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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.

Some definitions:

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.

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Suppose you invested in a stock market index only when it was "high" and compared the return obtained with that from an investment made only when the index was "low", how much do you think the returns would vary? How would these returns compare with an investment made regardless of index levels? Let us find out.

In real-time, market highs and lows cannot be determined. Therefore, it is common practice to compare the current value of the index with the average value of the last 100 days, 200 days, 365 days, 10 months etc. This is known as trend following. The average reduces the daily noise in the index values and provides a "trend'. Here are some examples: Nifty Valuation Charts Nov 2016: PE, PE, Div Yield, ROE, EPS Growth and a tool to calculate: Nifty Valuation Analyzer: PE, PE, Div Yield, ROE, EPS Growth Rate.

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Reinvesting stock dividends can make a huge impact on your wealth over the long term. To illustrate this, we first consider how a total returns index is calculated by assuming dividends are reinvested. Thanks to Prof. Robert Schiller for making monthly S & P 500 data available from 1871 for calculating the Schiller PE with the trailing 12-month dividend yield.

Thanks also to DQYDJ (Don't Quit Your Day Job) for making a fantastic online calculator based on the above data. Without this, I could not have constructed the S& P 500 total returns index from the price index from Jan 1900 (the earliest date that Excel will allow). Without this, I would have thought there is a mistake in the total returns index calculation and given up!

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I am not a mutual fund salesmen. Therefore I have no problem in pointing out that a mutual fund SIP, in particular in an equity mutual fund  does not reduce the risk associated with the equity market in any way. All a SIP does is buy units at different market levels. Some high, some low. No matter when you buy, the corpus accumulated is exposed to the full volatility of the market. If it crashes, then when you purchases those units (even if you did not do a SIP) will not matter.

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"How can I fund my goal if the market crashes a few years before I need the money?" is a question that I have often encountered. In this post (and the next), I address this issue with some specific examples.

An exit strategy is more important than an entry strategy

Suppose I can invest Rs. 1,000 a month and after a few years, the money has grown to Rs. 1,00,000 (more than possible seen it happen with a Rs. 500 SIP). Should I worry about when to invest 1,000 looking at market levels (aka dip buying) or should I be worried about the risk associated with the 1,00,000?

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