John Doe's Old-Age Provision: Dollar Cost Averaging and Time Diversification
19 Pages Posted: 7 May 2014
Date Written: April 2014
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.
Keywords: dollar-weighted return, retirement accounts, risk, cost averaging, DCA, time diversification
JEL Classification: G11, G17, D14
Suggested Citation: Suggested Citation