supported by theory and introduce a behavioral element to investing. One year where the plan doesn’t work would wipe out all the gains in years where it doesn’t, a little like the martingale betting strategy.
For example, let’s say you were trying to do this with VTSAX last year. If you waited until after the first week of January, the very best you could possibly do is buy at a point 2.5% higher, and only if you time your purchase perfectly. Much of the year, the market was much higher. If you had waited until April as you say, maybe you would be buying in at 20% higher, requiring 10 years where the strategy works.
If you’re saying that your existing holdings would do well if prices run away, well, you would have done even better had you not tried to time your purchase.
Max says
The expectation expressed by commentors that there is a strong likelihood of market gains and only slight risk of downward moves does not match historical reality. If there is one thing you can usually rely on in the market it is volatility. Right now various factors have aligned to boost stock prices temporarily. If you will look at long term charts of the S&P 500 or other indexes you would have to be a dyed-in-the-wool Pollyanna to think that from where we are now we are bound to be headed ‘Up’ and only ‘Up’. At the beginning of a year / Beginning of a quarter there are $$ flows into stocks. Joining the buyers at these points in time is NOT smart timing. I am waiting to buy for IRAs until we get a significant sell-off. I doubt very much if the year will go by without a market disturbance caused by politics or something else. The classic phrase is “Buy when there is blood in the streets” and the obverse of that would be “Buy when it looks like a rosy future is certain and retail buyers are pushing up prices.” Another piece of poor advice (imo) is “Buy quick because its bound to go up and it will never come down” There are rare times when it is good to chase advances. Now is not one of those times. A better time to buy is almost certainly coming. We will know when it is here because there will be predictions of endless doom.
Jason says
Max,
I actually said the opposite – I believe there exists a higher probability that the market at some point will be lower by 2% at some point than not. However, when you’re right, you earn 2%. When you’re wrong, you lose more. You could lose 6%, 10%, or even much more. Each wrong year can wipe out many good years, and leaves me to believe this strategy will cost you in the long run. You are effectively shorting the market by waiting to purchase, basically on no more information than its the beginning of the year.
Its probably not costing the author much in this form, but following this logic further gets scary. Say we applied this to any investments an individual made (hold money till the market dropped 2% or a year passed) – I believe this investor would seriously hurt his ROI in the long run.
Lynne says
I sort of do what Harry does. If funding my Roth IRA on Jan. 1 means buying at 52-wk highs, which I’d rather not do, I wait up to a few months for one of the not-uncommon pullbacks in the market.
My bigger challenge this year is that I usually buy either Vanguard’s high-yield bond fund or REIT fund VNQ for my Roth, since both really need to be in a tax-deferred account and aren’t available in my 401(k). But they’re both pricey, and bond funds will be vulnerable if/when interest rates start to go up, so I’m trying to figure out what to do this year.
Tom says
I have been accumulating VYM in my taxable account for the last year and a half by a similar method. I place limit orders for 1 to 2% less than the market price whenever I have the cash come available. I have done this maybe half a dozen times. The orders have always filled eventually. Orders at Vanguard’s brokerage last 60 days. There were a couple of times I had to renew, but eventually they filled.
My guess is with the coming debt ceiling fights or bad news out of Europe, Harry will get his 2% discount. It would be more sure if an etf limit order could be filled at any intra day dip, rather than having to watch to get the mutual fund closing price right. Let the volatility work for you.
Harry says
Obviously I’m not carrying this further to suggest that one should sell everything on Jan. 2 each year and buy back after a 2% dip, even if everything is in mutual funds in IRAs and 401k plans with no transaction cost or tax consequences for selling. As long the portfolio is within tolerance in asset allocation, having a few thousand dollars in cash is not going to make much difference one way or the other.
John Shmackaroid says
I like this idea. However, in the book, The Random Walk Guide to Investing, Jack Bogel, founder of Vanguard comments on “timing the market” and to paraphrase he admits he cannot time the market, he knows no one who can time the market and he doesn’t know anyone who knows anyone who can time the market.
