Dollar Cost Averaging when P/E10=14

Previously, I have examined dollar cost averaging at high (P/E10=26) and low (P/E10=8) valuations. This time I looked at today’s market with P/E10=14 in a Bear Market.

Scenario Surfer Results

I invested entirely in stocks. I started with a $5000 balance and a P/E10=14 Bear Market initially. I added $5000 (plus inflation) each year. I have included fixed allocations of 20%, 50%, 80% and 100%. Portfolios consist of the S&P500 index and 2% TIPS.

Year 10 Results

Run 1.
20% stocks, rebalanced: 62,766
50% stocks, rebalanced: 62,487
80% stocks, rebalanced: 60,168
100% stocks: 57,426

Run 2.
20% stocks, rebalanced: 66,703
50% stocks, rebalanced: 72,709
80% stocks, rebalanced: 77,076
100% stocks: 78,962

Run 3.
20% stocks, rebalanced: 67,178
50% stocks, rebalanced: 74,449
80% stocks, rebalanced: 80,706
100% stocks: 84,166

Run 4.
20% stocks, rebalanced: 66,635
50% stocks, rebalanced: 73,515
80% stocks, rebalanced: 80,106
100% stocks: 84,296

Run 5.
20% stocks, rebalanced: 67,404
50% stocks, rebalanced: 75,825
80% stocks, rebalanced: 84,280
100% stocks: 89,787

Your balance consistently exceeds the total amount invested by Year 10 when you dollar cost average starting with P/E10=14 Bear Market. Your best decision is 100% stocks. Typically, this adds about 50% to the total amount invested.

Year 20 Results

Run 1.
20% stocks, rebalanced: 149,986
50% stocks, rebalanced: 179,975
80% stocks, rebalanced: 210,679
100% stocks: 230,226

Run 2.
20% stocks, rebalanced: 144,536
50% stocks, rebalanced: 163,794
80% stocks, rebalanced: 181,388
100% stocks: 191,634

Run 3.
20% stocks, rebalanced: 158,269
50% stocks, rebalanced: 205,766
80% stocks, rebalanced: 261,329
100% stocks: 302,200

Run 4.
20% stocks, rebalanced: 158,199
50% stocks, rebalanced: 203,329
80% stocks, rebalanced: 252,203
100% stocks: 285,241

Run 5.
20% stocks, rebalanced: 140,405
50% stocks, rebalanced: 150,933
80% stocks, rebalanced: 156,415
100% stocks: 156,590

Your balance consistently exceeds the total amount invested by Year 20 by 50% or more when you dollar cost average starting with P/E10=14 Bear Market. Your best decision is 100% stocks. The final balance varies widely. It is about 50% to 300% more than the total amount invested.

Conclusions

Dollar Cost Averaging with new funds makes sense at today’s valuations. You are unlikely to become discouraged along the way.

Have fun.

John Walter Russell
December 1, 2008