The Silliness of “Buying On The Dips”

You’d like to get some income off your portfolio, be it in retirement or otherwise.  You are also a fan of Vanguard. So, you’re sitting around looking at two funds that seem appealing, the Vanguard Target Retirement Income Fund (VTINX) and the Vanguard Wellesley Fund (VWINX). 

Both have roughly the same mix between stocks and bonds.  As of this writing (2/2020), VTINX is 30% stocks and 67% bonds. Whereas the Wellesley Fund is 36/58.  Wellesley has nearly 4% cash while VTINX carries about 2.50%.

Both funds maintain the low expense ratios of which Vanguard is known for; VTINX at .11% and VWINX at .23%.  VTINX has a turnover of 10% and VWINX 28%, so both rather funds have quite low turnover rates. 

But that is where the similarities end.  VTINX is a fund of funds of sorts. It’s diversified among 5 Vanguard index funds, to include roughly 30% exposure to international stock and bond markets. 

The Wellesley Fund is all domestic positions of individual stocks and bonds.  And is actively managed. 

It appears the exposure to the international markets for the Vanguard Target Retirement Income Fund has really hurt performance. In the 16 years since inception, VWINX has beat VTINX in annual performance 14 of those years.   Wellesley has averaged 7.19% in that time period vs. 5.44% with the Target Fund. 

That difference of 1.50% annually over 16 years turns out to have been worth $72,000 MORE for someone who invested in Wellesley than someone who invested in the Target Retirement Fund.  See the two charts below.

One could explain the difference in GROWTH to the fact Wellesley does have more stocks, right? I mean the Target Retirement Income Fund is for INCOME after all.  (Well the Wellesley Fund is actually called the Wellesley INCOME fund but we’ll let that slide for a moment.)

Check out these two charts:

In these tables, I have you starting with $100,000 invested in both funds in 2004. I also have you taking 5% a year in income at the end of each year.  Notice, the Vanguard Target Retirement Income Fund paid out a total of $83,099 over the course of that time, averaging around $5,200 a year. 

Wellesley, on the other hand, paid out nearly $95,000, about $5,900 a year. So, in the Wellesley Fund you would have received an extra $700 a year, on average, in income over the course of those 16 years. Oh, but the fun doesn’t stop there. 

Even after the higher income amounts Wellesely paid out, you also had $31,000 MORE in your portfolio balance at the end of the 2019!  THe Wellesley Fund left you with $136,000. The Vanguard Retirement Income Fund $105,000, just a fraction over what your starting value was. 

Not sure I need to say more here, actually.  Yes indeed, past performance is not indicative of future results and all that.  The facts are the international markets hurt the performance of VTINX. Again, nearly 30% of the fund was invested in the Total International Stock and Bond funds. 

So, the ONLY reason I can see investing in VTINX over VWELX is if you believe the International markets will bounce back relative to the domestic markets.  Many people, it seems the vast majority of prognosticators actually, think this. I did a video on this just yesterday where we look at some of the largest firms projections over the next 10 years, from BlackRock to Vanguard.   They ALL believe international and emerging markets will dwarf the returns of domestic. 

If you agree with the professionals by all means go with VTINX.  As for me, I’d stay with Wellesely. I simply don’t trust the international markets as much as these other folks do. 

I was reading an article this morning titled “What Would You Have Done in 2009” by a guy I like named Ben Carlson. He writes: 

Have enough liquid reserves available but avoid an addiction to cash. The best part about holding huge cash reserves going into a crash is boasting to your friends (and enemies?) about how smart you are for side-stepping the crash.”

Man, oh man, do I ever agree with this. I can’t tell you how many people have told me over the years they avoided 2008 by being in cash. I don’t believe most of them. The ones I do believe are honest and will inevitably tell me they are STILL heavy in cash. And that brings me back to Carlson:

“The worst part is cash can quickly go from a security blanket to an addiction when stocks are falling. “Just a little longer…” you tell yourself every time stocks are in a drawdown. “I’ll buy when the dust settles” feels like a comfortable place to be until you realize by the time the dust settles it’s probably too late.

