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The corpus obtained when buying “low” or when the Nifty is below its 200 day moving average (dma) is compared with the corpus from buying “high” (nifty above 200 dma). Apologies for yet another post on this subject, but I had to satisfy my curiosity. Kindly bear with me.

Before we begin a clarification on nomenclature. As we all know, SIP is systematic investment plan. All thismeans, is investing with a system in place. Buying each month is just one of those systems. In the previous posts, I had used terms like low-SIP and high-SIP. This simply means, buying when the Nifty is below or above a certain average (10 month was used). The observation is made once a month and investing is done only the condition is satisfied.

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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.).

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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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