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

40 Comments

1. Thanks for this information. Based on SIP returns graph, I would interpret ‘active management’ means: Having the correct asset allocation plan and meticulous rebalancing / profit booking as per asset allocation plan. Otherwise the returns we see in SIP portfolio may get wiped of in next down period.

   1. Yes, but that is not easy to do either. Simple rebalancing strategy is enough imo

2. Thanks for this information. Based on SIP returns graph, I would interpret ‘active management’ means: Having the correct asset allocation plan and meticulous rebalancing / profit booking as per asset allocation plan. Otherwise the returns we see in SIP portfolio may get wiped of in next down period.

   1. Yes, but that is not easy to do either. Simple rebalancing strategy is enough imo

3. EXCELLENT WORK….. ASTONISHING TRUTH…………. now can u put graph (for US) inflation verses GOV bonds. it looks like bond is at least never below inflation. let us bite this bullet or bullshit also
   regards

   1. 🙂 Thank you. Good point.

4. EXCELLENT WORK….. ASTONISHING TRUTH…………. now can u put graph (for US) inflation verses GOV bonds. it looks like bond is at least never below inflation. let us bite this bullet or bullshit also
   regards

   1. 🙂 Thank you. Good point.

5. Pattu Sir,

   Thanks a lot for the wonderful article.

   A request, can you please share the excel you used to calculate the 5/10/15 year rolling returns. Also, can it be modified and used to get 5/10/15 year rolling return of SIP of a particular mutual fund, or a group of 2 or 3 mutual funds for comparison??

   Regards
   Anil

   1. I will complete the automated version where one can do this and then post it.

6. Pattu Sir,

   Thanks a lot for the wonderful article.

   A request, can you please share the excel you used to calculate the 5/10/15 year rolling returns. Also, can it be modified and used to get 5/10/15 year rolling return of SIP of a particular mutual fund, or a group of 2 or 3 mutual funds for comparison??

   Regards
   Anil

   1. I will complete the automated version where one can do this and then post it.

7. Moneylife had written about this about three years back!! moneylife.in/article/sip-smartly/26607.html

   1. And your point is? I don’t claim to publish original research here. I aware of this article and pointed out its limitations earlier.

8. Moneylife had written about this about three years back!! moneylife.in/article/sip-smartly/26607.html

   1. And your point is? I don’t claim to publish original research here. I aware of this article and pointed out its limitations earlier.

9. Dear Prof. What is the effect of holding on to say longer period say 20 or 25 years.. especially for retirement? Well the analysis does take one out of comfort zone.. I used to take 12 or 14% for my equity returns.. better to be conservative and cautious..

   1. and also does it take dividends into account?

10. Dear Prof. What is the effect of holding on to say longer period say 20 or 25 years.. especially for retirement? Well the analysis does take one out of comfort zone.. I used to take 12 or 14% for my equity returns.. better to be conservative and cautious..

    1. and also does it take dividends into account?

       1. I could not find total returns index. Dividends will increase returns by 1-2%. Longer duration will not change results

11. So what’s the moral of the story? Active mgmt matters, but What’s the guarantee that active mgmt delivers returns?

    Seems to me from the charts that even in well diversified (S&P 500 index) with a SIP, Timing matters. And I think that’s Karma or luck if one needs funds in those years when the Xirr is zero, low or negative. 🙁 may be that’s what pattu means by saying rebalancing closer to financial goals is what’s required.

    1. That there are no guarantees! Review the folio once a year, and protect it as the goal nears.

12. So what’s the moral of the story? Active mgmt matters, but What’s the guarantee that active mgmt delivers returns?

    Seems to me from the charts that even in well diversified (S&P 500 index) with a SIP, Timing matters. And I think that’s Karma or luck if one needs funds in those years when the Xirr is zero, low or negative. 🙁 may be that’s what pattu means by saying rebalancing closer to financial goals is what’s required.

13. The article seems to confuse asset allocation and portfolio rebalancing with active management. There are two investment truths that are important

    1. Asset allocation decision: Adding a small amount (say 10%) of bonds (or any other non-risky asset) to a portfolio reduces risk and/or enhances returns.

