Nothing can beat the smell of fresh air, cold icy morning, misty days, rain, snow and falling leaves. Four seasons mimic life. You are born in the spring, live through summer, age with autumn and die with winter. These different seasons are the best environment to live in. These different seasons are caused as the Earth, tilted on its axis, travels in a loop around the Sun each year. Summer happens in the hemisphere tilted towards the Sun, and winter happens in the hemisphere tilted away from the Sun. A complete cycle of these 4 seasons is important for life to sustain on Earth. Imagine if there was only one season on earth, there would have been no water, no food and no life.
In investing too, different cycles in market are important for making money. Imagine if there were no bear cycles and market going up in a straight line? There would be no sellers and the whole journey of investing could be so boring and less rewarding. Hence, like changing seasons are important, changing market cycles are important for an investor to make money in equities. More so when you are investing through SIPs.
There are always debate about what is the right period for SIPs, how long one should do an SIP. Well, SIPs are not for 3 or 5 years, in fact there is no right period in number of years or months for SIP. But Why?
The very basic concept of SIP is to buy units at set frequency and benefit from value averaging over a complete market cycle. Now what is this complete market cycle? What is this new monster you will ask. A complete market cycle is where markets go up for a certain period of time, followed by a fall from the peak to lowest possible point and then rise back to earlier levels and go on to make a new high. The order of these events can change and can go on multiple times and it is essential that your SIP is continued across these cycles to show its best possible power of value averaging.
Let me explain why..
Imagine you do a SIP for 3 or 5 years and this period is coincided with a bear cycle, you will only buy units at lower price, but for these units to give you returns, markets will have to rise. Similarly if you do an SIP during a bull cycle, you will keep buying units on the way up. In such market you will be instead better off investing lumpsum.
Now imagine you started SIP in a falling market and continue it when markets are rising again, your units bought during falling markets will start making profits. Similarly if you continue your SIP across such multiple market cycles your chances of making a decent return from SIP will increase significantly.
SIP started in Jan 2010 till Dec 2013 generated a single digit return as market was flat and bearish, but if this SIP was continued for next 3-4 years when market moved up, the return was in double digit. Hence, let your SIP see different seasons of equity market. Go for longer period of 15 to 20 years where the probability of market witnessing multiple cycles is high which will in turn increase probability of making better returns from equity mutual funds.
Like a complete cycle of different seasons makes Earth a better place to live, different cycles keeps market alive and is important for your SIP to make more money. Embrace these different market seasons!