Dollar Cost Averaging
Average Gain – over the 4 year investing horizon (this is the cumulative gain)
Standard Deviation – calculated from the average 4 year gain
Down Periods – percent of periods where the investment value at the end of 4 years is less than the original $1,000
10% Down Periods – percent of periods where the investment value at the end of 4 years is down at least 10%
Average Loss – average of all 4 year losses (when their is a loss)
5% Improvement – percent of periods where the Lump Sum strategy produces a 10% down outcome where the DCA strategy would improve the outcome by at least 5%
The un-invested money earns interest at the rate of the 3-month Treasury Bills plus 1%. We add the additional percent to compensate for when the investor actually keep the money out of the market for more than one quarter. Presumably, they could buy longer term Treasury bonds which would pay more. The results aren’t terribly sensitive to this rate of return.
We assume that dividends are not re-invested but are paid as cash at the end of the 4 year period.
We assume no costs for transactions.