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Create Your Own Buy Low Strategy


Create Your Own Buy Low Strategy2015 wasn’t a great year for stock market investors. The S&P 500 index ended up right about the same level as it started. The emerging market index funds (VWO) did very poorly in 2015 and was down about 20%. Our stock and bond portfolio didn’t do so well either, but at least it’s in the positive territory due to the $54,873 we stuffed into our tax advantaged accounts. So that was 2015, but what about 2016? The bull market is in its sixth year so it’s getting quite worn out. The first week of 2016 doesn’t look good so far. The S&P 500 slid more than 3% due to the China stock market turmoil and oil price weakness. Who knows what’s going to happen the rest of this year.

On one hand, this shouldn’t concern investors who are investing for the long haul. We don’t plan to start withdrawing from our retirement account until around 2030 so we have quite a few years left in the market. Long term investors should ignore short term volatility so they don’t lose any sleep. On the other hand, I would love to pick up some shares at a discount if there is a big drop in the stock market. What would you do if the S&P 500 index fell 10%? Or 20% or 40%? Would you buy more shares or sell to prevent further losses? You need to create a plan so you know what to do when the situation arises.

Previous strategy

Here is how I used to react to a 10% correction – Wow, the stock market is down, let’s buy up some shares. I then proceeded to transfer as much money as we could afford to our brokerage account and invest it. This is a good approach, but not great because usually the stock market will continue to drop in a bear market.

From September 2007 to February 2009, the S&P 500 index lost more than 50% of its value. We invested the bulk of our extra money at the early phase of this drop. It turned out well, but I think we could have done even better if we had a methodical buy low strategy.  Now that I’m not working full time anymore, we don’t have as much money to throw at the bear market. So it’s more important than ever to invest with discipline. Here is my 5-point buy low strategy.

1 – Review your asset allocation

2015 was a volatile year for stock market investors. If you haven’t checked your asset allocation lately, then you should review it now. Also, if your personal finance situation changed in the past few years, you should evaluate your target asset allocation to make sure it reflects your current risk tolerance. A lot can change in just a few years. In 2008, we were 100% in stock, but now we are much more diversified.

It’s important to find the right asset allocation for yourself and stick with it through thick and thin. Many individual investors lost a lot of money by selling at the wrong time. If you have a personalized asset allocation plan, then you won’t have to worry about trading in and out of the market. You just need to stick with it and rebalance once in a while.

For new stock market investors – You should read my article on how to figure out your asset allocation.

Surprisingly, our asset allocation is pretty close to target. Check it out.

asset allocation

2 – Rebalance

If your asset allocation is off target more than 5%, you probably should rebalance your portfolio. Since our asset allocation rarely deviate over 5%, I usually just add new money in the underweighted areas. This year, I’ll probably sell some REIT (Alternatives) and move it to US stocks. They are in my Vanguard retirement accounts so it is easy and I won’t have to pay any transaction fees or tax.

For new investors – Once you figure out your target asset allocation, stick with it and rebalance about once per year.

3 – Leave the automated investment alone

We contribute to our 401k every month through automatic deduction and we plan to leave this alone. This is where the bulk of our new money is going and we will keep buying through the thick and thin. If the stock market drops, then that’s great news because we will get shares at a discount. If the stock market rises, that’s good too. Our net worth will look good and encourage us to continue to invest.

This has been working well for us for 20 years so I don’t see the need to change it now.

For new investorsContribute to your 401k and increase your contribution to the maximum as soon as you can. The contribution limit is $18,000 in 2016. Personally, I recommend investing in the lowest fee index funds available in your 401k. This will minimize the fees you pay every year.

4 – Hoard Cash

Fortunately, we still have a little extra left after contributing to our 401k and paying our monthly bills. In the past few years, I used this extra money to invest in our dividend portfolio and Roth IRAs whenever we can. For 2016, I plan to hoard the cash and try to time the market better.

5 – Buy Low Strategy

Hmm.. Timing the market is usually frowned upon by the personal finance community. It’s much easier to just invest new money as soon as you can. Studies have shown that even if you can time the market perfectly, you’ll gain less than 1% extra annually. This is because the stock market goes up over time so investing as soon as you can will get you most of the way there. Also, it’s impossible to time the market perfectly so an average investor shouldn’t even bother about this.

