SIP vs. Only Buying The Dip
Everyone talks about buying the dip in the stock market. But have you ever wondered what would happen if you only bought when the market dropped?
Here’s an 18-year-long thought experiment.
Since Jan 2004, the BSE 500 has dropped by 10% or more 20 times. Yes, you read that right.
In this experiment, I’m comparing how your portfolio would have looked if you had only Bought The Dip (BTD) compared to a consistent monthly SIP.
The results will surprise you.
But first, the rules of the experiment
A Dip: a 10% drop in the BSE 500
Amount For SIPs: Rs. 50,000/month
Amount for BTD: Rs. 6 lakhs (50,000 x 12) is earmarked for one year. It can be carried forward to the following year(s) until there’s a 10% dip in the market. For example, if there’s a 10% drop in May 2004, 2.5 lakhs (50,000 x 5 months — 5 as May is the 5th month) will be invested. If the next drop is in February 2005, 4.5 lakhs (50,000 x 9 months — 9 as there are 9 months between May and Feb) will be invested.
The Results
From Jan 2004 to July 2022:
Value of 50,000/month investment- Rs. 3.7 crores
Value of only buying the 10% drops- Rs. 3.6 crores
In-house research
There’s hardly a difference in returns between the two portfolios — which is quite telling by itself. But for what it’s worth, the simple 'buy & forget' SIP approach has produced higher returns.
Keep in Mind
There’s a hidden cost while implementing the BTD strategy — the tricky challenge of keeping cash positions for too long and not getting swayed by emotions. For example, the custom-made BSE 500 BTD index rose ~50% between April 2013-June 2015. And there was not even one 10% dip in that period. Just imagine how hard it would have been to not invest liquid money during that time!
Monthly investments/SIPs are therefore a no-brainer.