Did some backtesting on what if we only buy when the market dips

[cclay88]

Hi, my insomnia brain wanted to test what if we buy only when the market crashes/dips. So I did some backtesting on the Nifty50 Index for the last 25 years.

I compared two strategies - 1) SIP vs 2) Buy only if the price is less than 20% of market all-time-high.

Which strategy do you think won in this backtesting?

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Turns out - both return around the same amount.



https://preview.redd.it/g2sxeewleno...bp&s=0f0d394f4e252f489629350d2871ae29605c0181

By the end of this testing period, the SIP strategy returned an amount of ₹13L, and Buy the Dip strategy returned ₹13.5L.

The takeaway is - that buying the dips is a solid investing strategy. To the point, it goes toe-to-toe with SIP. That's what this backtesting reveals.

Disclaimer: Just because it worked in the past doesn't mean it works in the future as well. I still think SIP >>>>

If you want to play around with numbers, here is the Google Sheet I used. You can copy and use it.

Also, if you want to read more about the assumptions and methodology I used, here is the detailed post.

Let me know what you think.

 

[mammabear7355]

@cclay88 Markets making all time highs is a fairly common phenomenon (for countries like India, US). So thinking that all time high means euphoria is not always right.

And hence SIP and buy the dip has given similar returns, conveying that buying the dip does not give higher edge than plain simple financial disciple based SIP

 

[cclay88]

@mammabear7355 I agree, SIP is still the king. I am just surprised an active strategy like buying the dip went toe-to-toe with SIP.

 

[cclay88]

@gvze Buy the dip usually refers to when the price is down.

But you raise an interesting point. What if we buy when the market is undervalued (in terms of PE valuation) and how it fares when compared to SIP.

 

[gvze]

@cclay88 yes . it will definitely beat the regular SIP. currently nifty is trading at 22 PE and small cap is trading at around 35 pe. where is the margin of safety in small cap? obviously it would correct. but just an yr back small cap index was at 24 PE and index at around 21 PE. that was the time to pump in money. but i was greedy and waited for a little more for the end of sideways market and missed the timing.

now i am changing my strategy - invest all through out the sideways market. pump in extra at times of correction in the sideways market. do this even if there is yrs of sideways market. currently we are at the beginning of sideways market.

small cap valuations will fall in the quarter result season and will increase again post election results. I just dont have a clue on which stocks to even track lol. nifty i believe will be in sideways market atleast for 6 months the coming yr.

 

[cclay88]

@gvze Fair enough. As you said, it's the sideways market. Not sure when the smallcap will crash though.

 

[gvze]

@cclay88 i believe it will be very stock specific. proper searching of value and valuations and growth is what will be rewarded. its the end of blanket run up of stocks this cycle at least. many stocks dont deserve the valuations they have right now, because where exactly is the proportionate earnings and sales growth in them? that will be visible in the results of this quarter. that is when there will be a crash in multiple of these counters which rose majorly due to speculation. that will also be the time when good quality stocks will be available at good valuation due to redemptions in small cap funds. but all this will be too quick.

so if fund managers and investors who truly know how to pick stocks and make exits at the right time will make a list of stocks to buy and make huge money. because india is a growing market and some of these small and microcaps with good businesses will become multibaggers.

i am a conservative investor who does not have the skill and time for stock picking so a multi cap fund is my vehicle to have some small cap exposure.

 

[piripiri]

@cclay88 Hey, thanks for the analysis. How many times did the market drop below 20% of all time high in your analysis? I think it happens rarely and can't be predicted so of course SIP is better but still curious.

 

[cclay88]

@piripiri Around 15 instances. I have counted only instances, with each instance there is quite a long period of market staying low.

 

[fodare]

@mammabear7355 But if buy the dip works just as well, then it maybe a better strategy right?
Why I say this is because such a dip maybe very rare.. Let's say once a year, so if instead of investing through sip, if I invest that money in savings account, I get 3% return plus I can anytime invest when it does dip and then get market returns in addition to the savings account interest Accumulated so far. Am I right?

