In the second part of the buying "low" vs buying "high" study, I consider return differences for identical investment amounts. And guess what? The results are most surprising!
For those who have not read the first part, I request that you head over to Equity: Buying “High” vs Buying “Low” and then come back.
1 Buying low (low-SIP): Buying when index (S&P 500 and Nifty total returns indices) has a value lower than its ten-month average. This is checked only once a month - on the first.
2 Buying high (high-SIP): Buying when the index has a value higher than its ten-month average when checked on the first of the month.
3 Buying systematically (normal SIP): Buy on the first of each month.
The investment amounts in the three methods have been kept similar. For example, consider a monthly SIP of Rs. 1000. After eight months the total investment would be Rs. 8000.
If I want to buy low and found that the index went below the 10-month average for the first time in the 9th month, then I will invest the Rs. 8000 saved up + Rs. 1000 = Rs. 9000 in one shot. This ensures all three methods have the same capital.
In the first part, I had not done this. There I found the difference in return between buying low and buying high was quite small. Now I perform this study for every possible 3Y, 5Y, 7Y 10Y, 15Y, 20Y and 25Y periods between
Jan 1900 to Sep 2016 for S & P 500 TRI and
Apr 2000 to Nov 2016 for Nifty TRI.
Two probabilities are considered:
1. The probability of a normal SIP beating a low-SIP.
2. The probability of high-SIP beating a low-SIP.
Results for S & P 500 Total Returns Index
Here 1347 periods implies that the number of 3Y SIP durations were tested between 1900 and 2016.
Results for Nifty Total Returns Index
Compare the very low number of periods available here. Our market is a baby and I am interested in reading too much into these numbers.
For the 7Y period, if you consider the excess return obtained when buying-low did better than a normal-SIP and such excess returns were obtained:
It was only for investments started just after a big crash (dot-com and 2008) and even here the difference is only about ~ 1% or so.
I think the data speaks for itself and no commentary is required. Happy to let my dull and boring SIPs continue
Will say this much: It is one thing to say I will invest on dips or invest during crashes etc. because it appeals to me, and quite another to insist that buying low is the best strategy.
Check out Reviews for You Can Be Rich Too
Ten reviews are available for our new book, You Can be Rich with Goal-based investing. Here is a sample:
The only book you need to get your hands on if you are lost in the financial jungle. Do it immediately. Simple, practical, crisp and precise.
The best gift that a young earner can receive.Kudos to the authors. - Karthik.
Request to Write a Review
If you have read the book, please review it at Amazon/Flipkart/Infibeam/Google Play. It will make us better writers.
Buy our New Book!You Can Be Rich With Goal-based Investing A book by P V Subramanyam (subramoney.com) & M Pattabiraman. Hard bound. Price: Rs. 399/- and Kindle Rs. 349/-. Read more about the book and pre-order now!