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 ⬆️ in long run
We can multiply SIP amount in equation with risk_appetite_factor, which ⬇️ 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.
