Saturday, April 23, 2011

buying the dips

Morningstar tested whether "buying the dips" is a good investing strategy.

Their study showed that it is an underperforming strategy.

However...

Buying on dips hurt risk-adjusted returns over one-month horizons for almost every asset class. The result may seem counterintuitive in light of value investors' historical outperformance. However, value hunting and dip-buying are distinct strategies. Value is pegged to fundamental measures such as book value or earnings, whereas dip-buying is a price-driven rule--technical trading, really. It's possible for an asset to shed dollars and still be overpriced. Value is also realized over years-long horizons, while our dip-buying strategy only held for a month (though there were extended periods where it rode markets down). There's evidence that the worst-performing assets over the previous years go on to outperform in the long run as mean reversion brings valuations back up to historical norms.

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