In this segment of the Motley Fool Answers podcast, Alison Southwick, Robert Brokamp, and special guest Ross Anderson from Motley Fool Wealth Management discuss the idea of keeping your eye out for significant market drops, and taking advantage when they do. Sounds good in principle, until your realize that it's a longer way of saying "market timing." Allow them to explain why that's not a Foolish strategy.
A full transcript follows the video.
This video was recorded on Nov. 7, 2017.
Alison Southwick: The next question comes from Francis. "My question is in regard to market corrections. I remember Bro mentioned that on average we see corrections of X% every X years. What were those percentages, again -- 10%, 20%? Something like that? I'm a long-term investor and I mostly buy index ETFs. The reason I ask is that I'd like to take those opportunities to add on to my positions as they come. I'm thinking of coding up a simple Python script that would email me if I see any dips of X% below recent highs on any of the stocks' ETFs on my watchlist."
Robert Brokamp: Well, first of all, let me give out some of the stats, and who knows which stats you listen to, because I use these stats all the time. But I'll pull some from our good friend Morgan Housel, who has been on some recent episodes. He looked at the Dow Jones Industrial Average from 1928 to 2013 and found out that you can expect a 10% decline about once a year, a 20% decline on average every four years, and then something more than 30% every 10 years.
The problem is, it's not very consistent. In fact, we just got through a period. Oct. 23rd was the longest streak that the S&P 500 went through without even a 3% decline. In terms of you trying to create a program -- by the way, that's clever. I love the idea. But if you are trying to create a program where you are going to try to buy on the dip, that says to me that you're going to have cash on the side waiting for that dip, and that dip may not come once a year. It might take three years. You're waiting for that 10% dip, but you've missed out on a 20% run-up. I don't think that's generally a good idea. I think if you've got the money and you don't need it in the next three to five years, just invest it.
Ross Anderson: Because you probably have been accumulating cash since February of 2016, at this point.
Brokamp: If you've been waiting for a dip.
Anderson: And you've missed out on a lot of gains waiting for that. The president of Motley Fool Wealth Management, Nick Crow, says he thinks a lot more money has been lost waiting for corrections than actually in them. I would generally just try and get invested and hang on.
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