If the average annual return for the S&P 500 is 8%, wouldn't it be far better if you only bought on days that it fell?
I ran the numbers in Excel. Here are the assumptions I made:
- You started investing in SPY on the day that it launched (January 29, 1993).
- Your broker allowed dollar-based investing.
- On each trading day, you deposited $10, and invested it according to one of two strategies:
- Strategy A: You bought $10 of SPY at the closing price, regardless of what that price was.
- Strategy B: You instructed your broker to buy $10 (plus your saved cash) of SPY at the closing price only if the closing price is lower than the previous closing price. If the closing price was not lower than the previous closing price, you would instead save the cash to invest it later.
- You reinvested all dividends at close on the in-dividend date. (How nice of your broker to lend you the cash to do this!) In other words, the performance of SPY is assumed to be the performance of the "Adjusted Close" column in Yahoo Finance.
At close on January 5, 2021, if you had used Strategy A, you would have $329,337.26, whereas if you had used Strategy B, you would have $329,273.05 (which includes $10 in cash, since the closing price on January 5 was higher than on January 4). So, if you had used Strategy B, you would have $64.22 less, or 0.019% less, than if you had used Strategy A.
In conclusion, it really won't make any difference at all.
You'd have to better define some parameters to be able to assess returns via back-testing, but the primary issue with this strategy is that you could sit with idle money for long bull runs. You could also buy on a down day that turns out to be the start of a long bear run.
A popular notion is that time in the market beats timing the market. That's generally true because people can't reliably time the market, if they could they would have vastly superior returns. There are tools available for back-testing strategies if you're so inclined, Think or Swim includes back-testing capabilities (not sure if available with their free paper trading accounts).
The short answer is that if the long term trend is up after your initial buy and hold purchase then buy and hold will outperform your intermittent purchase strategy. If the market is down long term then the intermittent strategy will outperform. Note that this is an equal dollar comparison, eg. invest all initially versus investing the same amount of money at various intervals.
If it's an oscillating market then it's up for grabs which one will do better and the answer will depend on what your intermittent strategy is. Will you buy just before the close if the S&P 500 is down 3 points intraday? 5 points? 10 points? Once you determine that, set up a spreadsheet and download historical data from Yahoo Finance or similar.
An unrelated way to explain this is that if you play with a DRIP calculator, for a stock in a long term descent, not reinvesting dividends loses less money, and vice versa for an up trend. The price of subsequent investments determines the success of the strategy.