Dollar Cost Averaging aka SIP analysis of S&P 500 and BSE Sensex

Published: August 13, 2015 at 7:54 am

Last Updated on January 2, 2016

What we know as Systematic Investment Plan is an investment strategy (not a financial product!) derived from what is known in the US as Dollar Cost Averaging. Obviously the term SIP sells better(than Rupee cost averaging) !

The Indian stock market is a toddler. Sensex data is available from only 1979. Many have argued with me that stock markets should be analyzed only after liberalization- that is from the early 90’s. So that would make the market an infant, arguably a premature one at that!

The reason for saying that is, the conclusions that one usually makes like, “sell when Nifty PE is >23” etc. are all based on this short history that we have and hence unreliable. It is only when we look at market data over tens of decades, can we understand how it works and how little we understand it. Mandelbrot used over150 years of cotton prices to show to the world that the assumption of normal distribution is wrong.

What if we took S&P 500, the US broad market index, for which data is available from 1871 and studied long term SIP returns on rolling basis (explained below)?

That market has seen two world wars, recessions, terrorist attacks, assassinations, scandals to name just a few. How much has the SIP (DCA) returns varied over say, 15 year periods?

The following was done to answer that question.

Monthly S&P price data, along with inflation index, and 10 year Gov bond rates are available from 1871 here

http://data.okfn.org/data/core/s-and-p-500

Unfortunately, Excel will recognize dates only 1st Jan 1900. So we work with that.

Jan 1900 to Jan 1915 represents the first 15 year SIP period for which return (XIRR) is calculated.

Feb 1900 to Feb 1915 is the second period. We have now rolled over the investment duration. 

We roll over until May 2015 is the end date of the last 15-year period.

There are now 1025 such 15-year periods from Jan 1900 to May 2015.

Rolling SIP returns (automated version coming soon) can easily be calculated with a simple Excel macro in about 45 seconds. Then we stare at the graphs in search for wisdom.

Click on the graphs if you wish to see a clearer image.

S-&-P-500-Dollar-cost-averaging

S-&-P-500-Dollar-cost-averaging-2

 

 

The SIP returns are the same in the top and bottom graphs. The top graph has the inflation rate for the corresponding investment period. The bottom graph has the 10-year bond  interest at the end of the SIP period.

Each blue point is a 15 year SIP return. Notice many of then are zero. This means, that there is a loss. Expenses have been neglected!

Notice how strongly the return depends on when you start the SIP!!! 

For several periods, the return is zero or below inflation. Inserted the 10Y interest rate data more for information. Don’t wish to conclude anything with it.

Moral of the story: There is no guarantee that SIP will work for any number of years. Since when you start the SIP matters, active management is essential as the financial goal nears. People who recommend equity for short durations are selling products and/or have little knowledge about investment risk.

Sensex-Dollar-cost-averaging-3

Sensex-Dollar-cost-averaging-4

 

15-year rolling SIP returns

Sensex-Dollar-cost-averaging-5

 

Notice the number of times the return has fallen below 10% (before taxes).

If you want guarantees that your SIP investments will ‘work’ or help you achieve your goals, you are barking up the wrong tree.

Do share if you found this useful

Did you know? We have more than 900+ videos on YouTube to explore! Join our YouTube Community!

Use our Robo-advisory Excel Template for a start-to-finish financial plan!

Join our courses in exclusive Facebook Groups!

  • 500+ members are now part of our new course, How to get people to pay for your skills! (watch 1st lecture for free). Learn how to get people to pay for your skills! Whether you are a professional or small business owner wanting more clients via online visibility or a salaried person wanting a side income or passive income, we will show how to achieve by showcasing your skills, building a community that trusts you and pays you!
  • 1822 members have signed for Goal-based portfolio management (watch 1st lecture for free). This is an online course to reduce fear, uncertainty and doubt while investing for a financial goal. Learn how to plan for your goals before and after retirement with confidence.

Want to check if the market is overvalued or undervalued? Use our market valuation tool (will work with any index!) or you buy the new Tactical Buy/Sell timing tool!
We publish mutual fund screeners and momentum, low volatility stock screeners on a monthly basis
About the Author Pattabiraman editor freefincalM. Pattabiraman(PhD) is the founder, managing editor and primary author of freefincal. He is an associate professor at the Indian Institute of Technology, Madras. since Aug 2006. Connect with him via Twitter or Linkedin Pattabiraman has co-authored two print-books, You can be rich too with goal-based investing (CNBC TV18) and Gamechanger and seven other free e-books on various topics of money management. He is a patron and co-founder of “Fee-only India” an organisation to promote unbiased, commission-free investment advice. He conducts free money management sessions for corporates and associations on the basis of money management. Previous engagements include World Bank, RBI, BHEL, Asian Paints, Cognizant, Madras Atomic Power Station, Honeywell, Tamil Nadu Investors Association, IIST Alumni Association. For speaking engagements write to pattu [at] freefincal [dot] com
About freefincal & its content policy Freefincal is a News Media Organization dedicated to providing original analysis, reports, reviews and insights on developments in mutual funds, stocks, investing, retirement and personal finance. We do so without conflict of interest and bias. Follow us on Google News Freefincal serves more than one million readers a year (2.5 million page views) with articles based only on factual information and detailed analysis by its authors. All statements made will be verified from credible and knowledgeable sources before publication. Freefincal does not publish any kind of paid articles, promotions or PR, satire or opinions without data. All opinions presented will only be inferences backed by verifiable, reproducible evidence/data. Contact information: letters {at} freefincal {dot} com (sponsored posts or paid collaborations will not be entertained)
Connect with us on social media
Our publications

You Can Be Rich Too with Goal-Based Investing

You can be rich too with goal based investingPublished by CNBC TV18, this book is meant to help you ask the right questions, seek the right answers and since it comes with nine online calculators, you can also create custom solutions for your lifestyle! Get it now. It is also available in Kindle format.
Gamechanger: Forget Startups, Join Corporate & Still Live the Rich Life You Want Gamechanger: Forget Start-ups, Join Corporate and Still Live the Rich Life you wantThis book is meant for young earners to get their basics right from day one! It will also help you travel to exotic places at low cost! Get it or gift it to a young earner

Your Ultimate Guide to Travel

Travel-Training-Kit-Cover-new This is a deep dive analysis into vacation planning, finding cheap flights, budget accommodation, what to do when travelling, how travelling slowly is better financially and psychologically with links to the web pages and hand-holding at every step. Get the pdf for Rs 199 (instant download)
Free android apps