Last week’s post “Risk and Return in Pictures” received some requests to chop up the data in different ways, so this is the second follow up post to try to do just that. I suggest taking a look at the original post by clicking here if you want a refresher, and then also take a look at Risk and Return in Pictures Part II by clicking here.
Dollar Cost Averaging
A reader indicated that it would be interesting to see the results of Dollar Cost Averaging versus Lump Sum investing when looking at these portfolios. What the readers want, the readers get… sometimes. This happens to be one of those times. :)
First, I only took three sample portfolios: All Equity, 50% Equity and All Fixed Income. This should be enough to tell us what we want to know. Let’s start by looking at the full period I had previously used, January 1988 to August 2008:
The total amount invested would’ve been $24,800 in all three cases and the all equity portfolio had 28.64% more value when compared to the all fixed income portfolio ($76,277 versus $59,296).
Next, let’s look at $100 monthly starting at the peak of the tech bubble:
In this case there were only 96 months, so the total investment would’ve been $9,600. The all equity portfolio had a 26.94% advantage over the all fixed income portfolio at the end ($15,414 versus $12,143).
And finally, let’s look at $100 monthly starting at the bottom of the market after the tech bubble burst:
This was the shortest time period and had only 71 months and $7,100 invested. The all equity advantage was 27.30% over the all fixed income portfolio ($10,576 versus $8,308).
In all three cases, the All Equity portfolio returned superior results when using dollar cost averaging versus the All Fixed Income portfolio. The conclusions are not as clear as you would think though. Over time as more money is invested the volatility differences between portfolios would increase – eventually you get to a point where the monthly fluctuations in the portfolio become larger than the amount of money you are adding monthly. As always, there is more to discuss and I will revisit these graphs in the future.