For those of you who may not be aware, SIP (Systematic Investment Plan) is commonly known as ‘Dollar Cost Averaging’ in United States.
Benjamin Graham who is considered as father of value investing and security analysis and is also the mentor of Warren Buffet once mentioned:
“A suggestion I can make is that if you were sure that you could follow a dollar-averaging program, you could start [investing] right away. Dollar averaging is a method of investment under which you set aside regularly a fixed amount of money and invest it in common stocks generally, either in a single common stock or preferably in a group investment through investment-company shares (mutual funds). By investing the same amount of money at regular intervals – say, every month, you get two advantages.
One is that over the years your investment reflects the average market price rather than the high market levels – which is where you are likely to buy if you follow the crowd. Secondly, the arithmetic of dollar averaging gives you more shares at the lower prices than at the higher prices, so that your average cost is lower than the arithmetic average. If you are putting $1,000 in one mutual fund scheme and the price is $10, you’d get 100 units. If later it’s $20, you’d get 50 units. You bought more units at the $10 basis than at $20. Consequently your average price would be less than $15.”
What Benjamin Graham has said about investing regularly for a long term works well for mutual funds than an individual stock. By doing this, we are able to avoid one of most fundamental and costly errors in investing; investing money only when the markets are high and redeeming or not investing further when the markets are low.
Not only that we get average prices instead of higher prices over the long term, the average price is lesser than arithmetical average because we buy lot more when markets are low and lot less when the markets are high.
Warren Buffett has also mentioned for an ordinary investor (like you and me) the best way to build wealth is to invest regularly over a long period of time. To quote Buffett:
“If you buy equities across the board [through equity mutual funds] and you do it over time so you don’t put all your money in at the wrong time … that’s probably the best investment most people can make.”
Charlie Munger, the right hand man of Buffett, vice chairman of Berkshire Hathaway, was once asked by a young man how to get rich. Munger responded by saying “If you consistently spend less than you earn and invest it in equity funds, dollar-cost average,” because you’re putting in money every pay check, he said, “that in, what, 20, 30, or 40 years, you can’t help but be rich. It’s just bound to happen.”
Rakesh Jhunjhunwala, about whom we’ve discussed earlier, who has made billions from stock markets, has the following advice for investors:
“You should invest every month. Do take SIPs. India is a long-term bull market and predicting the market time to time is difficult. You should invest periodically regardless of the index situation. Then I hope people will earn huge return on a compounded basis.”
SIP is such a simple and effective tool. It is so effective and so simple that many great investors across the world have endorsed it as the best way for building wealth.
Assuming an 18% annualised return, every 10K invested a month, for a period of 20 years, would fetch you Rs.2.34 crores at the end of 20 years.
Based on your contribution, you can calculate the wealth potential in front of you.
As per a report given by CRISIL, published in October 2014, equity funds in the past 17.5 years have given annualised return of 22.6%. They have generated 10% additional returns when compared to the 13% given by the CNX Nifty.
I’m confident that for next 2 decades, the future would be equal if not better than past. Rakesh Jhujhunwala has mentioned that Nifty which has grown 10 times in last 15 years; from 850 to 8500 is now capable of growing 15 times in next 15 years (around 20% annualised returns).
As he has mentioned above, in the long run, we can expect around 15% to 24% from Indian markets. I’m confident that we can earn around 18%.
All we’ve to do is to stay the course with our SIPs and keep increasing the contribution periodically.
All the best.