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Buy the Dip, Buy the Rise, or Follow a Plan: Which Had the Best Return?

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This infographic is available as a poster.

Buy the Dip, Buy the Rise, or Follow a Plan?

Buy the Dip

This infographic is available as a poster.

Buy the Dip, Buy the Rise, or Follow a Plan?

As performance trends come and go, investors may wonder whether they should adjust their portfolios accordingly. When prices drop, should they buy the dip in anticipation of prices going back up? Conversely, when prices rise, should they buy the rise in case the climb continues?

In this Markets in a Minute from New York Life Investments, we compare these scenarios with following a financial plan to see which one has delivered better returns.

A Tale of Three Portfolios

To evaluate these strategies, we compared the historical performance of three hypothetical portfolios:

  • Buy the dip: 100% of the portfolio was invested in the worst-performing asset class from the prior year.
  • Buy the rise: 100% of the portfolio was invested in the best-performing asset class from the prior year.
  • Follow a plan: A balanced portfolio of 60% U.S. large cap stocks and 40% U.S. investment grade bonds for the entire duration.

We considered 13 asset classes to determine the best and worst-performing assets in each year.

EquitiesFixed IncomeAlternatives
U.S. Large Cap StocksU.S. Taxable Municipal BondsGold
U.S. Small Cap StocksU.S. Investment Grade BondsEquity Real Estate Investment Trusts
Developed Market StocksU.S. High Yield BondsHedge Funds
Emerging Market StocksForeign BondsGlobal Commodities
Cash (U.S. Treasuries)

Four were within the broad category of equities, five were under the fixed income umbrella, and four were alternative investments.

Portfolio Values Over Time

We assumed all three portfolios had the same starting value of $10,000 as of January 1, 2011. Here’s how the year-end values of the portfolios would have changed over the last decade.

 Buy the DipBuy the RiseFollow a Plan
2011$10,007$10,893$10,433
2012$11,890$12,076$11,541
2013$11,896$12,421$13,689
2014$11,911$13,137$15,109
2015$7,997$13,509$15,301
2016$8,906$14,674$16,488
2017$8,979$16,616$18,814
2018$9,142$14,368$18,386
2019$10,754$14,685$22,360
2020$10,812$17,387$25,414

The buy the dip portfolio climbed steeply in 2012. Emerging market stocks, the worst-performing asset class in 2011, rebounded the following year with an annual return of 19%. Unfortunately, the buy the dip portfolio saw its value drop significantly in 2015. Global commodities had the worst return two years in a row, returning -33% in 2014 and 2015. Ultimately, the value of the buy the dip portfolio ended close to where it started, with total gains of just $812.

On the other hand, the buy the rise portfolio saw its worst annual performance in 2018. Emerging market stocks had returned an impressive 36% in 2017, but saw losses the following year. The buy the rise portfolio had its best return in 2020, when U.S. large cap stocks continued their upward climb from the year before. By the end of 2020, the buy the dip portfolio saw gains of over $7,000.

Finally, the balanced follow a plan portfolio experienced a small drop in 2018 when U.S. large cap stocks declined. However, it climbed the following two years due to a recovery in U.S. large cap stocks, which was the top-performing asset class in 2019. In the end, the balanced portfolio more than doubled its original value—the best performance of the three portfolios we analyzed.

Risk and Return

Of course, return is only one side of the equation. To properly evaluate all three strategies, investors can consider both risk and return.

Below, we look at how risk and return stacked up for each portfolio over the 10 year period.

 Buy the DipBuy the RiseFollow a Plan
Cumulative Return8%74%154%
Min Annual Return-33%-14%-2%
Median Annual Return1%7%11%
Max Annual Return19%18%22%
Standard Deviation14%9%7%

Standard deviation based on annual returns.

Not only did the buy the dip strategy have the lowest cumulative return, it also had the highest risk. For instance, this portfolio experienced the biggest one-year decline of -33%, and had the highest standard deviation of 14%.

In the middle of the pack, the buy the rise portfolio’s worst drawdown was -14% and it had a standard deviation of 9%. Notably, its median annual return of 7% was much higher than that of the buy the dip portfolio.

