Note:
- This methodology is NOT backtested (so, it could be bullshit). I follow this approach because it makes logical sense to me
- This method is not about how to pick the right stocks. This is about how I do SIP in the stocks that I already shortlisted based on fundamentals
What is SIP?
SIP is a methodology where an investor invests in an instrument in a periodic manner.
The metric widely used to define periodicity is time i.e, SIP is done monthly or bi-weekly or quarterly.
However the periodicity could also be dictated by price instead of time.
What is Price Based SIP?
- PBSIP is the type of SIP where you do a SIP instalment when price action gives you a signal to buy
- The time intervals between two PB-SIP instalments is uneven and dictated by price action
- The SIP instalment amount is also dictated by price action
Features of PBSIP:
- SIP amount is proportional to how far the buy price is away from 52 week high
- During downtrend, the SIP amount will be equivalent to martingale type position sizing
- During uptrend, the SIP amount will be equivalent to pyramiding type position sizing
Lets say we have 14 stocks in folio & invested 1L in each stock to begin with. Now we want to do PB-SIP
The rules:
1. Buy when Supertrend 7,5 gives buy in 1H chart
2. SIP amount=X*Y/14
where,
X: % buy signal is away from 52 week high
Y: total invested amount (=14L for 1st SIP)
Example
ASIANPAINT ST75 level in 1H is 17.7% away from 52 week high
TITAN ST75 level in 1H is 3.8% away from 52 week high
Lets say first AP gave a buy, then TITAN gave a buy
1st SIP amount in AP = (0.177*1400000/14) = 17700
1st SIP amount in TITAN = (0.038*1417770/14) = 3848
Intent here is to buy more of stocks under correction, assuming that the underlying company is quality enough that its stock price โฌ๏ธ in long run
We can multiply SIP amount in equation with risk_appetite_factor, which โฌ๏ธ with each passing year, as we inch closer to corpus target
Potential demerit of this system:
Stock with the highest % return (ex TATAELXSI) in our portfolio will have least amount invested as buy signals would have been near 52 week high
Stock under consolidation/correction (ex ITC, HUL) with lowest % return will have higher weightage
Favorable scenario :
In stock like RADICO, we SIP-ed small amount during the hyperbolic run up (Apr-Dec'21) and are SIP-ing big amount now when it is under correction
Ideal scenario:
Stocks like ITC run up big some day, and we have accumulated it enough using this methodology.
I chose ST 7,5 as it gives 10-15 buy signals in an year, which fits my requirement
One can finetune ST parameter and risk_appetite_factor as per needs
Conclusion:
Time based SIP is agnostic to price action, which I feel is non-ideal. Price based SIP potentially overcomes this.