However, I’m going to do an experiment this year and try to time the market. It will be interesting to compare how we do to if we just dollar cost average throughout the year. This will be a small part of our investment so even if I screwed up, it shouldn’t be that painful. This portion of our new investment will probably be $10,000 – $15,000. This will give me something to write about. I’m sure you want to know the result of this experiment, right?

Here is the current plan

S&P 500 drops (from peak) RB40 plan
less than 10% Sit tight
drops 10% Invest 25% of cash reserve
drops 15% Invest 50% of cash reserve
drops 20% Invest the rest of cash reserve
drops 25% Rebalance bond to 20%
drops 30% Rebalance bond to 15%
drops 35% Rebalance bond to 10%
drops 40% Rebalance bond to 5%

Okay, if the S&P 500 drops more than 25%, then this strategy involves messing around with our asset allocation. I know we shouldn’t screw with our asset allocation, but 30-40% off! That’s a huge discount. This is why I allocated 20% to bonds in the first place. In previous bear markets, I felt like I didn’t have enough money to invest when the stock market was way down. Now I have bonds which will enable me to buy when there’s blood in the streets. I’m confident this will work out in the long term, but it could be a roller-coaster ride in the short term.

2018 will be volatile

2018 started off pretty badly and the S&P 500 is about 10% off its high so we still have a long way to go before we hit 40%. We might not get a 40% off sale in 2018, but I’m sure we’ll get there at some point. What do you think about my buy low strategy?

Do you have a strategy for investing in a bear market?

*Sign up for a free account at Personal Capital to help keep track of your investment. I log in almost every day to check on my accounts and cash flow. It’s a great tool for DIY investors and I highly recommend it.

Image Credit: by AZRainman

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Joe started Retire by 40 in 2010 to figure out how to retire early. He spent 16 years working in computer design and enjoyed the technical work immensely. However, he hated the corporate BS. He left his engineering career behind to become a stay-at-home dad/blogger at 38. At Retire by 40, Joe focuses on financial independence, early retirement, investing, saving, and passive income.

For 2018, Joe plans to diversify his passive income by investing in US heartland real estate through RealtyShares. He has 3 rental units in Portland and he believes the local market is getting overpriced.

Joe highly recommends Personal Capital for DIY investors. He logs on to Personal Capital almost daily to check his cash flow and net worth. They have many useful tools that will help every investor analyze their portfolio and plan for retirement.
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{ 36 comments… add one }
  • Martin January 8, 2016, 1:12 am

    I like the strategy! I pretty much do the same. I do weekly purchases for a small amount to always be on the market. Then I hoard money on the side that I can put in the market whenever it goes lower. It will be interesting to see if it is a good idea or not to try and time the market 😀

    • retirebyforty January 8, 2016, 10:09 am

      It might take a few years to pay off. If the bull market continues in 2016, then this strategy won’t work as well. We’ll see. 🙂

  • Austin January 8, 2016, 3:45 am

    Interesting take on a down market, I will definitely be interested in how it goes! As somewhat of a beginning investor with less than 100k in my portfolio, timing the market just seems too risky for me, but if it drops 20%+ I’ll definitely be cutting back our spending to free up more investment money 🙂 market is only down 9% and it seems like there are plenty of good deals out there already! Enjoyed the post, I’ll be watching!


    • retirebyforty January 8, 2016, 10:14 am

      I think that’s the right way to go. New investors should just focus on saving and investing as much as they can. A bear market can be stomach churning if you haven’t been through one before.

  • beth January 8, 2016, 4:11 am

    I do this and it allows me to buy a few extra shares with my meager funds. I have a buy price and a sell price for each of the stocks and ETFs in my portfolio and on my watch list of things to buy.

    I try and stay unemotional about the dips and rises and stick with my plan but it is hard not to get excited when there is a big sale.

    • retirebyforty January 8, 2016, 10:16 am

      I had a buy and sell price in the past and it didn’t work well for me. I usually sell too soon and the stock continue to rise. Now, I’m mostly buy and hold. Buy extra when there is a sale, of course.