Lastly, the follow a plan portfolio performed well on all fronts. Compared to the other two portfolios, it had the highest cumulative return and the lowest risk. Over the 10 year period, its worst annual performance was a decline of just -2%.

Buy the Dip: More Effort & More Risk

Notably, there are lots of variables that could affect the results of these strategies.

  • Time period: Are there general market conditions at play? For example, U.S. large cap stocks had a bull market for most of the period we studied, boosting the return of the balanced portfolio.
  • Types of securities: Is the portfolio investing in entire asset classes, or specific companies?
  • Short-term or medium-term movements: Is the portfolio tracking daily dips and rises, or annual dips and rises?

However, based on this set of data, buy the dip and buy the rise strategies have historically had lower returns and higher risk than a balanced portfolio. If the market doesn’t move in the way the investor predicts, this can result in large drops in the portfolio. It also requires more effort to track these trends, and could result in higher fees from more frequent trading.

In contrast, following a balanced portfolio has historically resulted in lower risk and higher returns. By sticking to a plan, investors are also much more likely to be aligned with where they are on the investor lifecycle. This means their investment choices match up with their goals and risk tolerance.

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Markets in a Minute

What is the Success Rate of Actively Managed Funds?

For actively managed funds, the odds of beating the market over the long run are like finding a needle in a haystack.

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Actively Managed Funds

What is the Success Rate of Actively Managed Funds?

Over a 20-year period, 95% of large-cap actively managed funds have underperformed their benchmark.

The above graphic shows the performance of actively managed funds across a range of fund types, using data from S&P Global via Charlie Bilello.

Missing the Mark: Actively Managed Funds

Several factors present headwinds to actively managed funds.

  • Trading costs: First, fund managers will trade more often than passive funds. These in turn incur costs, impacting returns.
  • Cash holdings: Additionally, many of these funds hold a cash allocation of about 5% or more to capture market opportunities. Unlike active funds, their passive counterparts are often fully invested. Cash holdings can have the opposite effect than intended—dragging on overall returns.
  • Fees: Active funds can charge up to 1-2% in investment manager fees while funds that tracked an index passively charged just 0.12% on average in 2022. These additional costs add up over time.

Below, we show how active funds increasingly underperform against their benchmark over each time period.

Fund Type1 Year
% Underperformed
5 Year
% Underperformed
10 Year
% Underperformed
20 Year
% Underperformed
All Large-Cap 51879195
All Small-Cap 57718994
Large-Cap Growth 74869698
Large-Cap Value 59698587
Small-Cap Growth 80598597
Small-Cap Value 41819192
Real Estate 88627487

As we can see, 51% of all large-cap active mutual funds underperformed in a one-year period. That compares to 41% of small-cap value funds, which had the best chance of outperforming the benchmark annually. Also, an eye-opening 88% of real estate funds underperformed.

For context, Warren Buffett’s firm Berkshire Hathaway has beat the S&P 500 two-thirds of the time. Even the world’s top stock pickers have a hard time beating the market’s returns.

2020 Market Crash: A Case Study

How about active funds’ performance during a crisis?

While the case for actively managed funds is often stronger during a market downturn, a 2020 study shows how they continued to underperform the index.

Overall, 74% of over 3,600 active funds with $4.9 trillion in assets did worse than the S&P 500 during the 2020 market plunge.

Stage of 2020 CycleTime Period% Underperforming S&P 500
CrisisFeb 20 - Apr 30, 202074.2
CrashFeb 20 - Mar 23, 202063.5
RecoveryMar 24 - Apr 30, 202055.8
Pre-CrisisOct 1 2019 - Jan 31, 202067.1

Source: NBER

In better news, roughly half underperformed through the recovery, the best out of any market condition that was studied.

The Bigger Impact

Of course, some actively managed funds outperform.

Still, choosing the top funds year after year can be challenging. Also note that active fund managers typically only run a portfolio for four and a half years on average before someone new takes over, making it difficult to stick with a star manager for very long.

As lower returns accumulate over time, the impact of investing in active mutual funds can be striking. If an investor had a $100,000 portfolio and paid 2% in costs every year for 25 years, they would lose about $170,000 to fees if it earned 6% annually.

