Dollar Cost Averaging Today: Revisited

I looked at Dollar Cost Averaging with the Scenario Surfer. I used P/E10=26.

Variable Allocations

Invest $5000 per year into stocks (S&P500) and TIPS. Start with 0% stocks and 100% in 2% TIPS. When P/E10 falls below 16.0, convert to 100% stocks and 0% in TIPS. Stay in stocks until Year 20.

Year 20 balances. Start with $5000 balance. P/E10=26 initially.

Run 1. 256,869
20% rebalanced: 149,647
50% rebalanced: 178,050
80% rebalanced: 206,790

Run 2. 209,745
20% rebalanced: 145,056
50% rebalanced: 163,674
80% rebalanced: 178,396

Run 3. 196,698
20% rebalanced: 142,850
50% rebalanced: 156,898
80% rebalanced: 165,925

Run 4. 176,334
20% rebalanced: 138,470
50% rebalanced: 148,389
80% rebalanced: 157,118

Run 5. 141,764
20% rebalanced: 129,011
50% rebalanced: 123,820
80% rebalanced: 116,943

In all cases, the variable allocation did best.

In all except Run 5, the outcomes favored a higher stock allocation when it was fixed. In Run 5, the outcome favored a minimal stock allocation when it was fixed.

Fixed Allocation Baseline

100% stocks from the start. P/E10=26 initially.

Run 1. 287,120
20% rebalanced: 159,981
50% rebalanced: 206,767
80% rebalanced: 255,436

Run 2. 120,554
20% rebalanced: 131,161
50% rebalanced: 128,995
80% rebalanced: 124,621

Run 3. 155,647
20% rebalanced: 138,385
50% rebalanced: 146,986
80% rebalanced: 153,051

Run 4. 111,270
20% rebalanced: 131,847
50% rebalanced: 127,992
80% rebalanced: 119,244

Run 5. 265,293
20% rebalanced: 154,258
50% rebalanced: 192,500
80% rebalanced: 234,960

The 100% stock allocation was best 3 out of 5 times. It was worst 2 out of 5 times.

There was always a trend, favoring either a larger or smaller fixed allocation. When it favored a higher allocation, the 100% stock allocation was best. When it favored a lower allocation, the 100% stock allocation was worst.

TIPS Baseline

100% TIPS from the start.

Balance: 131,347

The TIPS baseline did better than the 100% stock allocation 2 out of 5 times. It did better than the variable allocation 0 out of 5 times.

Conclusion

A fixed stock allocation carries significant risk. A variable stock allocation consistently performs better. In this case, I used a very simple variable stock allocation algorithm: allocate everything to TIPS until P/E10 falls below 16.0 for the first time. Then allocate 100% to stocks through Year 20.

This was only a brief survey. It supports my previous findings. Dollar Cost Averaging Today behaves as expected.

Have fun.

John Walter Russell
January 2, 2008

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Dollar Cost Averaging Today: Edited
DCA Today: The Point of Frustration