In my experience, investors sitting on a lot of cash are usually worried about equity valuations or the economy, and tell themselves and others that they’re going to buy gobs of stock after a crash. The strategy sounds prudent and has common sense appeal—everyone knows that one should be fearful when others are greedy, greedy when others are fearful. But historically waiting for the market to fall has been an abysmal strategy, far worse than buying and holding in both absolute and risk-adjusted terms.

Using monthly U.S. stock market total returns from mid-1926 to 2016-end (from the ever-useful French Data Library), I simulated variations of the strategy, changing both the drawdown thresholds before buying and the holding periods after a buy. For example, a simple version of the strategy is to wait for a 10% peak-to-trough loss before buying, then holding for at least 12 months or until the drawdown threshold is exceeded before returning to cash. This strategy would have put you in cash about 47% of the time, so if our switches were random, we’d expect to earn about half the market return with half the volatility.

The chart below shows the cumulative excess return (that is, return above cash) of this variation of the strategy versus the market. Buy-the-dip returned 2.2% annualized with a 15.7% annualized standard deviation, while buy-and-hold returned 6.3% with an 18.6% standard deviation. Their respective Sharpe ratios, a measure of risk-adjusted return, are 0.14 and 0.34, meaning for each percentage point of volatility buy-the-dip yielded 0.14% in additional annualized return and buy-and-hold yielded 0.34%.