Why SIP Is The Best Option Made For You?
There are many people who say that they can time the market. Here is what investor Vijay Kedia says,
“Only two people can buy at the bottom and sell at the top — one is God, the other is a liar.”
We all know that one cannot consistently time the market with accuracy. But let us take the case that one has the ability to buy at the market at every dip. As can be seen from Vijay Kedia’s quote above, only God can be the one who will be able to buy every dip at the bottom. We will call this ‘Buy The Dip’ strategy. As compared to this, there is another person who knows that he doesn’t have the ability to time the market, and decides to buy the index with a fixed amount. We will call this as SIP (Systematic Investment Plan) strategy, also known as ‘Dollar Cost Averaging’.
Nick Maggiulli has written a wonderful article on this comparing these two different strategies.
As can be seen from this article, the ‘Buy The Dip’ strategy underperforms the SIP strategy 70% of the time.
Source: Dollar and Data
The primary reason for this underperformance is that you are investing your money only when the next bottom comes. The problem with this is that you will constantly be piling up your cash while the person doing SIP will have his compounding engine going on for him.
The only time where the buying the bottom strategy outperforms the SIP strategy is when there is a prolonged bear market.
Let’s be realistic here. We all know that no one is capable of hoarding up loads of cash and investing all of that amount at the exact bottom. If we look at the data presented here, even the person who was able to perfectly time the bottom would underperform (for 70% of the time) the person who invests his money consistently without worrying what the market might do next.
Here’s what Terry Smith from Fundsmith says about market timing,
“There are two types of people:
- Those who can’t time the market.
- Those who know that they can’t time the market.
There is no third type.”
I think we all can agree with him. I had also written a thread on why people who try to move in and out of the market thinking that they might outperform, are more likely to end up underperforming. Do give it a read.
Timing the market might look easy, but it isn’t stress-free. Are you willing to bear the pain of holding onto a pile of cash with mediocre returns? And if you do, how long are you ready to stay out of the market. Many people think that the market might crash further and sell out their positions in order to buy at the bottom. This is what happened in March 2020. People on social media were coming out with targets of 6000 and even 4500 for Nifty when it was around 9000. There are many people who followed this advice and those might be regretting it now. Legendary investor Peter Lynch has said it perfectly,
“Far more money has been lost by investors preparing for corrections, or trying to anticipate corrections, than has been lost in corrections themselves.”
As I am writing this, Nifty is over 14000. Nobody would have thought that the market would recover all its losses within one year and go on to hit a new high. Nobody knows where the market will go from here. And that is not the question we must be worried about. The real question is what will you do irrespective of what the market does. So, the next time you think about timing the market, or you come across someone who claims to time the market, always remember that staying in the game is more rewarding than constantly moving in and out of the game.
Stay invested, and don’t let your compounding engine slow down.
Till next time.