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

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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

Charted: Unemployment and Recessions Over 70 Years

Despite market uncertainty, U.S. unemployment is low, at 3.7%. In this infographic, we show unemployment and recessions since 1948.

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Unemployment and Recessions

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Charting Unemployment and Recessions Over 70 Years

As of August 2022, the U.S. unemployment rate sits at 3.7%, below its 74-year average of 5.5%.

Why does this matter today? Employment factors heavily into whether economists determine the country is in a recession. In fact, in the last several decades, employment-related factors have some of the heaviest weightings when a recession determination is made.

In this Markets in a Minute from New York Life Investments, we look at unemployment and recessions since 1948.

Why Is the Unemployment Rate Important?

To start, let’s look at how unemployment affects the economy.

During low unemployment and a strong labor market, wages often increase. This is a central concern to the Federal Reserve as higher wages could spur more spending and notch up inflation.

To curb inflation, the central bank may increase interest rates. As the economy begins to feel the effects of rising interest rates, it may fall into a recession as the cost of capital increases and consumer spending slows.

Who Determines It’s a Recession?

A committee of eight economists at the National Bureau of Economic Research (NBER) in Massachusetts make the call, although often several months after a recession has happened. As a result, employment data often acts as a lagging indicator.

This committee of academics looks at a number of variables beyond two consecutive quarters of negative GDP growth. Other factors include:

  • Nonfarm payroll employment
  • Real personal income less transfers
  • Real personal consumption expenditures
  • Industrial production
  • Wholesale retail sales adjusted for price changes
  • Real GDP

A widespread decline in economic activity across the economy, as opposed to just one sector, is also considered.

Unemployment and Recessions Over History

Over the last 12 business cycles, the unemployment rate averaged 4.7% at the peak and 8.1% during the trough. The below table shows how the unemployment rate changed over various U.S. business cycles, with data from NBER:

Peak Month Unemployment RateTrough Month Unemployment Rate
Nov 19483.8%Oct 19497.9%
Jul 19532.6%May 19545.9%
Aug 19574.1%Apr 19587.4%
Apr 19605.2%Feb 19616.9%
Dec 19693.5%Nov 19705.9%
Nov 19734.8%Mar 19758.6%
Jan 19806.3%Jul 19807.8%
Jul 19817.2%Nov 198210.8%
Jul 19905.5%Mar 19916.8%
Mar 20014.3%Nov 20015.5%
Dec 20075.0%Jun 20099.5%
Feb 20203.5%Apr 202014.7%

In 1953, following post-WWII expansion, the unemployment rate fell to 2.6%, near record lows.

During this time, the economy faced strong consumer demand and high inflation after a period of prolonged low interest rates. To combat price pressures, the Federal Reserve increased interest rates in 1954, and the economy fell into recession. By May 1954, the unemployment rate more than doubled.

In 1981, the unemployment rate was high during both the peak of the cycle (7.2%) and the trough (10.8%) by late 1982. This marked the end of the 1970s stagflationary era, characterized by slow growth and high unemployment.

More recently, at the peak of the business cycle in 2020 the unemployment rate stood at 3.5%, closer to levels seen today.

Unemployment Today: A Double-Edged Sword

As of July 2022, the number of job vacancies is at 11.2 million, near record highs.

To reign in the inflationary pressures of the current job market—which saw year-over-year wage increases of 5.2% in both July and August—the Federal Reserve may take a more aggressive stance on interest rate hikes.

The good news is that labor force participation is increasing. As of August, labor force participation was within 1% of pre-pandemic levels, offering relief to the labor market supply. Higher labor force participation could lessen wage growth without unemployment levels having to rise. Since more people are competing for jobs, there is less leverage for salary negotiation.

Going further, one study shows that since the Great Financial Crisis, labor market participation has had a greater influence on wage growth than unemployment levels or job openings.

Against these opposing forces of higher job vacancies and higher labor market participation, the outlook for unemployment, along with its wider effects on the economy, remain unclear.

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How Closely Related Are Historical Mortgage Rates and Housing Prices?

With mortgage rates climbing, could housing prices drop? We explore the relationship between historical mortgage rates and house prices.

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Scatterplot showing the relationship between historical mortgage rates and house prices

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Are Historical Mortgage Rates and House Prices Related?

Mortgage rates are rising at their fastest pace in at least 30 years. As mortgage rates climb, it becomes more expensive to finance a home purchase. This leaves many homebuyers with lower budgets. Could house prices drop as a result?

In this Markets in a Minute from New York Life Investments, we explore the relationship between historical mortgage rates and housing prices over the last 30 years. It’s the last in a three-part series on house prices.

