Logic dictates that buying the lows will make you a lot richer than investing without much thought or analysis. Or, in Nick Maggiulli's own words, 'Why Buying the Dip is a Terrible Investment Strategy'.
We have all heard stories of how friends and family bought so and so share - in the latest example, bought ITC at under 150 INR and sold it at above 250 INR - all within a year - giving glorious returns of 66%. This sounds like an investors fantasy.
I looked at 10 years worth of data from the BSE index to understand how much incremental would I have made if I invested monthly (on a random day of the month) vs on, say, a 90 day low.
A systematic investment plan that is set to buy the same number of units (the amount would differ) every month - on the 1st, irrespective of the market being high or low.
An investment strategy where you analyse the market and buy units every month, but what would seem as the lowest point in the month.
An investment strategy similar to scenario 2, but in this, you buy 3x the units, every 90 days, timing the market and buying at the lowest perceived point.
Source : https://www.bseindia.com/Indices/IndexArchiveData.html
Buying on the same day every month may seem dull and even at time counter intuitive, and buying at the 90 day low, every 3 months or so, seems like the obvious choice. You track the trend daily, and then make an informed decision - but ofcourse, you can not time the market - you can make intelligent guesses, but the market may go further low or pick up.
The returns over a 10 year period, using XIRR:
In the grand scheme of the investing world, 15.1% ROI is considered very good. Ofcourse 16% is better, but 16% is the highest possible return, possible in hindsight, it's often impossible to know which is the exact day when the market would hit its 90 day low every 3 months.
The unlikely best strategy
Some of you may quite rightly point out - instead of regularly investing in the stock market, a lumpsum invested in March of 2020, March 24th to be exact, would have more than doubled in 18 months (March 24, 2020 to September 7, 2021) giving a spectacular ROI of 2.1 times or 113% growth. It's the stuff of dreams, but, and there is a BUT.
- That kind of stock market crash comes once in decade, and may take 12 months to recover, or sometimes, decades - as seen during the Great Depression
- To have that kind of courage and risk appetite to go all in, when everyone around is frantically selling their investments, is rare - to say the least
- In hindsight, everything is crystal clear. Almost like watching a ship in stromy seas from a drone, 'Ah, the ship should have ideally taken that course'. But when you are the captain, and there's a storm up ahead, it will require years and nautical miles of experience and a bit of luck to safely wade through