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Markets in a Minute

Ranked: The Largest Bond Markets in the World

The global bond market stands at $133 trillion in value. Here are the major players in bond markets worldwide.

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The Largest Bond Markets in the World

The Largest Bond Markets in the World

In 2022, the global bond market totaled $133 trillion.

As one of the world’s largest capital markets, debt securities have grown sevenfold over the last 40 years. Fueling this growth are government and corporate debt sales across major economies and emerging markets. Over the last three years, China’s bond market has grown 13% annually.

Based on estimates from the Bank for International Statements, this graphic shows the largest bond markets in the world.

ℹ️ Total debt numbers here include both domestic and international debt securities in each particular country or region. BIS notes that international debt securities are issued outside the local market of the country where the borrower resides and cover eurobonds as well as foreign bonds, but exclude negotiable loans.

Ranked: The World’s Top Bond Markets

Valued at over $51 trillion, the U.S. has the largest bond market globally.

Government bonds made up the majority of its debt market, with over $26 trillion in securities outstanding. In 2022, the Federal government paid $534 billion in interest on this debt.

China is second, at 16% of the global total. Local commercial banks hold the greatest share of its outstanding bonds, while foreign ownership remains fairly low. Foreign interest in China’s bonds slowed in 2022 amid geopolitical tensions in Ukraine and lower yields.

Bond Market RankCountry / RegionTotal Debt OutstandingShare of Total Bond Market
1🇺🇸 U.S.$51.3T39%
2🇨🇳 China$20.9T16%
3🇯🇵 Japan$11.0T8%
4🇫🇷 France$4.4T3%
5🇬🇧 United Kingdom$4.3T3%
6🇨🇦 Canada$4.0T3%
7🇩🇪 Germany$3.7T3%
8🇮🇹 Italy$2.9T2%
9🇰🇾 Cayman Islands*$2.7T2%
10🇧🇷 Brazil*$2.4T2%
11🇰🇷 South Korea*$2.2T2%
12🇦🇺 Australia$2.2T2%
13🇳🇱 Netherlands$1.9T1%
14🇪🇸 Spain$1.9T1%
15🇮🇳 India*$1.3T1%
16🇮🇪 Ireland$1.0T1%
17🇲🇽 Mexico*$1.0T1%
18🇱🇺 Luxembourg$0.9T1%
19🇧🇪 Belgium$0.7T>1%
20🇷🇺 Russia*$0.7T>1%

*Represent countries where total debt securities were not reported by national authorities. These figures are the sum of domestic debt securities reported by national authorities and/or international debt securities compiled by BIS.
Data as of Q3 2022.

As the above table shows, Japan has the third biggest debt market. Japan’s central bank owns a massive share of its government bonds. Central bank ownership hit a record 50% as it tweaked its yield curve control policy that was introduced in 2016. The policy was designed to help boost inflation and prevent interest rates from falling. As inflation began to rise in 2022 and bond investors began selling, it had to increase its yield to spur demand and liquidity. The adjustment sent shockwaves through financial markets.

In Europe, France is home to the largest bond market at $4.4 trillion in total debt, surpassing the United Kingdom by roughly $150 billion.

Banks: A Major Buyer in Bond Markets

Like central banks around the world, commercial banks are key players in bond markets.

In fact, commercial banks are among the top three buyers of U.S. government debt. This is because commercial banks will reinvest client deposits into interest-bearing securities. These often include U.S. Treasuries, which are highly liquid and one of the safest assets globally.

As we can see in the chart below, the banking sector often surpasses an economy’s total GDP.

Banking Sector

As interest rates have risen sharply since 2022, the price of bonds has been pushed down, given their inverse relationship. This has raised questions about what type of bonds banks hold.

In the U.S., commercial banks hold $4.2 trillion in Treasury bonds and other government securities. For large U.S. banks, these holdings account for almost 24% of assets on average. They make up an average 15% of assets for small banks in 2023. Since mid-2022, small banks have reduced their bond holdings due to interest rate increases.

As higher rates reverberate across the banking system and wider economy, it may expose further strains on global bond markets which have expanded rapidly in an era of dovish monetary policy and ultra-low interest rates.

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