B says
I agree with Lynne on not buying at 52 week highs. Also agree with Harry that a few thousand in cash one way or the other is not a big deal. 95% of my retirement portolio is sensibly invested and I don’t time the market. The other 5% I enjoy playing around with. I do some market timing getting in and out of a total market index (VTI). I will step in and buy when there is bad news about something like when the debit card fees pushed Visa way down. I also buy silver (SLV) when it is less than $28 and sell it when it goes up to $31. I bought Ruger (RGR) after the school shooting and it is up 10%, I’ll probably sell it soon. The individual size of these positions ranges from $7K to $30K — nothing that I would lose any sleep over. I’m generally looking for moves of 3-10% and I close them out. Otherwise the money sits in cash, which is probably where it should be from a portfolio allocation standpoint. If interest rates weren’t practically zero, I’d be less tempted to do this. Maybe some day I’ll get burned and give up, but volatility has been my friend and I haven’t had any losses. I would NEVER do this as a strategy for critical funds.
D says
This is similar to a strategy of buying on big down days in the market, what’s called a “Really Bad Day” by a regular at Bogleheads. It’s something I’ve done in previous years with limited success. While it does improve the expectation of positive returns with new money, as others have pointed out there’s still a strong chance of reduced returns over the full year, vs investing the lump sum on day one.
It would be great if you could make your 2013 IRA contribution on Dec 31, 2012! I frequently choose Dec 31 for rebalancing and adding to holdings in taxable accounts. That way I’m assured of matching the next full-year’s return. Since this is not an option with IRA’s, I think the next best odds are to make your full contribution, either on day one, or w/in the first week or so. The farther out in the year you go, the greater the likelihood of underperforming, particularly if the market is trending up, as it was in 2012 and for most of the 90’s
Harry says
D – Similar, but not the same. A Really Bad Day could happen after the market is already up by 20%. Buying at a price 16% higher is better than at 20% higher but it’s still a higher price. We will see how 2013 plays out. If it’s like most of the 90’s, I would be really happy with losing out on some gains from this $5,500.
White Coat Investor says
How’d that work out for you. 🙂 It seems to me that buying at first opportunity was a lot better this month.
Harry says
It’s working very well in that the value of my portfolio went up several times more than the $5,500 I’m holding back.
White Coat Investor says
I like that perspective. Win win 🙂
bp says
Greetings TFB! I’m requesting a follow-up on this…
Has waiting for a dip backfired? What is a plan from here?
I’m looking to put in my 2013 contribution sometime, but I only have until December (back door Roth). I think I may contribute now, and just choose a non-stock investment for the time being.
Harry says
Same as comment 16 above. I’m very happy my portfolio has increased in value many times over the $5,500. I’m hoping it will keep going up from here. Any lost gains on $5,500 pale in comparison to the gains on existing holdings. If the Dow goes to 36,000 by the end of the year I will need that $5,500 in fixed income to keep my asset allocation.
By the way the deadline is April 2014, not December 2013.
bp says
So basically you’re saying be glad the majority of our holdings have gone up and use the $5,500 to adjust asset allocation. Great insight! I see now where you said that before; I just misunderstood.
Thanks for the April 2014 tip… I was thinking I needed to covert in 2013 for the “back door” Roth.
I may be due for an asset allocation adjustment as well. I shifted some of my emerging markets holdings to S&P/World funds a couple years back. Now that S&P moving up and emerging markets are flat/down, I was thinking it may be a good time to re-up my emerging markets %.
Chip says
This is an interesting topic. Has anyone considered this?
Contribute fully on Day 1.
Then if there’s a dip, overcontribute.
And then when the dip has passed, pull back the overcontribution (before tax day).
This would happen:
Day1: Add $6000 (2020 limit)
Dip came, let’s say value is now 5000.
Over contribute by adding another 6k, at the dip price.
Dip goes away in a couple of months, value is now:
Day 1 contribution: Back to original 6k
Overcontribution: Now worth 6k+gains from dip recovery
Remove original 6k contribution from IRA.
If done before Tax Day 2021 it appears there are no penalties or early withdrawal penalties. And the original 6k didn’t gain anything, so no need to pay any capital gains either.