Use the Dip

The perpetual battle between optimism and skepticism, fear and hope drives investor behavior to sit on cash and wait for the dip.

Different people have different take on it.

However universally financial advisors and experts seem to agree that for average retail investor it is better to invest using methods like Dollar cost averaging (popularly known as Systematic investment plan or SIP in India).

Buying the dip can produce positive results (especially in hindsight) if you are able to buy the dip.

However, in our actual experience most investors waiting for the dip become even more paranoid when the dip comes fail to act/react and end up missing it.

Nick Maggulli (Twitter avatar @dollars and data) had recently shown how investors will find it tough to execute “buy the dip”.

I believe while buying the dip might be difficult and dealing with the psychological impact of the dip and calmly executing the strategy might be even more straining on the investor.

However, is there an opportunity to “use the dip”.

Since 1998 January, (I took this date as this is pre-dot com bubble when markets were still on an upswing), there have been 57 instances of markets falling by 5% of more during a week.

We are talking about 1235 weeks here.

An investor using weekly SIP (Dollar cost averaging) of INR 100 would have saved INR 123500 over this period.

However, if the same investor would have set-up a rule to use every 5% dip to increase the weekly contribution by 4X, thereby saving INR 140,500, the result would have been dramatically different.

In-fact high time Mutual Funds provide this option to investors to automate the process and help an investor not only save but even invest more.

While this is highly intuitive, lot of investors keep focus on trading, the new investments ideas and waiting for the dip, that they are not able to focus on something which is simple and intuitive to execute.

Happy investing and “stay the course”