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The market volatility in today’s time is quite high as there are multiple developments across the globe taking place simultaneously. From the Ukraine-Russia war and consequent soaring inflation to high aggression in increasing interest rate hikes to the new worry of a potential financial collapse of Credit Suisse (SIX:) and Deutsche Bank (ETR:), etc. is too much for market participants to take everything into consideration.
However, this volatility is not just the enemy of investors but can also become favorable if they know how to capitalize on it. SIPs (Systematic Investment Plan) is one of the ways to counter high volatility. For the uninitiated, SIP is a way to invest in stock (or any other asset) in a systematic way, by periodically investing a fixed sum of money. This helps investors to capitalize on lower price levels which are seen on the screen on account of volatility. Sometimes investors also buy at the high, but over a longer period doing this repeatedly averages out the price and gives decent returns if the primary trend of the asset is upwards.
One of the biggest benefits of SIPs is that it removes the need for timing the market. Although, I believe that timing the market is possible (in a probabilistic way) and can definitely yield higher returns but that requires a decent understanding of the current market structure, the tools to identify turning points of the market, more screen time, etc. Timing the market does not mean catching the exact top and exact bottom, rather it means identifying these turning points with a leeway of a few percent. Obviously, not every time one would be able to do this.
But not everyone has the time to put in the sheer amount of effort to hone their skills in technical analysis and therefore SIP is a good alternative to it. As mentioned earlier, investors keep a fixed sum and decide on a fixed interval to invest and keep on repeating the process perpetually, irrespective of the price at the time of investment.
Investors would also be happy to know that SIP works with the security that is in a primary uptrend but works better when the stock is falling as a lower price essentially fetches more shares for the same investment. Not all the time a stock remains in a primary uptrend as facing bull and bear cycles is an inevitable part of any business. Therefore, investors need to make sure that they do not stop investing when the fear is prevailing due to which the price of the stock plunges.
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