How the fate of your mutual fund SIPs is decided by “timing luck”

Published: May 22, 2018 at 10:40 am

Last Updated on

It is a genius plan. Simply tell the naive investor that one should not time the market and invest regularly via SIP as it will reduce risk. Convince them that automating something will make them disciplined and show them a few select data points of how rewarding this approach has been. Then the seller gets regular commissions from the investment value (not amount), the AMC gets regular AUM. Happy-happy-happy. What about the investor? Is there any proof that a SIP actually works?

Short-answer: If you look at the data without bias, the answer is NO. Unmanaged SIPs are simply subject to timing luck. Regular readers may be aware that this is a point I have mentioned time and time and time again:

A Mutual Fund SIP is Hope, Not a Strategy!

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

Beware of Misinformation: Mutual Fund SIPs Do Not Reduce Risk!

Don’t get too comfortable with equity: This is how a real market crash “feels” like

Don’t Be Fooled: SIP is NOT systematic investing!

Lessons from my SIP in Sundaram Select Midcap Fund

So why one more post? Three reasons: (1) introduce the idea of timing luck as it is a simple way to convey a basic market truth. (2) Present new results with an updated rolling SIP calculator and extended S&P 500 daily data (3) Crunching data in excel is my way out of depression.

What is timing luck?

It essentially means the reward or risk in your portfolio is determined by when you buy, sell, rebalance etc. In this context, it means, when you start a SIP determines your returns. When you start following a PE or 200-DMA strategy will determine your returns and so on. Active management will reduce this variation in returns but not eliminate it.

What return will you get if you did a SIP in a SENSEX Index fund?

Let us answer this question over different durations. If we are looking at a five year period, we will consider all possible 5Y periods from 1979 to 2018 and change the time of starting the SIP by one month. The date you see in the horizontal axis refers to the SIP start date.

Five year SIP

So there 408 blue dots, each of which is the return from a 5-year SIP in the Sensex. You can add returns from dividends of about 1% for <10 years, but also reduce about 0.5-1% due to expenses. Notice that return are 0% for many durations. This means that there is a loss and Excel cannot compute the return! Anyone with a conscience will admit that what return you will get is plain pot-luck. Of course, if I say the truth, I cannot sell SIPs.

Ten year SIP

 Notice that even a 10-Y sip reacts sharply to market ups and downs – more on this below. So what return will you get from an unmanaged SIP over 10Y?

Fifteen year SIP

Plenty of single-digit returns after 15Y too. Remember you can add 2% for reinvested dividends to the returns but must remove about 0.5-1% for expenses and about 1% for tax. And please don’t tell me there is a one lakh tax-free LTCG limit. You want that to still apply to you after 15 years?

Also, notice that the number of blue dots decreases as the duration is increased. This means that for long durations, we simply do not know what kind of returns the Indian markets will offer. We have no history. Of course, if I wanted to sell SIPs, I will not worry about such things and talk about the India growth story. Plenty of suckers around to fall for that.

Remember “time in the market” does not mean more returns! See: How can a 400% profit result only in 8% return?! Hodling to the moon Risk!

Twenty-year SIP

Twenty five-year SIP

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Thirty-year SIP

Now, don’t get carried away. SIPs themselves only came into existence in the early 2000s.  The place to look at the fate of truly long-term SIPs is the S&P 500. So in what follows we look at SIP returns from 1929.

S&P 500 30-year SIP returns

Remember that about 1-2% dividends should be added, but taxation will reduce returns to almost the same extent (depending on income levels). Also, about 0.1% or so deducted due to expenses.

Any return below 6% or so would not have beat inflation after tax and there are plenty of those. Wait a minute, how practical is a 30-Y SIP in the first place!! Of course, it is not practical, but it does illustrate one important aspect of the SIP. IT DOES NOT REDUCE MARKET RISK!!

Look at the same 30-Y return graph now plotted against SIP end date and the market movement below.

Notice how even after 30 years, the final SIP return depends on the market state when you exit. This is because all SIP does is average the buying price of your investments. Over time, you would have accumulated a lump sum which is subject to the full market risk. Now let us repeat this graph over 40 and 50 years!

