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Charts & Analysis

Buying Below The 200 Day Moving Average

@b50 asked me a question that I

I was thinking about point-to-point returns v/s SIP.
Now while SIP has its virtues, I think it under-delivers in bull markets.
I was thinking instead of investing regularly when markets trade below 200DMA. it does take some (fairly simple) data maintenance but I think it beats SIP.
Any thoughts?

I did the analysis all the way back from 1997, about what happens if you only invest money in the markets when the market’s less than 200 DMA.

Let’s assume an investment of 10,000 per month in the Nifty if it’s above the 200 DMA, and put the rest in a debt fund yielding 7% if it’s below.

SIP vs. <200 DMA Investment 

While returns are lesser, volatility is lesser – but the problem is that you never invest enough. Only 38% of the days since 1997 have been blelow the 200 DMA, and in there, much of that has been bunched. In one case nearly four years elapsed before you could invest!

Nifty versus 200 DMA

Lastly, what about if you took all the money in the debt fund and put it back into equity if you were below the 200DMA? Again, not all that great:

Sub 200 DMA with reinvestment

There were periods of outperformance but very tiny ones – the SIP scores better.

If you’re a passive investor, it might be better to stick with a simple SIP rather than a strategy of buying in when less than 200 DMA. Having said that, there may be other strategies that work better.

You can also check variations of the above strategy: Buy more when you are further away from 200 DMA, sell at the 200 DMA crossover and so on. But these might increase the level of activity in what should be a passive portfolio strategy.

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