Last Updated on December 29, 2021 at 6:25 pm
Many investors make the mistake of believing what seems logical will actually work in the stock market! Take the case of buying on market dips. Many believe if they invest a lump sum when the market has fallen, they would make more returns and consider this a form of market timing (it is not!).
This article busts this myth by backtesting a systematic investment and a systematic + dip investment. We also compare a systematic investment with a systematic + momentum investment and show that it is no different from dip-buying!
Systematic vs systematic + dip investment: Suppose we invest Rs. 2000 a month via SIP in equity. Let us call this systematic. In contrast, suppose we invest Rs. 1000 a month via SIP in equity. The other Rs. 1000 is used for buying on DIPs. The dip signal is defined using six months and 12 months moving averages.
- If the signal = 0, the market is moving up, and the other Rs. 1000 is invested in a liquid fund.
- If the signal =1, the market is falling, and the liquid fund is redeemed and invested in equity.
- Let us call this strategy systematic + dip investing.
This is an example with Nifty Smallcap 100 – TRI.
Join over 32,000 readers and get free money management solutions delivered to your inbox! Subscribe to get posts via email! 🔥Enjoy massive discounts on our robo-advisory tool & courses! 🔥
Systematic vs systematic + momentum investment: Suppose we invest Rs. 2000 a month via SIP in equity. Let us call this systematic. In contrast, suppose we invest Rs. 1000 a month via SIP in equity. The other Rs. 1000 is used for buying when the market is moving up (momentum). The momentum signal is defined using six months and 12 months moving averages and is the opposite of the dip signal mentioned above.
- If the signal = 0, the market is moving down, and the other Rs. 1000 is invested in a liquid fund.
- If the signal =1, the market is moving up, and the liquid fund is redeemed and invested in equity.
- Let us call this strategy systematic + momentum investing.
This is an example again with Nifty Smallcap 100 – TRI.
We will backtest these strategies over 15 years using Sensex TRI data + a liquid fund and over 30 years using S&P 500 TRI data + 1Y US Treasury bill index. The results for the small cap index was recently shared in the Facebook group Asan Ideas for Wealth.
Results for Sensex TRI + liquid fund
Dip buying
We test the dip-buying strategy over 122 15-year periods for the Sensex + liquid fund (HDFC liquid fund was used as a proxy). The top panel shows Sensex TRI and the signal. The bottom panel shows the XIRR comparison. Each XIRR data point is a 15-year return.
Notice there is no difference between the two strategies. If anything, the DIP buying has produced a lower return recently. Please note, no taxes are accounted for in this backtest. So this only makes the DIP result even worse when we factor in tax.
Momentum buying
These are results for systematic investing vs systematic + momentum buying.
Again, there is barely any difference before tax!
Results S&P 500 TRI + 1Y US treasury bill
Some investors believe buying on dips will make a difference over the long term. So we consider 30 years here. There are 262 30-year return data points in the lower panels.
Dip buying
The difference between the two strategies is so tiny that we cannot tell them apart!
Momentum buying
Again the same result – no difference!
What do these results mean? The above results clearly show that waiting to buy on market dips is a useless strategy. It is a loss-making strategy if we factor in taxes! The same is also true for momentum-buying.
We want to point out that trying to buy stocks or mutual fund units at a particular time is not market timing! Market timing refers to buying tactically and selling tactically.
In this case, the outcome will depend a lot on what method is used. Some market timing strategies:
- can result in lower risk* (main aim) and lower returns (side-effect)
- and some can result in higher returns* (some times) and higher risk (the price to pay)
* Please note, lower risk or higher returns is not a guarantee. Backtests do not factor in future market movements and sequence of returns, human emotions, taxation and exit loads. All these would impact the outcome of market timing, aka tactical asset allocation.
No single strategy would work for all markets and at all times, including systematic investing! See: How the fate of your mutual fund SIPs is decided by timing luck!
How we invest is only one side of the coin. How we manage the risk at the portfolio level and ensure enough money for our future needs (regardless of returns!) defines investing success.
🔥Enjoy massive discounts on our courses, robo-advisory tool and exclusive investor circle! 🔥& join our community of 5000+ users!
