The previous two studies on buying “low” vs. buying “systematically” pointed to the surprising regularity with which systematic investing does better (or at least as well as – good enough).
In response to this, many suggested that in order to ensure buying “low” wins, I should ensure the cash that is put away waiting for the right “time” to invest in the market should not be idle and should be allowed to grow in a suitable instrument (liquid fund, ultra short-term fund etc.).
Therefore, in order to allow buying “low” to win, I have assumed that such cash grows at the rate of 8% a year or 0.64% monthly (1+0.64%)^12 = (1+8%) . We assume no tax need be paid, no exit loads exist and the return will be set in stone for as long as we would invest. Anything for good old buying “low”.
With these assumptions, we repeat the previous study with the Nifty TRI and S &P 500 total return indices. Three types of investments will be considered as before:
Normal SIP – buying on the first of each month, regardless of index level.
Buying Low – buying on the first of each month only if the index is less than the last ten months average (10MMA). This is a good enough replacement for the 200 DMA as established before. Nothing Earth shattering is going to happen by choosing a different moving average.
Buying High – buying on the first of each month only if the index is more than the last ten months average. No one is going to invest this way, but the aim is find out how good or bad buying high as an option is. If buying high does not matter much, then for sure, buying every month is does not matter too.
For the last two options, we will assume that cash stored away is invested when the time is right. For example, if Rs. 100 is the month investment made via a normal SIP, and if the index was above the 10MMA for say, 7 months, then in the eight month, Rs. (100 x 7)+ interest earned at 8% (p.a) + Rs. 100 would be invested.
In all three cases, the total investment is adjusted to be the same in the final purchase. If this is not made, the low-SIP (or high-SIP) could have a total investment as low as 50% of the normal-SIP.
It is important to recognize that the cash is only invested for a few months. It will earn a constant monthly interest and not the full 8% (p.a). If your liquid fund investment of four months has a XIRR of8%, it only refers to an annualized return of 8%. It does not mean money has grown at 8% each month!
XIRR is a non-intuitive approximation. A higher corpus does not mean a higher XIRR! They are distinctly different.
Results for Nifty TRI with 8% debt return
The results of idle cash (debt return = 0%) and active cash (debt return = 8%) are compared below for 5Y, 10Y and 15Y.
Normal higher corpus = probability of normal-SIP providing a higher corpus than low-SIP.
Normal high-SIP corpus = probability of high-SIP providing a higher corpus than low-SIP.
Normal higher return = probability of normal-Sip providing a higher return (XIRR) than low-SIP
High Sip higher return = probability of high-SIP providing a higher return (XIRR) than low-SIP.
Notice that over 5Y and 10Y periods (bet. Apr 2000 to Nov. 2016) when the cash is active, the probability of normal-SIP outperforming the low-SIP reduces significantly. However, it is not low enough to claim the low-SIP strategy is better. There is no change in return probabilities, but let us put that down to a XIRR quirk and ignore that
Even during the periods when the low-SIP corpus, was higher than the normal-SIP corpus, the percentage difference in corpus (blue dots below) was quite small.
How that be? Is it not common sense that low-SIP should win? And low-SIP should win at all costs, should it not? Somaybe this study should be repeated with a tax-free, exit-load free, fixedincome return of 14% (monthly?)?
Results for S & P 500 with 8% debt return
If I choose the active cash return to be 8%, this is what we get for a studybetween July 1901 to Sep 2016 –whopping 1143, 25-year periods.
The probability of a normal SIP getting a higher corpus than a low-SIP drops by 21% when the debt return goes from 0 to 8%. The trouble is, 8% fixed income return is unrealistic for the US market (except for short periods in history).
Therefore I think 4% is a more realistic fixed income return. Even this is for long-term bonds. The money market returns would be lower. When re-tested with 4%, the numbers did not differ much from 0% debt return.
Amusingly, only 37% of the 1143 25 year periods, the equity return was greater than 8%! And about 36% of the times, the equity return was less than 4%!
So there you have it. The normal SIP is pretty decent way to invest. Buy low if you wish to, but do not assume that it is a better strategy. There is no evidence to back that up.
Couple of caveats associated with systematic investing.
Risk management is crucial and is possible without stopping the systematic investing.
Systematic investing does not mean investing in the same fund or security. It just means, investing with a set asset allocation each month.
Systematic investing does not mean investing on the same day each month. It just means once a month on any day convenient without recourse to index value or market valuation.
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