Strategy Breakdown: Selling the Highs and Buying the Dips

May 6, 2019  | By Kevin Smith

One of the most commonly referenced investment strategies must be “sell the highs and buy the dips”. Why is it so popular?
  • Makes sense. Hard to argue against.
  • Easy to apply (in theory).
  • Low cost to execute.
  • High profile investors have endorsed it.

As with so many investing ideas, the data is sobering. There is no doubt this strategy has generated incredible results at times. For example, we took advantage of the December 2018 ‘dip’ and have seen positive results from it so far, but the average results over history are not reliably impressive. The charts below show the subsequent average annual performance of the market after new market highs (left) and after 10% market dips (right). You can click on them to enlarge the images. The bottom line? New market highs and 10% dips don’t tell us much, if anything, about what is going to happen next.

Selling the New Market Highs

Data source: S&P 500 1926 – 2018

Buying the 10% Dips

Data source: S&P 500 1926 – 2018

So, why doesn’t this strategy work consistently? The easiest explanation is market prices move with momentum in part because of the herd behavior of investors. This means all-time highs are often followed by more all-time highs. If you sell at a market high, you often give up on the subsequent gains on the way to the next market high.

There may be times in your investing lifetime that it makes sense to reduce your risk or take more risk, and you stand a chance at benefiting from this strategy in those cases, but it is far from a sure thing, and should be used sparingly. As one of my favorite professional investors Cliff Asness has said with humor: “If market timing is a sin, perhaps you could—or even should—sin a little.” If you want more evidence, here is Cliff’s research paper.
Cliff Asness, AQR Capital Management
Posted in: Investing, Strategy
Kevin X. Smith, CFA
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Kevin is responsible for advising clients for whom he is the lead financial advisor. He also manages the operations and development of the firm, and oversees all of the investments of Austin Wealth Management clients. Kevin is on a mission…Read More

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