Systematic Investment Plan – Decades of Investing or just some short term accumulation? “A Stress Test”…

Systematic Investment Plan, SIP (Dollar Cost Averaging as known in the overseas world) is an evergreen darling concept for investors, financial advisors, distributors, market gurus, product manufacturers (investments or insurance) etc.

But, has anyone shown you a Stress Test on, what would happen to the accumulated corpus if there is a market crash towards the end phase of accumulation?

Does SIP make sense or not?

Well, its pretty simple if we look at the numbers.

SIP doesn’t work in one’s favour if there is a fairly large market crash hitting like a tsunami, say a 50% correction; especially during the first 10 or 15 years of accumulation.

The numbers say it all.

Can a 10 year SIP go into negative capital?

YES, IT CAN.

At a CAGR (Compounding Annual Growth Rate) of 12% on a SIP investment for 10 years, if there is a crash of 50% in the investment value at the end of the tenor – YES, one’s invested capital goes into a NEGATIVE TERRITORY.

So, should we say NO to SIPs?.

No, that isn’t the idea here.

It’s just to ‘Be Aware’ that a SIP is not a full proof investment even for a 10 year period.

So, what’s an ideal tenor for a SIP.

I would say, ‘DECADES OF SIPping’

That is when a Strong Muscle is built into both the capital and the accumulated corpus.

e.g. on a 30 year SIP, @ 12% CAGR, the capital grows by about 9.8 times; but, when a crash of 50% happens, one is still comfortably placed at about 4.9 times the capital value. One doesn’t lose the capital; in fact, one gained a decent return over the capital. But, the same isn’t true on a 10  / 15 year SIP.

Theories of moving goal oriented money away from the market into safer options a couple of years before the goal etc. always remain.

Once again, the idea here is not to move away from those sensible money management decisions.

It’s just to reiterate that, a SIP is actually a ‘Multi-decade Sensible Investment Plan (M-SIP)’ and is a ‘Dam’ built to accumulate money. If the market flood strikes a big blow, the Dam just cracks a little, but is not completely broken. Bottomline, ‘longer the SIPping, the better it gets’.