I’ve received more emails than I can count from investors who’ve been stuck in cash since 2009. And I completely understand how it could happen because you become paralyzed.”

Folks, I can’t agree enough with Carlson’s take that “you become paralyzed” by being in cash.   Let me tell you how this happened to me just last year. 

I started my business in 2018 and moved EVERYTHING to cash mid-year, as I was going all in for my business and wanted to make sure I had enough liquidity to keep the lights on if the business didn’t generate revenue.  I absolutely did not want to see the market take 30% of my liquid needs over a years time, that 30% could literally be the difference between success and failure for my business. After all, a 30% decline in real terms, means no mortgage payment, no utility payment, no food etc. all because the market had a hissy-fit.  

Can’t let that happen. So, I went ALL CASH in 2018. And I sat there watching when the market went up, thinking I just missed enough gains to cover a mortgage payment. Or when the market went down thinking I missed the losses that would have cost me a mortgage payment. 

It’s truly a psychological roller coaster, watching, waiting, worrying. 

Well, 2019 rolls in and business begins to pick up, enough so, I contemplate going back in the market. “What if the business pick up is temporary?” I ask myself. As such, I stay put, in cash. 

And in cash I stayed towards mid-year. I think it was around June, when I finally got back in, frustrated as all can be that I missed these gains.

Now remember, friends, it isn’t the percentage of gain that is frustrating to miss, it’s the actual DOLLAR amounts; 14.90% gain is what equivalent? 5 mortgage payments?  You don’t actually think in percentages, you think in terms of DOLLARS and what those dollars could buy. 

So, finally I had to make a choice. It seemed business was stable enough to take the risk and get back in the market. The way I looked at it was that my Youtube channel was generating enough income to at least pay the mortgage and all my other debts were paid off.  If no one else hired me again, and I had to go work some crappy, old job to put food on the table I could do that, WITHOUT having to tap into my investments. 

Around June, if memory serves, I got back in. And ironically, by luck I bought on the “dips”.  See the chart above? Well, the market was off 8% from its intra year high by the time I invested. 

Yay for me, right? Buying on the dips and stuff? 

Yeah, but I MISSED a 10% gain up to that point. I missed an 8% decline off the top, but also a 15% increase BEFORE that.  Buying on the dips, by accident this time, literally cost me a huge amount of money!

The question about “buying on the dips” is always WHICH DIP TO BUY?  I actually DID buy the dip. But I could have easily waited to buy the dips that were to come later and I would have missed out on even more gains. 

The above shows what dip I bought. That’s an 18% gain from when I bought in, on the dips, to the end of the year.  Not too shabby, eh? For every $100k, I was up $18,000. 

But this overlooks the nearly 15% gain I missed to start the year. So, while 18% is nothing to sneeze at, it’s well short of what the markets did last year, and those are gains I’ll never get back. 

And above is just for 2019?

What about 2018?

Hopefully, you can see the absurdity of “buying the dips”. If you bought the dip in February you still proceeded to take a 3.5% loss for the rest of the year.

But that’s not even the real issue.  The real issue is how long did you have your cash sitting on the sidelines waiting for the dip?

Were you sitting there waiting for the inevitable Trump decline as Nobel-prize winner Paul Krugman was warning?

If the question is when markets will recover, a first-pass answer is never.”

The issue with ‘buying the dips’ means inherently you have CASH in which to “buy the dips”. Having that cash means, of course, you’re not invested. And if you’re not invested, you’re missing out!  It’s literally that simple. 

Don’t do that! If you’re going to invest, just invest and be on your way. Be done with it and don’t look back. There is NO evidence, NONE at all, you or anyone can time the market, buy the dips, moving averages, etc.  If you want to get market returns, the truth is always and forever will be, you’ve got to be in the market, come hell or water. 

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