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John Doe's Old-Age Provision: Dollar Cost Averaging and Time Diversification

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  • Dirk Ulbricht

Abstract

Do timing and time diversification improve the average investor's stock market return? Contrary to literature's scenario of wealthy investors, average investors invest each month over life. Many purchases prevent investors from buying at peak, but horizons decrease, giving latter investments less time to offset losses. This paper accommodates timing using internal rates of return, facilitating the comparison of wealthy and average investors. One to 480 months investments in S&P and downward trending Nikkei, are compared. In conclusion, average investor's risk and return ratios improve with horizon and, compared to wealthy investors, in bullish and deteriorate in bearish markets.

Suggested Citation

  • Dirk Ulbricht, 2014. "John Doe's Old-Age Provision: Dollar Cost Averaging and Time Diversification," Discussion Papers of DIW Berlin 1376, DIW Berlin, German Institute for Economic Research.
    • Handle: RePEc:diw:diwwpp:dp1376
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    References listed on IDEAS

    as
    1. Michael Brennan & Feifei Li & Walter Torous, 2005. "Dollar Cost Averaging," Review of Finance, Springer, vol. 9(4), pages 509-535, December.
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    3. Ronald J. Balvers & Douglas W. Mitchell, 1997. "Autocorrelated Returns and Optimal Intertemporal Portfolio Choice," Management Science, INFORMS, vol. 43(11), pages 1537-1551, November.
    4. Steven Vanduffel & Ales Ahcan & Luc Henrard & Mateusz Maj, 2012. "An Explicit Option-Based Strategy That Outperforms Dollar Cost Averaging," International Journal of Theoretical and Applied Finance (IJTAF), World Scientific Publishing Co. Pte. Ltd., vol. 15(02), pages 1-19.
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    6. Malliaris, A.G. & Malliaris, Mary E., 2008. "Investment principles for individual retirement accounts," Journal of Banking & Finance, Elsevier, vol. 32(3), pages 393-404, March.
    7. Michael J. Brennan & Feifei Li & Walter N. Torous, 2005. "Dollar Cost Averaging," Review of Finance, European Finance Association, vol. 9(4), pages 509-535.
    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    Dollar-weighted return; retirement accounts; risk; cost averaging; DCA; time diversification;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G17 - Financial Economics - - General Financial Markets - - - Financial Forecasting and Simulation
    • D14 - Microeconomics - - Household Behavior - - - Household Saving; Personal Finance

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