Abstract
AbstractWe study the fundamental properties of the “Buy the dip” (BTD) investment heuristic. Looking into cash holdings versus a stock market exchange‐traded fund, we find that BTD does not necessarily maximize investors' real terminal wealth and is sensitive to market conditions at the beginning year of investment. While under certain conditions, BTD may improve risk‐adjusted performance over a passive investment policy or a classical dollar‐cost averaging approach, its optimality is subject to estimation risk. Given the vast popularity of BTD, our results have important implications for asset managers and retail investors alike.
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