What Should You Do When Stock Prices Drop?

Buying high and selling low sound foolish, but it works better than you might think! Over the past 40 years, selling after the NASDAQ dropped more than 6% in two weeks and buying after the NASDAQ gained more than 6% would have yielded better returns than staying continuously invested.

The white line on the below chart shows the NASDAQ's actual returns since 1971—it's 70 times bigger! Buying and selling after 6% swings did even better, with a hundredfold return. That investing strategy is shown shown by the red and green line. Periods invested in the market are green, periods out of the market are red.

The 6% threshold is arbitrary; try mousing over the grid to explore other buy and sell strategies. Not all of them work!

While some of these strategies have yielded good long term returns, all of them had decades where they under performed the market.

The two week, 14 day window is also arbitrary, try adjusting it!

14 days (should cache these so dragging isn't laggy.....)

These strategies are quite sensitive to small adjustments of the time window. This suggests that their returns are highly dependent on past patterns which might not repeat in the future! Most of the outsized returns happen by exiting the market when the dot com bubble pops and the financial crisis happens.

Following momentum works if the market generally does what it previously did; if large daily swings are the result of underlying change in value that takes place slowly then this is the way to go.

If, on the other hand, you think stocks act more like a random walk, then buying high and selling low is the exact opposite of what you should do. If we're not entering a sustained decline, these strategies will probably do worse than just staying in market like they did in the 1990s and 2010s.

TKTK: here's what buying the dip looks like.