DCA at Year 15

I looked at dollar cost averaging (DCA) while varying allocations in accordance with valuations (Valuation Informed Indexing VII). I measured progress at Year 15.

Scenario Surfer Baseline with 100% TIPS

I invested entirely in 2% TIPS. I started with a $1000 balance. I deposited $1000 (plus inflation) each year. Here is the Year 15 balance.

TIPS only baseline:
Zero % stocks: 18,986.

Scenario Surfer Runs with Valuation Informed Indexing

I invested entirely in stocks and 2% TIPS. I started with a $1000 balance. I selected P/E10=26 Bear Market. I deposited $1000 (plus inflation) each year. Here are the Year 15 balances. I varied allocations in accordance with valuations as measured by P/E10.

Run 1.
20% rebalanced: 18,339.
50% rebalanced: 17,104.
80% rebalanced: 15,577.
Valuation Informed Indexing: 18,254.

Run 2.
20% rebalanced: 20,176.
50% rebalanced: 21,770.
80% rebalanced: 23,075.
Valuation Informed Indexing: 27,715.

Run 3.
20% rebalanced: 18,206.
50% rebalanced: 16,870.
80% rebalanced: 15,399.
Valuation Informed Indexing: 16,036.

Run 4.
20% rebalanced: 18,631.
50% rebalanced: 17,511.
80% rebalanced: 15,742.
Valuation Informed Indexing: 17,910.

Run 5.
20% rebalanced: 17,789.
50% rebalanced: 15,877.
80% rebalanced: 13,896.
Valuation Informed Indexing: 18,612.

Run 6.
20% rebalanced: 20,674.
50% rebalanced: 23,019.
80% rebalanced: 25,125.
Valuation Informed Indexing: 30,315.

Run 7.
20% rebalanced: 20,867.
50% rebalanced: 23,533.
80% rebalanced: 25,935.
Valuation Informed Indexing: 28,856.

Run 8.
20% rebalanced: 20,274.
50% rebalanced: 21,951.
80% rebalanced: 23,262.
Valuation Informed Indexing: 28,708.

Run 9.
20% rebalanced: 18,451.
50% rebalanced: 17,236.
80% rebalanced: 15,609.
Valuation Informed Indexing: 18,243.

Run 10.
20% rebalanced: 20,539.
50% rebalanced: 22,541.
80% rebalanced: 24,028.
Valuation Informed Indexing: 28,094.

Here are the ordered Year 15 balances with VII:
30,315.
28,856.
28,708.
28,094.
27,715.
18,612.
18,254.
18,243.
17,910.
16,036.

Compare this with the TIPS baseline of 18,986. The odds are about 50%-50% of a substantial improvement. The odds are about 50%-50% of a minor shortfall.

Rebalancing with 20% stocks beat the TIPS baseline 5 out of 10 times.

Rebalancing with 50% stocks beat the TIPS baseline 5 out of 10 times.

Rebalancing with 80% stocks beat the TIPS baseline 5 out of 10 times.

Scenario Surfer Runs with 100% Stocks

I invested entirely in stocks. I started with a $1000 balance. I selected P/E10=26 Bear Market. I deposited $1000 (plus inflation) each year. Here are the Year 15 balances.

Run 1.
20% rebalanced: 22,064.
50% rebalanced: 27,112.
80% rebalanced: 32,607.
100% stocks: 36,483.

Run 2.
20% rebalanced: 18,820.
50% rebalanced: 18,373.
80% rebalanced: 17,701.
100% stocks: 17,136.

Run 3.
20% rebalanced: 18,928.
50% rebalanced: 18,485.
80% rebalanced: 17,649.
100% stocks: 16,901.

Run 4.
20% rebalanced: 19,508.
50% rebalanced: 19,865.
80% rebalanced: 19,623.
100% stocks: 19,087.

Run 5.
20% rebalanced: 20,853.
50% rebalanced: 23,637.
80% rebalanced: 26,314.
100% stocks: 27,988.

Run 6.
20% rebalanced: 20,752.
50% rebalanced: 23,291.
80% rebalanced: 25,621.
100% stocks: 27,047.

Run 7.
20% rebalanced: 17,965.
50% rebalanced: 16,204.
80% rebalanced: 14,245.
100% stocks: 12,879.

Run 8.
20% rebalanced: 18,879.
50% rebalanced: 18,257.
80% rebalanced: 17,117.
100% stocks: 16,099.

Run 9.
20% rebalanced: 21,630.
50% rebalanced: 25,974.
80% rebalanced: 30,706.
100% stocks: 34,035.

Run 10.
20% rebalanced: 18,488.
50% rebalanced: 17,384.
80% rebalanced: 15,933.
100% stocks: 14,819.

Data Summary

Here are the ordered Year 15 balances with 100% stocks:
36,483.
34,035.
27,988.
27,047.
19,087.
17,136.
16,901.
16,099.
14,819.
12,879.

Compare this with the TIPS baseline of 18,986. The odds are about 40% of a substantial improvement. The odds are about 50%-50% of a shortfall.

Rebalancing with 20% stocks beat the TIPS baseline 5 out of 10 times.

Rebalancing with 50% stocks beat the TIPS baseline 5 out of 10 times.

Rebalancing with 80% stocks beat the TIPS baseline 5 out of 10 times.

Data Analysis

Owning stocks was beneficial about 50% of the time.

Here are the two largest, intermediate and smallest balances with Valuation Informed Indexing.

30,315.
28,856.
27,715.
18,612.
17,910.
16,036.

Here are the two largest, intermediate and smallest balances with 100% stocks.

36,483.
34,035.
19,087.
17,136.
14,819.
12,879.

This is the TIPS baseline (100% TIPS at 2% interest): 18,986.

Conclusions

Dollar cost averaging with stocks at today�s valuations has about a 50%-50% chance of doing better than buying only TIPS.

Owning 100% stocks has a very wide spread in the data. The probability of a substantial shortfall compared to investing in TIPS is about 2 out of 10. The probability of a substantially improved upside is about 4 out of 10.

Valuation informed indexing narrows the spread of the data considerably. The probability of a shortfall is about 50%. The probability of a substantial shortfall is small. The probability of a substantially improved upside is close to 5 out of 10. The potential upside dollar amount is not as high as with 100% stocks.

Have fun.

John Walter Russell
June 2, 2008