Historical Mortgage Rates vs Housing Prices

To compare trends in historical mortgage rates and housing prices over time, we calculated year-over-year percentage changes. We used monthly data spanning from January 1992 to June 2022. Here’s a summary of movements over that timeframe.

Scenario# of Months
Mortgage Rate Decline, House Price Growth193
Mortgage Rate Growth, House Price Growth117
Mortgage Rate Decline, House Price Decline49
Mortgage Rate Growth, House Price Decline6

November 2006 has been excluded from the above tally as year-over-year mortgage rate growth was 0.0% at that time.

Mortgage rates and house prices have a weak positive correlation of 0.26. This means that when mortgage rates increase, house prices typically also increase. What could be contributing to this trend? Mortgage rate increases are associated with periods when the Federal Reserve is raising its policy rate in response to inflation that is higher than desired. Often, this coincides with strong economic growth, low unemployment, and rising wages, which can all strengthen home prices.

Over the last 30 years, it was quite rare for mortgage rates to rise while house prices simultaneously dropped. This only occurred in the early stages of the Global Financial Crisis and during the recovery.

DateMortgage Rate YoY ChangeHouse Price YoY Change
Aug 20070.8%-0.6%
Oct 20071.1%-1.9%
Jan 20101.6%-2.9%
Apr 20106.3%-1.5%
May 20103.3%-1.4%
Jul 20110.4%-3.8%

While mortgage rates saw some upward movement in the wake of the Global Financial Crisis, it took the housing market longer to recover. In fact, housing prices didn’t see a positive year-over-year change until March 2012.

Is There a Lag Effect?

A change in mortgage rates may not be immediately reflected in housing prices. To test whether there was a lag effect, we also explored the relationship between historical mortgage rates and housing prices two years later.* For instance, we compared the annual percentage change in mortgage rates in 2020 to housing price growth in 2022.

Here’s what the data looked like with this two year lag of housing price growth.

Scenario# of Months
Mortgage Rate Decline, House Price Growth190
Mortgage Rate Growth, House Price Growth97
Mortgage Rate Decline, House Price Decline37
Mortgage Rate Growth, House Price Decline17

*We tested for a lag effect using house prices six months later, one year later, two years later, and three years later. The data using house prices 6 months later and three years later revealed no correlation between mortgage rates and housing prices. The data using house prices one year later revealed the same correlation as using house price data from two years later. November 2006 has been excluded from the above tally as year-over-year mortgage rate growth was 0.0% at that time.

The pattern was similar, albeit with a slightly negative correlation of -0.15. In other words, mortgage rates and house prices tended to move in opposite directions.

For example, this occurred in 2020 when mortgage rates were dropping and the Federal Reserve had not yet begun to raise its policy rate. Two years later in 2022, house prices were seeing record high levels of growth amid strong demand and low supply.

Compared to our first analysis above, there were also more instances where mortgage rates increased and house prices decreased. This activity all related to mortgage rates rising from 2005-2007 amid inflation concerns, with housing prices crashing in the following years due to subprime mortgages and the Global Financial Crisis.

Historical Mortgage Rates: One Piece of the Puzzle

Could the current rising mortgage rates cause housing prices to drop? In the last 30 years, there is no historical precedent for this apart from the Global Financial Crisis. Of course, subprime mortgages—mortgages to people with impaired credit scores—contributed to the housing market collapse at that time.

While researchers believe it’s unlikely housing price growth will turn negative, the pace of growth is slowing down. We can see this in the below chart showing trends between historical mortgage rates and housing prices over time.

Changes in historical mortgage rates and house prices over time. When the year-over-year mortgage rate changes has been above 20% for more than two months in a row, the pace of house price growth has slowed.

Historically, a slowdown in house price growth has occurred when mortgage rates increase rapidly. Since 1992, there have been four instances when mortgage rates rose over 20% year-over-year for more than two months in a row. Each of them has been accompanied by a deceleration in house price growth.

Time PeriodHouse Price YoY Change at StartHouse Price YoY Change at End
Sep 1994-Feb 19953.1%2.9%
Aug 2013-May 20147.2%4.7%
Sep 2018-Dec 20185.8%5.5%
Jan 2022-Jun 202218.4%16.2%

Note: House price data only available until June 2022 and does not reflect any fluctuations since that time.

In the first half of 2022, house price growth slowed by over two percentage points. However, it’s important to keep in mind that while mortgage rates and affordability can play a role in the housing market, there are other factors at play. The current market is buoyed by high demand as millennials reach their prime home buying years, coupled with a housing supply shortage.

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