    2. Portfolio re-balancing can also reduce risk and enhance returns. (especially true when the portfolio deviates from the target allocation)

    That SIP doesn’t guarantee inflation adjusted returns or even a positive return is irrelevant. Firstly, most people don’t have a lump-sum to invest. Most people earn a salary / regular income over several decades, part of which must be invested for retirement (unlike say a film-star whose earnings peak at an early age with little or no income thereafter). Secondly even if a lump-sum is to be invested, it makes sense to spread the investment over a few years (not decades) to avoid the risk of investing at the market peak.

    1. The ‘article’ neither speaks about asset allocation or rebalancing!
       “That SIP doesn’t guarantee inflation adjusted returns or even a positive return is irrelevant.” Maybe for you. I and not a “film star” and I dont have a lump sum to invest.
       Btw neither of those two strategies can guarantee a real return.

14. Thanks Pattu and a nice one. It would be an interesting analysis for the what-if scenario of – how would this play out while combining the equity and bond (say in 50:50 ratio) and maintaining it all through in each month of the 15 yr period.
    Is the final return over the inflation (always?) and by how much (in percentage terms considering inflation as the base)?

    And that IMO, is all that an individual investor should worry about!

    1. Thanks. Don’t think such a folio will not always beat or even match inflation too. If 50% of your folio returns 0% or negative, your net portfolio return would not be much!

       1. sir,
          but what happens if a US like scenario happens , where equity (some times ) give ZERO or negative and DEBT may be GOVT debt at least gives better than inflation, (as per your analysis). or it can not happen in MY INDIA
          regards

          1. It has occurred in India between 1992 to 2002. So defintely possible.

       2. Hi Pattu, actually, juxtaposing (and to a large degree, negative correlation between the equity and bond trend line) of the two graphs of the S&P500 gave me that impression – of, having a mix of equity and bond would have ‘nearly always’ beaten inflation – but, i might be wholly wrong 🙂 and looking more closely, the y-axis scale difference might have did me in 🙁

          But, using this data set – on the quest of a combination that would have beaten inflation ‘always’ and to elaborate on my first comment of maintaining the ratio (month over month between the equity and bond), is basically re-balancing (which, in practice would complicated for an individual investor (on a monthly basis at-least), but a good starting point to align our thoughts).

          You know where im going with this 🙂

          1. What happens in an active managed folio cannot be backtested. For a simple index equity and index bond fund, the answer to, would it have beat inflation if present is 50:50 ratio, the answer is no. It is impossible if one asset class returns 0% or less than that.

             1. Ah yes, i do see that. For this combinatorial exercise, i meant simple index equity and GOV bond (same as the S&P500 index, bond and the inflation data set used for this post).

                The only thing left is to see is – would not the constant re-balancing for the equity portions (yes index one), not end up at-least give a bond like return? Thus bringing us closer/bettering the inflation line..

15. Hi Pattu,

    Good Article and it raises a interesting question..It would be interesting to see what are the number of periods for which the XIRR is greater than a certain return(lets say 12%).For example for the 10-year rolling SIP returns ,by looking at the graphs I think we can argue that for most of the 308 10 year periods the return has been more than 12%(although I cannot tell the exact numbers))

    Can you please update(if its not too much work) the post with the numbers for the number of periods for which the returns are more than 12%(or any reasonable number)?

    1. Let us say that we can argue that way. It does not change the central result that your return after a 15Y sip could be quite low – lower than inflation.

       1. Yes.I do accept that your statement is true”Notice how strongly the return depends on when you start the SIP!!! “.But shouldn’t that be balanced by the fact that if we invest in an SIP for over 15 years probability of getting returns less than inflation is very low(as per the number of data points in your graph).It would be interesting and helpful for me if you can update the blog post with the number of periods for which the returns are less than inflation

16. Hi Pattu,
    Just a thought if you can add index PE, I am thinking if positive xirr corresponds with a certain low PE ?

    1. Hi, Have a look at this: Are Mutual Fund SIPs Suitable for Disciplined Long-Term Investors?

17. Pattu Sir
    If the Moral of the story is that – There is no guarantee that SIP will work for any number of years then is there any justification of continuing SIP in MF? Instead at least trying to timing the market as far as possible (not very hard pressed just simply trying) and invest lumpsum manually seems to be the more optimum strategy w.r.t. investing in MF. In that case the famous notion of MDBSC* rocks does not hold any more …. what is your opinion?

    1. Where is the guarantee that timing the market will work?!

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