Always buy cheaper than market - Not clickbait - extremes
TLDR - What happens when this formula is applied during market extremes - bull and bear periods
Almost 6 months ago, i made a blog post about an option to buy stocks / ETFs cheaper than the market price in a post here. It is not rocket science, it is simply executing a limit order spread across a week / month or whatever time frame you see fit. You read about the steps in detail here.
I was discussing this post with the Singapore Financial Independence Retire Early telegram group and Isaac one of the active members of the forums raised a very valid point on trying to back test this approach during extreme market conditions.
So that is what i did. I used the same ETF (Reliance NIFTY JUNIOR BeES ETF) from the original example to keep things consistent and went through two extreme scenarios - an extreme bull case and an extreme bear case to see how this way of purchasing stocks and ETFs work.
Reliance NIFTY JUNIOR BeES ETF - This ETF tracks NIFTY NEXT 50 index, or in simple terms the 51st to 100th largest companies by market capitalisation listed in NSE.
Here is a price chart of the ETF from 1-Jan-2005 to 19-May-2019. I have highlighted the two extreme cases for the bear and bull scenarios as below.
Source: moneycontrol
Assumptions
SIP
Systematic Investment Plan (SIP / DCA) triggered on the first business day each month
SIP amount of 10,000 Rupees
At the end of the investment period of 18 months how many units did SIP investor get and what is the average price of purchase
Assume purchase price is end of day price for the day the SIP is triggered
Discount
Discount model assumes a limit order at 2% discount to start of the month price, order valid till end of the month
Amount of 10,000 rupees every month
At the end of the investment period of 18 months how many units did SIP investor get and what is the average price of purchase
Assume purchase price is end of day price for the day
If for any reason the price is not hit, we skip for the month and continue to the next month so there is no spill over of unused funds to the next month.
Bear case
I picked the period of the global financial crisis for the bear case. The global stock markets were crashing and this index was no exception. The period i chose for this is 1-Jan-2008 to 1-Jun-2009.
As you can see from the example, the price drop of the ETF was significant during this period and with some bouts of stabilisation in between. This led to the discounted option not triggering in certain months and not consistently capturing the fall.
Clearly with an average price of 61.34 vs. 64.2, SIP is the clear winner in the bear market
Bull case
For the bull case, I have used the period from 1-Jan-2017 to 1-Jun-2018. The markets had a clear upward trend and with very little periods of stabilisation.
Again, given the constant upward trend and hardly any sideways movement, the discount rate option simply does not get triggered in most months. So the amount invested compared to SIP also suffers.
At an average price of 277.82 vs. 282.16 and total amount invested at 177K vs 88K, SIP option is a clear winner here during the bull market.
Conclusion
When the market is at it extremes both during a bull or bear periods, timing the market doesn’t work. So stick with your SIPs. But having said that, back testing using the perfect extreme bull and bear scenarios is only possible in hindsight. 95% of the time the market is taking 2 steps forward and 1 step back outside of these extremes. I am still going to continue using this method of purchasing.
What are your thoughts on this? Do you disagree, what would you do differently.
Leave your comments below.
