Buy the Dip vs Dollar Cost Averaging: A 20-Year Test

Waiting for a crash can cost more than buying today

0:00 Waiting for a 20% stock market crash can leave you still paying more than you would today. Because the market gets to move before your sale starts. My name is Blake and today on 9-5 Investing, we are going to talk about buying the dip versus dollar cost averaging and what waiting for a better price can actually cost you. Here's a simple example. An investment costs $100, rises to 150, and then crashes 20%, which puts the price at $120. You got the crash you wanted, but you're still paying 20% more than the price you originally rejected.

0:33 It's like refusing to buy a $100 jacket, watching the store raise the price, and then getting excited cuz there's finally a sale tag on it.

What "buying the dip" means

0:43 Now, buying the dip can mean very different things. So, let's separate them before we start declaring a winner. If you invest from every paycheck and keep buying when the prices fall, that's regular investing for a dip. You're not sitting outside the market waiting for permission to enter. The version we're examining is holding back money you already intended to invest, letting it pile up, and waiting for a decline before buying. Dollar cost averaging means investing equal amounts at a regular interval regardless of prices.

1:14 For example, $500 each month into the same diversified fund with no emergency meeting every time the market has a bad Tuesday. The schedule removes a timing decision. It does not remove the investment risk. And we need another distinction because investing your paycheck and gradually investing an inheritance are not the same decision. With a paycheck, the next contribution doesn't exist yet. With an inheritance or a bonus, the entire amount is already available, and spreading it out means deliberately keeping some of the cash.

1:47 Comparing these situations without explaining that difference is like comparing two runners when only one of them has been allowed to start the race.

The 20-year test

1:55 So, what happens when researchers give investors the same money in different buying rules? Schwab published a hypothetical comparison in July of 2025. $2,000 available at the start of each year from 2005 through 2024, invested using different schedules. In that test, perfect annual timing finished at 186k. Investing immediately finished at 170k. And spreading each year's money across monthly purchases finished at 166k. Keeping everything in Treasury bills finished at $47,000.

2:35 Perfect timing won that test, but knowing every year's best buying point was a much smaller advantage than the difference between participating in stocks and staying in cash. That's historical evidence, not a promise about the next 20 years. And a cash-only strategy is not the same as a rule that eventually buys a 10% decline. That last distinction matters. You can't label every strategy you dislike as waiting forever, compare it with stocks, and call the argument settled.

3:03 Nick Maggiulli tested a different idea in 2019. Save $100 per month then buy at the lowest point between market highs with perfect hindsight about the bottom. His dip strategy underperformed monthly investing in more than 70% of the 40-year periods he examined. But it did win in some periods, especially when a severe decline arrived early enough. That's a different experiment from Schwab's annual timing test. The buying rules and waiting periods differ.

3:30 So, neither result means every possible dip strategy always wins or always loses.

What has to go right

3:37 Here's the useful question those examples raise. What was to happen before your waiting strategy pays off? First, the decline has to arrive before the growth you missed becomes more valuable than the discount. Then, you have to follow through and actually buy. Imagine your rule says buy after a 10% fall. It happens, but now the news is worse. So, you decide 20% would feel safer, and at 20% you're suddenly shopping at 30%. You didn't create a buying rule, you created a moving appointment with a stock market that does not care about your calendar.

4:12 Writing down the decision before the scary part arrives won't make the trade successful, but it gives you something more concrete than whatever the news makes you feel that morning. And the waiting money matters, too. Cash earning interest is different from cash earning nothing, so any serious comparison has to count that interest fairly. It also needs the same contributions, the same investment, the same dates, and a rule you could actually follow without knowing the future.

4:36 A chart can be perfectly calculated and still answer the wrong question. If the dip buyer gets extra cash or the monthly buyer starts earlier, you change more than the buying strategy.

Lump sum: all at once or in pieces?

4:50 Now, let's deal with that lump sum question, because regular investing doesn't automatically mean that laying money that's already yours is better. Vanguard's February 2023 research compared investing a lump sum immediately with splitting it into three monthly investments using global stock returns from 1976 through 2022. Measured after 1 year, immediate investing won 68% of those historical comparisons. That version assumed no interest on the waiting money.

5:20 Adding treasury bill interest reduced the win rate to 65%. So, cash interest changed the result, but it didn't reverse the overall finding in that study. And 68% is a historical frequency, not a 68% return or your personal probability of success. Vanguard also recognizes a behavioral trade-off. A short fixed schedule can be useful for someone who would otherwise leave the entire amount in cash because investing it feels unbearable. That's a compromise with an end date.

5:47 Waiting until the market feels safe and has no deadline, and safe is a feeling that can become surprisingly difficult to schedule.

When holding cash makes sense

5:55 Not to give you the other side, because there are completely sensible reasons to hold cash that have nothing to do with predicting a crash. Money for an emergency or a near-term purchase has a different job from retirement money. If you need a down payment soon, a market recovery that arrives years later does not pay the seller today. The amount that you invest also has to fit the losses that you can tolerate. And a broad stock fund is different from one struggling company.

6:20 A lower share price does not, by itself, prove that the business is worth buying or that it will recover. Think about a restaurant that's losing its customers. Buying another slice of ownership more cheaply doesn't bring those customers back. You still need to understand what happened to the business. So, here's a practical way to separate the decisions.

Write the rule first

6:38 First, decide what the money is for, then how much investment risk fits that goal. And then write down how the money gets invested. For new contributions, that could mean an automatic schedule. For cash already available, decide between investing at once and a defined phase-in with an amount and an actual finish date. If you still want to reserve money for dips, specify the trigger, the amount, and what happens if the trigger never arrives. Otherwise, the plan is missing the part where you eventually do something.

7:06 For example, a rule might say a 10% decline from a defined reference point triggers a purchase. You still have to decide whether that happens once, repeats, or resets after a new high. Those details sound boring because they are, but boring details are what separate a strategy you can evaluate from a sentence that sounds good under a picture of a crashing chart. None of this requires predicting next month's market. It requires knowing which decision you're making and accepting that every choice has a trade-off.

7:34 Buying during a decline can be perfectly reasonable. Putting your entire investing plan on hold until the market offers a price you want is actually a much bigger bet. And remember, the $100 investment fell from 150 to 120. The sale sign tells you what happened to the price recently. It doesn't tell you what the waiting cost was. Have you ever set money aside for a dip and then change your mind when it arrived? Let me know in the comments and thanks for watching.