Automatic Investment Plans: Realized Returns and Shortfall Probabilities

Posted: 10 Aug 2008 Last revised: 4 Feb 2012

See all articles by Adam Y.C. Lei

Adam Y.C. Lei

Midwestern State University

Huihua Li

St. Cloud State University

Date Written: 2007

Abstract

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

Lei, Adam Y.C. and Li, Huihua, Automatic Investment Plans: Realized Returns and Shortfall Probabilities (2007). Financial Services Review, Vol. 16, No. 3, pp. 183-195, 2007, Available at SSRN: https://ssrn.com/abstract=1152854

Adam Y.C. Lei (Contact Author)

Midwestern State University ( email )

3410 Taft Blvd
Wichita Falls, TX 76308
United States
(940) 397-4403 (Phone)
(940) 397-4693 (Fax)

HOME PAGE: http://www.adamyclei.com/

Huihua Li

St. Cloud State University ( email )

Saint Cloud, MN 56301
United States
(320) 308-3231 (Phone)
(320) 255-3986 (Fax)

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