Automatic Investment Plans: Realized Returns and Shortfall Probabilities
Posted: 10 Aug 2008 Last revised: 4 Feb 2012
Date Written: 2007
We compare the realized returns and shortfall probabilities of automatic investment plans with those of lump sum investments. We do not assume a cash position and we use bootstrapping techniques to assess the performance differences. Our results indicate that the levels of realized returns from these two strategies are statistically identical for investment horizons from 1 year to 40 years, regardless of whether we take return autocorrelations or business cycles into account. Automatic investment plans, nevertheless, have higher shortfall probabilities for intermediate horizons. Investors relying on automatic investment plans should consider these probabilities and adjust their asset allocations accordingly.
Keywords: Dollar cost averaging, Bootstrapping, Simulation
JEL Classification: C14, C15, D14, G11
Suggested Citation: Suggested Citation