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Building a Better Mousetrap: Enhanced Dollar Cost Averaging

Journal of Wealth Management, 2012, Volume 15, Number 1, 41-50.

22 Pages Posted: 21 Feb 2012 Last revised: 8 May 2017

Lee M. Dunham

Creighton University - College of Business Administration

Geoffrey C. Friesen

University of Nebraska at Lincoln - Department of Finance

Date Written: December 1, 2011

Abstract

This paper presents a simple, intuitive investment strategy that improves upon the popular dollar-cost-averaging (DCA) approach. The investment strategy, which we call enhanced dollar-cost-averaging (EDCA), is a simple, rule-based strategy that retains most of the attributes of traditional DCA that are appealing to most investors but yet adjusts to new information, which traditional DCA does not. Simulation results show that the EDCA strategy reliably outperforms the DCA strategy in terms of higher dollar-weighted returns about 90% of the time and nearly always delivers greater terminal wealth for reasonable values of the risk premium. EDCA is most effective when applied to high volatility assets, when cash flows are highly sensitive to past returns, and during secular bear markets. Historical back-testing on equity indexes and mutual funds indicates that investor dollar-weighted returns can be enhanced by between 30 and 70 basis points per year simply by switching from DCA to EDCA.

Keywords: dollar cost averaging, optimal investment strategies, dollar-weighted returns, behavioral finance

JEL Classification: G11, G14

Suggested Citation

Dunham, Lee M. and Friesen, Geoffrey C., Building a Better Mousetrap: Enhanced Dollar Cost Averaging (December 1, 2011). Journal of Wealth Management, 2012, Volume 15, Number 1, 41-50.. Available at SSRN: https://ssrn.com/abstract=2008465 or http://dx.doi.org/10.2139/ssrn.2008465

Lee M. Dunham (Contact Author)

Creighton University - College of Business Administration ( email )

United States
(402) 280-2637 (Phone)

HOME PAGE: http://https://business.creighton.edu/faculty-directory-profile/433/lee-dunham

Geoffrey C. Friesen

University of Nebraska at Lincoln - Department of Finance ( email )

Department of Finance
Lincoln, NE 68588-0489
United States
402-472-2334 (Phone)

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