Use our Robo-advisory Tool for a start-to-finish financial plan! ⇐ More than 1,000 investors and advisors use this!
New Tool! => Track your mutual funds and stock investments with this Google Sheet!
We also publish monthly equity mutual funds, debt and hybrid mutual funds, index funds and ETF screeners and momentum, low-volatility stock screeners.
- Do you have a comment about the above article? Reach out to us on Twitter: @freefincal or @pattufreefincal
- Have a question? Subscribe to our newsletter using the form below.
- Hit 'reply' to any email from us! We do not offer personalized investment advice. We can write a detailed article without mentioning your name if you have a generic question.
Join over 32,000 readers and get free money management solutions delivered to your inbox! Subscribe to get posts via email!
About The Author
Dr M. Pattabiraman(PhD) is the founder, managing editor and primary author of freefincal. He is an associate professor at the Indian Institute of Technology, Madras. He has over ten years of experience publishing news analysis, research and financial product development. Connect with him via Twitter(X), Linkedin, or YouTube. Pattabiraman has co-authored three print books: (1) You can be rich too with goal-based investing (CNBC TV18) for DIY investors. (2) Gamechanger for young earners. (3) Chinchu Gets a Superpower! for kids. He has also written seven other free e-books on various money management topics. He is a patron and co-founder of “Fee-only India,” an organisation promoting unbiased, commission-free investment advice.Our flagship course! Learn to manage your portfolio like a pro to achieve your goals regardless of market conditions! ⇐ More than 3,000 investors and advisors are part of our exclusive community! Get clarity on how to plan for your goals and achieve the necessary corpus no matter the market condition is!! Watch the first lecture for free! One-time payment! No recurring fees! Life-long access to videos! Reduce fear, uncertainty and doubt while investing! Learn how to plan for your goals before and after retirement with confidence.
Our new course! Increase your income by getting people to pay for your skills! ⇐ More than 700 salaried employees, entrepreneurs and financial advisors are part of our exclusive community! Learn how to get people to pay for your skills! Whether you are a professional or small business owner who wants more clients via online visibility or a salaried person wanting a side income or passive income, we will show you how to achieve this by showcasing your skills and building a community that trusts and pays you! (watch 1st lecture for free). One-time payment! No recurring fees! Life-long access to videos!
Our new book for kids: “Chinchu Gets a Superpower!” is now available!
Must-read book even for adults! This is something that every parent should teach their kids right from their young age. The importance of money management and decision making based on their wants and needs. Very nicely written in simple terms. - Arun.Buy the book: Chinchu gets a superpower for your child!
How to profit from content writing: Our new ebook is for those interested in getting side income via content writing. It is available at a 50% discount for Rs. 500 only!
Do you want to check if the market is overvalued or undervalued? Use our market valuation tool (it will work with any index!), or get the Tactical Buy/Sell timing tool!
We publish monthly mutual fund screeners and momentum, low-volatility stock screeners.
About freefincal & its content policy. Freefincal is a News Media Organization dedicated to providing original analysis, reports, reviews and insights on mutual funds, stocks, investing, retirement and personal finance developments. We do so without conflict of interest and bias. Follow us on Google News. Freefincal serves more than three million readers a year (5 million page views) with articles based only on factual information and detailed analysis by its authors. All statements made will be verified with credible and knowledgeable sources before publication. Freefincal does not publish paid articles, promotions, PR, satire or opinions without data. All opinions will 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
- Twitter @freefincal
- Subscribe to our YouTube Videos
- Posts feed via Feedburner.
Our publications
You Can Be Rich Too with Goal-Based Investing
Published by CNBC TV18, this book is meant to help you ask the right questions and seek the correct answers, and since it comes with nine online calculators, you can also create custom solutions for your lifestyle! Get it now.Gamechanger: Forget Startups, Join Corporate & Still Live the Rich Life You Want
This book is meant for young earners to get their basics right from day one! It will also help you travel to exotic places at a low cost! Get it or gift it to a young earner.Your Ultimate Guide to Travel
This is an in-depth dive into vacation planning, finding cheap flights, budget accommodation, what to do when travelling, and 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 300 (instant download)