March 29, 2008 Letters to the Editor

Updated: April 5, 2008.

Problem Opening Deluxe Calculator

I received this letter from Richard.

The deluxe calculator files in the Yahoo Briefcase look like they are supposed to be self-extracting executables. When I download them, however, I can’t open them, unzip them, or extract them. Has anyone else reported a problem, such that it might be a problem on my end? Or, is there a problem with the files in the briefcase?

Thank you.

HERE IS MY RESPONSE

At times, I have had problems with Yahoo Briefcase myself. I looked into your problem carefully.

I can open the downloaded calculator on my computer. I use Microsoft XP and the Home version of Microsoft Excel.

My wife has Microsoft Vista and Microsoft Works. She was unable to extract the calculator. Then she installed Cosmi Perfect Pro Office System software. Now she can download and extract the calculator without difficulty.

Thank you for reporting this problem. I am sure that others have experienced the same difficulty.

Dollar Cost Averaging

I received this letter from Fred.

I am rather astonished to see your endorsement of dollar cost averaging on your site. You should be aware that this strategy was thoroughly debunked as long ago as 1994. (Marshall and Baldwin, "A Statistical Comparison of Dollar-Cost Averaging and Purely Random Investing Techniques”, Journal of Financial & Strategic Decision Making, Volume 7.Issue 2) A follow-up paper reached the same conclusions in the Spring 2000 issue. Dollar cost averaging neither increases return nor reduces risk in either simulated or real market conditions. Are you unaware of these studies or do you have some basis for disagreeing with them that you wish to bring forth?

Regards.

HERE IS MY RESPONSE

Thank you for an excellent question.

Yes. I am aware of such studies. And Yes, I disagree strongly with the major conclusion.

Dollar cost averaging lowers the average price per share purchased in a sideways market. This is a mathematical fact.

Where the studies add insight is that the overall trend of the market is up. This trend is sufficiently strong to favor investing a lump sum early.

I do not know the details of these particular studies. The studies that I have seen limited the investment time frame to one or two years. They assumed a lump sum at the beginning of the period. They included no useful means to differentiate between a bull market and a bear market. All of this misses the point.

Dollar cost averaging was developed for an investor who is currently receiving income. It favors investing consistently rather than building up a cash reserve and waiting for a favorable price. The appropriate timeframe is decades, not months.

I examined dollar cost averaging in one of my earliest series of studies: “Accumulation Stage: Edited.” I use the term “switching” to refer to changes of allocation in accordance with valuations (in this case, Professor Robert Shiller’s P/E10).

Accumulation Stage: Edited

From the Conclusions:

“When valuations are very high, as they are today, stocks have a substantial downside risk. Their most likely returns are about the same as having a 100% TIPS portfolio.”

And “Translating this into plain language: you should pay attention to preserving capital as you approach retirement unless stocks are cheap. They are not cheap. They are expensive.”

These conclusions have held up.

Now is a good time to preserve capital. Today is an excellent time to invest in money market funds and other cash equivalents instead of stocks.

You can use the Stock Return Predictor (Stock Returns button on the left) to see the likely return of stocks over the next decade or two. You can train yourself on the Scenario Surfer (button on the left) to vary stock deposits with valuations for safe and reliable returns. A deposit on the Scenario Surfer is a negative withdrawal amount.

I have written several more recent articles: “Dollar Cost Averaging Today,” “DCA Today: The Point of Frustration” and “Dollar Cost Averaging Today: Revisited.”

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

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