"Buying the Dip" (EP.144)

Episode Summary

Executive Summary: Episode 144 blends community updates, a book recommendation on anonymous online communities, a cautionary recap of Archegos’ leveraged collapse, and listener Q&A on model portfolios, retirement/financial independence, and goal setting. The main research segment tests “buying the dip” versus lump-sum investing across global markets and finds dip-buying generally underperforms due to the opportunity cost of holding cash, even if it modestly reduces downside risk.

Main Topics: Community updates and audience growth: The hosts discuss merchandise interest, international listener engagement, podcast download/view growth, and plans for an AMA with Paul Merriman and guests. Anonymous communities and social networks: They review The Hidden Psychology of Social Networks and connect its themes to the podcast’s anonymous community board, emphasizing trust, shared purpose, and reduced ego signaling. Archegos collapse and leverage risk: A brief news segment explains Bill Hwang’s Archegos meltdown as a case of concentrated bets, swaps, and extreme leverage amplified by weak coordination among lenders. Are model portfolios too complex for DIY investors?: A listener/community debate examines whether the Rational Reminder model portfolios are too difficult for average investors to implement and whether simplified one-ticket ETFs are better for most people. Financial independence, work, and meaning: The hosts discuss why people want to stop working, framing financial independence through Brian Portnoy’s four C’s and Jonathan Haidt’s ideas about happiness, work, flow, and active leisure. Research: why ‘buying the dip’ fails: The main portfolio topic compares lump-sum investing with waiting in cash until a 10% or 20% market decline, finding dip-buying usually hurts returns despite some downside protection.

Key Arguments: Anonymous communities can create trust and openness because people are there to learn rather than perform identity, making discussions more honest than ego-driven social platforms. The Archegos story shows how concentration and leverage can turn one bad position into a system-wide unwind when lenders are not fully coordinated. Rational Reminder model portfolios were created to translate factor ideas into a practical DIY format, but the hosts agree they are probably too complex for the average investor. Many knowledgeable community members can handle model portfolios, but for most friends/family the simpler recommendation is a one-ticket ETF solution. Financial independence is less about never working and more about gaining control, security, and freedom from others’ decisions. Work can support competence and flow, but active leisure and meaningful relationships can also produce the same benefits, so a balanced life matters. Buying the dip is inferior on average because cash has a real opportunity cost; delaying investment usually sacrifices positive expected returns. Dip-buying can improve downside metrics like VaR/CVaR, but that does not compensate for the loss in expected compound returns over time. The strategy is especially weak in strong long-term markets like the U.S.; waiting for a crash often means missing long periods of market appreciation. If an investment policy is right for you, the best time to implement it is now; if it feels too scary now, it may not be the right policy.

Data Points: Audio downloads (March 2021): Just under 100,000 - Monthly podcast audio downloads mentioned in the intro Audio downloads (March 2020): 55,000 - Year-over-year comparison for podcast growth YouTube views (March 2021): Around 25,000 - Video views compared with minimal views a year earlier Combined listens: Well over 100,000 - Total across audio and YouTube for March 2021 Community board size: Roughly 3,000 participants - Estimated active community members Podcast audience estimate: Roughly 20,000–25,000 listeners - Hosts’ rough estimate of listeners based on downloads AVUV 1-year return: 156.9% - Avantis U.S. Small Cap Value ETF one-year performance through April 1, 2021 SPY 1-year return: 65% - SPDR S&P 500 ETF one-year performance VT 1-year return: 66.6% - Vanguard Total World ETF one-year performance AVUV annualized return since inception: 29.42% - October 1, 2019 to March 31, 2021 Emerging markets 1-year return: Just under 67% - iShares MSCI Emerging Markets ETF one-year performance International small-cap value 1-year return: 81% - Avantis international small-cap value ETF one-year performance Archegos leverage: $85 borrowed per $100 invested - Example of the family office’s extreme leverage Archegos market loss: $35 billion - Combined market value lost by at least eight stocks exposed to Archegos on one Friday AMA date: May 4 at 3 p.m. Eastern - First AMA with Paul Merriman and two research colleagues Morningstar sample size: 520,000 individuals - 2020 401(k) participant data analyzed by David Blanchett Self-directing share: 41% - Portion of Morningstar sample managing assets themselves Strategy changes among target-date/managed funds: 3% to 3.5% - Share of participants switching strategies during 2020 Self-directed allocation changes: 13% - Share of self-directing participants changing allocations by more than 5% Underperformance of reallocators: 750 bps - Estimated underperformance in 2020 versus not changing allocations Community discussion length: 109 comments - Thread on why people want financial independence or to stop working All-time highs followed by 10%+ drop: Less than 3% of the time - Frequency across indexes within 12 months of a peak U.S. all-time high months: 24% of months - Monthly frequency of U.S. stock data reaching new highs U.S. all-time highs followed by 10%+ drop: 1.14% of months - Frequency of peaks leading to a 10% or greater decline within 12 months Average annualized drag from 10% dip-buying (world index): 60 bps - Average shortfall versus lump sum over 10-year rolling periods Average annualized drag from 20% dip-buying (world index): 2.2% - Waiting for deeper dips increased underperformance U.S. 10% dip-buying drag: 1.44% - Average annualized underperformance versus lump sum U.S. 20% dip-buying drag: 3.4% - Average annualized underperformance versus lump sum Canada 10% dip-buying outperformance frequency: 48% of rolling periods - Share of overlapping 10-year periods where buy-the-dip beat lump sum Canada 10% dip-buying annualized shortfall: 97 bps - Average underperformance versus lump sum despite downside improvement Japan long-run comparison: T-bills outperformed stocks from 1990 to 2020 - Alternative return environment during Japan’s lost decades Canada 20% dip-buying outcome: Only slightly worse than 10% dip-buying - Country-specific sensitivity analysis

Pivotal Quotes: "The opportunity cost if someone did not stay in their seat in their asset classes a year ago. It's just jaw-dropping numbers year over year." — Cameron Passmore: Intro discussion of huge one-year equity and factor returns "I think the answer to the question: the question was: Are the rational reminder model portfolios too complicated for the average DIY investor? For the average DIY investor, I would say they probably are." — Benjamin Felix: Listener/community debate about model portfolio complexity "Overall, we did not find buying the dip to be of any use at all whatsoever." — Benjamin Felix: Conclusion of the buy-the-dip research segment

Implications: Listeners should be wary of market-timing narratives, especially dip-buying, because waiting in cash usually lowers long-run returns. Simpler portfolios and clear policies are likely better for most people than complex DIY implementation.