      • beth January 9, 2016, 6:00 am

        95% of my stock portfolio is buy and hold but I now have a very small space in my portfolio for stocks I buy low with the intention to sell when there is a rise in the price. It is something I just started last year. I have made buys but I have yet to sell anything.

        • retirebyforty January 9, 2016, 9:56 am

          Good luck. I don’t plan to sell unless a company change fundamentally. I have no idea when to sell and my track record isn’t great.

  • MrTako @ Mr Tako Escapes January 8, 2016, 4:25 am

    Hi Joe – I can’t wait to watch your experiment proceed. Let me know when the market hits bottom, ok? 😉

    All kidding aside, I curious about when and why you’ll call bottom – because I actually have TONS of cash to invest! Now if I could only find a reasonable place to put it…

    • Mike H. January 8, 2016, 8:41 am

      I’m not really a believer in market timing, but I can’t deny it’s attractiveness. But I’m also really bad at predicting a rebound. So my strategy is simple: I use my accumulated cash to make increasing purchases as prices dip. Market down 10% I invest a reasonable amount. If it then drops further, I invest more. The lower it goes, the more I invest until my cash runs dry. If it starts to rebound, I ease up on investing new cash. That way, when the rebound happens, even if I didn’t get in at the exact lowest point, I got reasonably close, plus everything I put in on the downslide.

    • retirebyforty January 8, 2016, 10:17 am

      I can’t tell when the market hits bottom. I think 40% decline is just a great spot to pick up some new shares. Of course, I’ll check the PE ratio. If we get to around 15, then I think that’s a good spot to buy.

  • Money Beagle January 8, 2016, 6:13 am

    I’m not anywhere near convinced that we are in or should be in a bear market. The economy is still doing very well. Unemployment is low, profits are leveling off but they’re still quite high, and corporate debt is also quite low compared to times in the past where we were heading toward downswings in the economy.

    People have complained about how slowly the economy has grown since the recession, but I think that slow growth is actually a good thing, as it has built up a ‘real’ economic base, instead of the quick growth in past booms that have ended up falling right apart at the first sign of weakness.

    • Mike H. January 8, 2016, 8:44 am

      The economy is fine for the most part. What people tend to mean when they say that is, “My salary isn’t growing very quickly and my employer blames the economy.” Alternatively, they could be referencing the very real decline in manufacturing jobs in America – unfortunately for them, a resurgent economy won’t bring those jobs back by itself.

      I’m with you – steady and predictable growth is much better than spikes.

  • Leigh January 8, 2016, 7:21 am

    My strategy is to ignore the market as I usually do and continue investing. It works great. I bought $10,000 of Vanguard Total International in July 2012 which turned out to be the bottom for that year not because I was watching the market but because that’s when I had the money available.

    So this year, I will be frontloading my pre-tax and after-tax 401(k) and at some point, contributing to my Roth IRA, as per usual and not watching the market. It seems to be working out just fine so far.

    • Leigh January 8, 2016, 7:29 am

      P.S. 2015 was a great year for the stock market, if you’re in the accumulation phase. You kept buying shares at lower prices, which is exactly what you want to be doing!

      • retirebyforty January 8, 2016, 10:19 am

        I usually ignore the stock market too, but I’ll try timing the market this year. It will give me another topic to write about. 🙂
        Front loading is a great way to go.

  • freebird January 8, 2016, 9:18 am

    While I think it’s possible to find substantially underpriced shares among unfollowed lightly traded small caps, I think it’s much less likely in the large household names, and even less so when these are aggregated into an index. So I’d stick with dollar cost averaging when buying ETFs. Also I think we haven’t been tested by a prolonged bear market lasting several years in a couple of generations, and I think Japan’s recent experience shows that it’s always possible.

    • retirebyforty January 8, 2016, 10:23 am

      A prolonged bear market is what I’m afraid of the most. I’m not sure what we’d do in that case. I guess we just need to keep investing and hope the market recovers before we need to withdraw in 15 years or so.

  • Jo January 8, 2016, 9:54 am

    Buy low is cool but buy lower is better and buy lowest is the best. Just be careful not to catch a falling knife…
    In the same way I would say that buy low sell high is cool but buy lowest sell highest is the best. Just do it and you can retire very early.
    I don’t know when it’s low, lower or lowest. That’s why I buy all the time, keeping a balanced portfolio that meets my risk tolerance. I wonder if to wait for the right price to buy is a strategy that works or it’s more like a gambling game.

