Listen to this articleThe stock market goes through cycles. Two of the most important stock market cycles are the bull(Top) and bear(Bottom) markets. Once the Bull Phase or Bear Phase starts, a few years can go by.
Sometimes, investors find it difficult to decide whether to begin a systematic investment plan (SIP) and whether to continue making investments during a certain market phase. Is there really a right time to start your SIP?
Let’s find answers through a detailed analysis of the data from the last 27 years!
Table of Contents
1.) Predictictability of Market Cycle
2.) Top vs Bottom – Analysis of S&P BSE Sensex TRI
3.) Points To Ponder
4.) Don’t Stop!
5.) Conclusion
1. Predictability of Market Cycle
Let’s accept that it is impossible to consistently predict the exact Top or Bottom of a Market Cycle.
At best, one can create and follow a valuation checklist whenever one deviates from their Strategic Asset Allocation, which should help investors reduce portfolio-level volatility to some extent while participating in the equity market.
But still, let’s assume one has some magical power, can predict the exact Top and Bottom, and wants to start a long-term SIP. So, should that investor start SIP at the Top of the cycle or the Bottom?
2. Top vs Bottom – Analysis of S&P BSE Sensex TRI
This well-detailed and in-depth analysis uses long-period data of S&P BSE Sensex TRI (last 27 years). This research analysis took all those periods when the equity market has fallen more than 20% from its Top.
The table below is the investment summary of two investors, one who started a Rs. 10,000 monthly SIP at the Top of various market cycles and the other at the Bottom:
| Market Cycle | SIP Start Month | S&P BSE Sensex TRI Levels | Market Correction (%) | Correction Tenure (Months) | SIP Period (Years) | Amount Invested(in Lakh) | Valuation as on 30-Sep-23(in Lakh) | Difference in Invested Amt.(in Lakh) | Difference in Final Value(in Lakh) | SIP XIRR (%) |
| 1 | Sep’96 Dec’96 | 3,563 2,803 | -21% | 3.3 | 27.126.8 | ₹ 32.5 ₹ 32.2 | ₹ 334.7 ₹ 322.4 | ₹ 0.3 | ₹ 12.2 | 14.4% 14.4% |
| 2 | Aug’97 Nov’98 | 4,617 2,888 | -37% | 15.7 | 26.224.8 | ₹ 31.4 ₹ 29.9 | ₹ 301.8 ₹ 260.7 | ₹ 1.5 | ₹ 41.1 | 14.6% 14.8% |
| 3 | Feb’00 Sep’01 | 6,313 2,874 | -54% | 19.3 | 23.622.0 | ₹ 28.4 ₹ 26.5 | ₹ 222.4 ₹ 180.3 | ₹ 1.9 | ₹ 42.1 | 14.9% 15.0% |
| 4 | Jan’04 May’04 | 7,168 5,229 | -27% | 4.1 | 19.719.4 | ₹ 23.7 ₹ 23.3 | ₹ 106.3 ₹ 100.7 | ₹ 0.4 | ₹ 5.7 | 13.5% 13.4% |
| 5 | May’06 Jun’06 | 15,186 10,790 | -29% | 1.1 | 17.417.3 | ₹ 20.9 ₹ 20.8 | ₹ 70.5 ₹ 69.8 | ₹ 0.1 | ₹ 0.8 | 12.7% 12.7% |
| 6 | Jan’08 Mar’09 | 25,756 10,216 | -60% | 14.0 | 15.714.6 | ₹ 18.9 ₹ 17.5 | ₹ 58.5 ₹ 49.8 | ₹ 1.4 | ₹ 8.7 | 13.2% 13.3% |
| 7 | Nov’10 Dec’11 | 26,968 19,759 | -27% | 13.5 | 12.911.8 | ₹ 15.5 ₹ 14.2 | ₹ 39.4 ₹ 33.7 | ₹ 1.3 | ₹ 5.7 | 13.5% 13.9% |
| 8 | Jan’15 Feb’16 | 29,844 22,951 | -23% | 13.0 | 8.77.6 | ₹ 10.5 ₹ 9.2 | ₹ 19.8 ₹ 16.3 | ₹ 1.3 | ₹ 3.5 | 14.2% 14.8% |
| 9 | Jan’20 Mar’20 | 41,953 25,981 | -38% | 2.2 | 3.73.5 | ₹ 4.5 ₹ 4.3 | ₹ 6.0 ₹ 5.7 | ₹ 0.2 | ₹ 0.3 | 15.6% 16.3% |
3. Points To Ponder
i) It is interesting to note that while the % return is marginally higher for SIPs started at the bottom of the market cycle, the absolute gain in the rupee term (Wealth Creation) is far higher for SIPs that began at the top.
ii) The “Cost of Delay” of starting SIP late can be huge over the long term. The longer the market takes to reach the bottom, the higher the “Cost of Delay” keeping all other things constant.
iii) Even the marginal difference of % return goes away over the long-term, irrespective of whether you started at the top or bottom (refer to the return difference for SIPs during the first 6 Market Cycles, i.e. in long-term).
4. Don’t Stop!
It could be tempting to stop a systematic investment plan (SIP) when the markets are down.
However, you don’t have to time the market with SIPs! All you have to know is that, in the end, your SIP will be successful, even if there are temporary ups and downs.
Your investing goals shouldn’t be dashed by transient downturns, If your assets are distributed over a longer period of time and among a variety of investment types, there is less chance that one bad year would derail your entire plan.
This kind of volatility makes regular SIP investments extremely important.
5. Conclusion
Please keep in mind that because the market is unpredictable, there is never a perfect time to start your SIPs. This is because it’s unclear if the present high will herald the beginning of a declining trend or the creation of new highs.
For this we should understand what type of investment we are making, in this case, it is SIP, which is designed for a long-term investment approach.
If you are serious about investment and someone who is still searching for the right investment approach on social media platforms like Quora, Facebook, Twitter, etc. A professional financial planner can come up with a comprehensive plan that best suits your individual goals.
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