S&P 500 40-year SIP returns

S&P 500 50-year SIP returns

You can SIP for a lifetime and still not escape market ups and downs!! A SIP will not reduce risk, you have to do that yourself – see below. The point I am trying to make is that an unmanaged SIP is simply too risky as you relying on luck for it to work.

Timing luck is still applicable for “buying low and selling high”

Whatever market timing strategy you use, PE, PB, DMA, etc. you simply cannot escape from timing luck but can reduce it. This is evident from the previous posts:

Want to time the market with Nifty PE? Learn from Franklin Dynamic PE Fund

Nifty 200 DMA: Buying High vs Buying Low

Is PB-based investing better than PE-based investing?

Misconceptions about the Nifty PE

So what is the solution?

1: Never ever assume you can “a lot of equity exposure” because your goals are far away.

2: Never ever start a SIP without a proper asset allocation strategy. In fact, I would say invest each month on your own and do not automate it. This way, you will have full control and change investment amounts as you please.

3: Have a clear plan of how to reduce equity. I have recently shown that even when initial returns are poor, if you reduce equity as per a set plan, you have a decent chance of achieving your target. Remember we cannot spend returns, we need money. See: How to reduce risk in an investment portfolio

4: Forget about tax and market movements. Rebalance your portfolio at least once a year. See: Managing Risk Without Stopping Mutual Fund SIPs

If you just start a SIP and assume things will be alright, you are riding your luck. SIP is merely a practical way of investing because we get paid periodically. It has nothing to do with discipline or risk reduction. Don’t listen to the sales guys or the AMCs. Learn risk management on your own or consult a SEBI registered fee-only financial planner and discuss risk reduction strategies with them.

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M Pattabiraman author of freefincal.comM. 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 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, TamilNadu Investors Association etc. For speaking engagements write to pattu [at] freefincal [dot] com

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  1. on reading this post I feel, though difficult, one should invest in small no.of good businesses either with self competence or paid expert advice rather than active, passive mf investment. Timing the market for passive mf investment is not that dirty.

    1. Did I anywhere say keeping doing a SIP no mater what? IF that is all that you infer from this post, then the message is lost on you

  2. Interesting analysis again. However, this leads to further confusion. Whenever I think of rebalancing, I tend to move further away from equity. I feel if I can meet my goals with a fixed lower ROI, it’s not worth taking the risk.

  3. Brilliant Post , Pattu. Only one thing to mention, We can continue our SIP’s , along with the rebalancing whenever required. I feel problem with investing on our own is that when to invest each month, it again take our emotional control and waiting for market correction each month.

  4. Why aren’t you doing systematic withdrawal? It would be really foolish to invest in an SIP for 15 years and withdraw everything right after a market crash like 2008. No investment adviser or mutual fund salesman would suggest that.

    The conclusion of the article will be very different if you use SIP to invest and SWP to withdraw.

  5. Why aren’t you doing systematic withdrawal? It would be really foolish to invest in an SIP for 15 years and withdraw everything right after a market crash like 2008. No investment adviser or mutual fund salesman would suggest that.

    I strongly suspect the conclusion article will be different if you use SIP to invest and SWP to withdraw.

  6. Pattu,
    What I understand from this article is that doing SIP without caring about proper asset allocation will expose our investment into timing risk. SIP is not the enemy here, manually investing every month needs lots of discipline and lots of luck too. What if you manually invest on a day of a month and then market keeps going down for next 5 days? There will be a feeling that we did not do it correctly, then next month we will be searching for more falls.
    Not everybody are as disciplined to invest every month manually. Also if we are investing for 20 years, we should not be looking at markets everyday to decide whether to invest or not.
    We wish to hear from you what are the factors you consider before choosing to invest on a particular day manually every month.

  7. Dear Pattu Sir,
    Till Date heard of Demerit of SIPs but with your presentation we have to look seriously into regular SIP investment planned to achieve goals. if Have luck :)?
    Well if
    1.)we do same analysis with Nifty50 or NN50 or some other indices like Value30, We will be getting similar results?
    2.) If we do lumsum investment with 15 Yrs Horizon, Will it be same results?

    Thanks & Regards


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