 

[mammabear7355]

@fodare I agree you may earn some additional amount from the savings rate.

When I mentioned that SIP is better I was considering return on effort, not just return on investment.

My 2 cents: always optimize for return on effort, which considers time spent on something. Time is the most important currency which we all are spending each second. Outsource what can be outsourced unless you are interested in learning or it gives you happiness….

You can very well take your mutual fund returns from 12-15% avg to above 25% CAGR if you pledge the mutual funds and trade options using the margin obtained. But for that you need to invest time in learning options and then monitor your trades regularly to achieve this. I used to do it earlier but stopped now because I don’t have time to monitor the trades.

Happy with lesser return but spending time doing things I like.

Peace.

 

[fodare]

@mammabear7355 Yes agreed. I guess it comes down to personal decision to decide if the effort is worth for you..

 

[gracedaily]

@mammabear7355 Great stuff! Remember reading somewhere about a NIFTY PE based entry exit model. Roughly speaking enter when PE under 20 and exit when above 25.

SIPs make life so simple and it’s great to see them do well from your data.

 

[mammabear7355]

@gracedaily That model is a good one but not for 100% entry exit, you can withdraw or add a certain % of your corpus based on these levels but not wise to stay out of market in any situation unless your financial goal is met.

Another useful parameter is to add / go aggressive: whenever nifty monthly return is negative for 3 consecutive months. Eg: Dec-22 to Feb-23, March was flat but then it boomed, another example April-22 to Jun-22

 

[mommybiker]

@cclay88 This is the kind of content this sub needs more of. I did the same analysis a few years back, and reached the same conclusion.

I also ran an analysis of how the date of SIP in a Nifty Index fund affects the outcome, and it made a difference of less than 1% in the final portfolio value.

 

[cclay88]

@mommybiker Thank you!

Your SIP date study is interesting. I would have guessed around 2-5% difference. Surprising it's less than 1%. Maybe the day might show a difference - SIP on the first Monday vis-a-vis on first Friday. Gotta test.

 

[mommybiker]

@cclay88 Do let me know what your backtest shows.

 

[pepperbites]

@cclay88 I recently read a similar story and tried something myself for sometime. Let me share.

Let's say you do a SIP of ₹30,000 spread across 4 funds:

A - ₹7,500

B - ₹5,000

C - ₹10,000

D - ₹7,500

Assumptions:

All four funds are to fund your long-term goals (5+ years away), equity-heavy, and come with great track record of consistent returns.

I reduced the overall SIP amount to ₹25000 (keeping in mind that even by reducing the amounts, I still stuck to my goal-based approach of investing for each fund) by reducing a bit from all of the original SIP amounts, but made sure that the left over ₹5000, is actually invested in whichever fund showed least growth in the last month (% terms.). What this would do is that since these funds are all good, yet the deliver solid consistent returns over time, putting in a little extra when the performance is a bit down, somehow boosted returns over long term.

This method kind of combines the SIP route as well as making sure you put in some more money whenever there is a slight sluggish growth in short term.

Let me know what you think of this.

 

[cclay88]

@pepperbites That's interesting. You are betting on the underperforming fund to recover in the long term. It's the same I guess, instead of directly expecting market to recover, you are backing the MF to recover. The only risk is see is - sometimes the underperforming fund keeps on underperforming.

 

[pepperbites]

@cclay88 You’re right.
You can even do the reverse. Put more in best performing fund.

Or one can do mix and match of this every year in one of the funds.

This makes sure there is a bit of human intelligence also involved in the whole process.

I choose my strategy because even if the fund underperforms a while, over time, given its track record it should give me decent returns.

Plus, even with the reduced SIP amount, I know I am meeting my goals.

At the end of the day, I believe in giving the fund manager ample opportunity with my money to show his/her skills in the market. After all, that’s what they are being paid for.