    There are many researchers that compared different timing strategies with backwards testing. Meb Faber have published a very methodical article where he used moving averages for timing and got very nice results. Not that I recommend anything, just to say it’s interesting to read.

    • retirebyforty January 8, 2016, 10:24 am

      We buy all the time as well. The timing piece of this is just a small part of our new investment.
      Usually waiting to buy is not optimal, but it’s better in a bear market.
      I’ll check Meb Faber. Thanks!

  • Stockbeard January 8, 2016, 10:14 am

    I liked FinancialSamurai’s suggestion of doing things over time: get say $10’000 ready, and invest $2’000 at a time every time the market drops an additional 2% or more. It reduces risk if the market keeps falling after your first move

    • retirebyforty January 8, 2016, 10:33 am

      I read that a while back and I couldn’t find the article. I think that’s a great idea too, but it’s probably too granular for me. 2% drop is too little to get worked up about. I don’t check the stock market that often.

  • Nathan @ Investment Hunting January 8, 2016, 11:13 am

    Great post. One thing I would add is to review your sector allocation a well. You talked about it in your rebalance section. When I think of rebalance I think of funds vs individual stocks. For individual stock buyers I think sector allocation is important (not having too much n one basket). 2015 was a tough year for the energy sector. I invested heavy into this sector. Before I realized it more than 30% of my total portfolio was in energy. I am long energy and know oil will go back up, but 30% is a lot to risk in one category. To remedy this, I added more capital to low coverage sectors.

    • retirebyforty January 9, 2016, 9:42 am

      I haven’t looked at my sector allocation much lately. We have some investment in energy, but not a big percentage. I’m thinking about picking up more KMI because they are beaten down. Thanks for the reminder. I will check this weekend.

  • Tracy @ Financial Nirvana Mama January 8, 2016, 12:15 pm

    Hi, I agree hoarding cash in 2016 is super wise. The bull market has had its ride and needs time to correct itself. It has gone for too long and 2014/15 craziness with the Swiss franc nightmare, the Greek debt insanity, the crashing oil and China market volatility (and economic slowdown) is a lot to absorb. My simple strategy go to strategy is in a bear market, wait for a 50% discount over a 5 year period from the peak, look for some consolidation in the price, wait for the market to show signs of turning around and the stocks start following suit (upward trend). Buy shares in no brainer reputable companies (ex: Brk-B/Google stocks…so you can sleep at night) and ride it out until you want to exit the positions based on your financial goals and timeframe. This involves some technical analysis and timing the market but it is a very simple strategy especially if you are holding for a long time (not trading).

    • retirebyforty January 9, 2016, 9:43 am

      You might have to wait a while for a 50% drop from peak. You should consider getting in a little at a time. It’s really difficult to call bottom.

      • Tracy @ Financial Nirvana Mama January 17, 2016, 11:48 am

        Hi Joe, yes, it’s hard to call the bottom. I just like it when stocks go on sale so I’m waiting for my goto stocks to drop a bit more. Apple for example has already dropped 25% from the peak so just waiting to see how the markets behave over the next few weeks before considering what to do next.

  • Fritz Gilbert January 8, 2016, 5:08 pm

    Interesting, and worthwhile “trial” for your readers. My only concern: what if it goes down 19%, then rises? I’m doing a bit of your “earlier” strategy (buy on dips), but keeping each purchase small enough that I’ll still have dry powder for a pretty long decline (unlike your earlier experience of investing it all too early). I do agree with the “sell the bonds” strategy if we see that big a decline. At that point, stocks will have a high prospect for better long term returns than bonds, and you have a long enough time frame to tilt your asset allocation toward stocks. You have a plan, that’s the important part.

    • retirebyforty January 9, 2016, 9:51 am

      I don’t mind standing pat if it drops just 19%. I’d probably miss it anyway. It has to drop below 20% for a few days before I see it. I probably should set up some kind of notification.
      If I don’t see a 20% decline, I will probably just invest at the Roth IRA deadline.

