Laws Train Museum
With the Dow Jones Industrial Average down more than 1,000 points as I write this, how should investors handle this selloff? Let’s take a simple example. These suggestions assume cash is available. Eventually the market will come back. As long as the inflation is this high and approaching 10%, the market is not going to do well so patience is required. Here are a few simple suggestions.
Set up a buying schedule where you establish limit orders following a pattern that might go like this. One might go as low as to let X = 5 shares.
- Buy X number of shares at a price 3% below the current price. Multiply the current price by 0.97 to calculate the 3% limit order.
- Buy X + 10 shares at a price 5% below the current price. Multiply the current price by 0.95 to calculate the 5% decline.
- Buy X + 15 shares at a price 7% below the current price.
- Buy X + 20 shares at a price 10% below the current price.
- Buy X + 25 shares at a price 13% below the current price.
- If cash is available run this patter down to where the new purchase price is as low as 30% below the current price.
I think you get the pattern of shares and prices below the current price. What ETFs to consider? I recommend sticking with either VTI or ESGV. Either will cover the broad U.S. Equities market.
If you wish to be a tad more adventurous, consider market sectors. Over-sold sectors are: Discretionary (VCR), Financial (VFH), Industrial (VIS), and Telecom (VOX).
Buy the end of the day, Health (VHT), Materials (VAW), and Technology (VGT) will likely move into the over-sold zone. Set up a similar buying schedule for these sectors.
If you need to raise cash, sell off all bonds and treasuries and use that cash to set up these equity limit orders. If you have ETFs you have been wanted to cull from the portfolio, do it and use the cash to establish these buying limit orders.
If readers have other suggestions, post them in the comments section provided below.
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ITA Readers: I don’t think you need to be in a panic in setting a sequence of limit orders as it is highly unlikely we have hit a market bottom. We might even have months to set these orders so be patient.
Lowell
Lowell
Thanks for sharing the buying schedule described in your post.. I like the fact that it is weighted so that you are buying larger amounts as the price goes down and that it is a disciplined way to average into the market when it is in a down trend. I sold a position in the mega-cap value ETF, MGV today. I plan to use the buying schedule to buy back in.
Richard
Richard,
I’ve been setting up several such buying schedules in the Relative Strength portfolios.
Lowell
Thanks Lowell, very helpful.
Lowell,
I have found this post very helpful and have used the average down buying schedule a few times to make purchases by just making a “from the hip” guess on what range of limit settings to use. I wonder if looking at support levels with something like the Fibonacci retracement tool to determine the span of the limit settings would improve results? Can you share any thoughts or experience you may have on the subject?
Thanks,
Richard
Richard,
I don’t have any special insights regarding using Fibonacci number sequences to set Buy orders. It would be very difficult to do any back-testing to support such a model.
Instead, I use percentages to set Buy orders. What percentages to use is a personal decision. I generally begin at 3% below the current price and move down from there. There is a point where one either exhausts available cash or low prices are missed.
Lowell
Lowell,
Thank you for your reply. Schwab’s StreetSmartEdge has Fibonacci tools which are available on charts under the “Draw ” option. I find it interesting that the market bounced off of the 50% retracement level yesterday. My gut feeling it won’t hold that support level for long.
Richard
Richard,
The VTI is off about 1% this morning so the support is not holding. However, that could change before the close today.
I don’t pay much attention to short-term gyrations.
Lowell
Be sure to read this post and watch for the BPI data I’ll post before noon tomorrow (9/24/2022) as there are buying opportunities – assuming cash is available.
Lowell