  • James January 9, 2016, 1:41 am

    I’ve found that asset allocation and hoarding cash are two of THE most important things in wealth accumulation. Many people are quick to point out mutual fund managers’ poor performance, but when you dig deep into the stats, you find that big-time managers are crippled by their limited ability to either a) convert to or b) bring in cash.

    • retirebyforty January 9, 2016, 9:55 am

      It’s tough to find any money when the economy is down. That’s why we need to prepare now and hold some bonds.

  • Caroline Rose January 9, 2016, 3:51 pm

    I am SO PETRIFIED of this market. My husband and I are 63 – he is retired and getting SS. I am working 25 hrs/wk and also getting SS. We had planned to augment these revenue streams with a yearly 3% withdrawal from our IRA but now I am afraid to touch anything for fear we cannot make up losses due to our age. Statistics say we too should be in for the long haul as we could easily live another 25+ years. Well I will die of worry long before then if the market goes down 40%. At least we have no accumulated debt to speak of – house, cars paid for, have a rental home which helps on taxes. Retirement is certainly not for sissies. We took out only 1% in 2015 cause every cent went to dentist bills – we have retirees medical insurance from hubby’s work to get us to 65, but no dental coverage. Need a few implants and root canals and the travelling around the country leaves you stuck in the driveway!

    • Mike H. January 11, 2016, 11:39 am

      Hi Caroline. Let me reassure you as much as I am able. You are in a great position: dual Social Security incomes, part-time active incomes, subsidized health insurance, rental income, no debt (i.e., the vast majority of your expenses are variable), and especially AWARENESS of both your own probable timeframe and the risks involved. Does this mean the market is any less scary? Nope. But it does mean that you can weather some storms.

      Unlike the last couple of economic slowdowns, there doesn’t seem to be a structural issue driving 2015-2016: energy isn’t a “bubble” like the dot-com, housing price, or variable-rate mortgage issues. This looks to me to be a simple tapering off of the last 5 years’ of bull market.

      I really like “Retirement is certainly not for sissies.” You’re right, but worrying about a stagnant stock market on a daily basis isn’t good for your health. You and your husband have the three top goals checked off: 1) guaranteed lifetime income, 2) no long-term debt, and 3) knowledge. Keep up the good work.

      • retirebyforty January 11, 2016, 6:55 pm

        Right. I wouldn’t worry about it too much. If you’re worried, you might adjust your asset allocation to be more conservative. You didn’t mention how much % you have invested in stock. At your age, I wouldn’t invest 100% in stock. If you need help, you should try to find a local fee-only financial advisor. You need to have an asset allocation that you can live with.
        The market will pull back at some point. Good luck!

  • Xavi January 12, 2016, 2:39 pm

    Hi Joe, I love your blog. I have been reading it for a long time and this is the first time that I don’t agree with one of your ideas (5 – Buy Low Strategy).
    In my opinion, your strategy would not work if both stocks AND bonds drop (I have to admit, though, that this scenario is not very probable at the moment).
    In addition, as you mention, this strategy involves messing around with your asset allocation.
    Let me propose a variant of your strategy that would not have these drawbacks:
    1) Increase significantly the amount of cash in your asset allocation (maybe 15% or 20%, instead of 2%).
    2) As you already recommend, rebalance your Portfolio when your asset allocation is off target more than 5%.

    When stocks drop, you will see (looking at the asset allocation) if you have to sell bonds or use cash to rebalance. If both bonds and stocks drop, you will need to use cash.

    This strategy would also tell you when to sell stocks: again, when your asset allocation is off target (stocks too high, cash and/or bonds too low).

    The idea is taken from the “Permanent Portfolio“ (Harry Browne), which uses a very simple asset allocation: 4 assets (stocks, long term bonds, cash, gold), 25% each. Rebalancing when 1 asset drops below 15% or rises over 35%.

    • retirebyforty January 13, 2016, 9:59 am

      Hi Xavi, Thanks for following Retire by 40!
      I think it would still work if both stocks AND bonds drop. Normally, bonds don’t drop that much even when it drops.
      I’m working on increasing our cash allocation. I don’t think we’ll get to 15%, though. That’s way too much cash for my comfort level.
      Thank you for the suggestion.

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