For Today’s Accumulators

I looked at dollar cost averaging for today’s accumulators.

A Continuing Bear Market

We are already in a long lasting (secular) Bear Market. I used the Investment Strategy Tester to determine what to do.

Investment Strategy Tester Conditions

The Investment Strategy Tester automates the Scenario Surfer. It makes 1000 runs and displays the results.

Although based on the historical record, the Investment Strategy Tester does not directly predict turning points where a Bear Market becomes a Bull Market and vice versa. In this instance, I assume that a P/E10=14 Bear Market condition will last up to Year 15 as a result of Government actions, which are delaying an eventual recovery. Under ordinary circumstances, I would not have extended the time frame beyond Year 10.

Accumulators

Historically, accumulators have done well by dollar cost averaging into an all-stock portfolio. I checked fixed allocations from 70% to 100% along with TIPS at a 2% interest rate.

I started with $1000 and added $1000 per year (i.e., I withdrew $-1000 per year). The results were consistent. The data spread increased with time, but the averages were all very close until Year 15. There was always a downside possibility with a higher stock allocation even at Year 15.

I repeated the calculation with an initial balance of $10000. The results were similar. The case for a lower stock allocation to protect the downside was stronger, but not by much.

I repeated with Valuation Informed Indexing. My allocations were 100%-90%-80%-50% and P/E10 thresholds of 8-10-18. It did better throughout the first 15 years, lifting the lows just slightly at very little penalty to the highs. This was especially apparent in Years 10 and 15 when starting from $1000. The best outcomes were similar to a fixed 90% allocation, but the downside was better in all instances.

What If You Are Unlucky?

Here is a comparison of Valuation Informed Indexing and 100% stocks at Years 5, 10 and 15. These results are listed as Unlucky (that is, 20% probable).

5-Year Balance
Valuation Informed Indexing: 4936
100% Stocks: 4674

10-Year Balance
Valuation Informed Indexing: 10801
100% Stocks: 10165

15-Year Balance
Valuation Informed Indexing: 18927
100% Stocks: 18452

Investing entirely in TIPS would have done better at Years 5 and 10. The balances with 2% TIPS would have been 5307, 11168 and 17638.

The conclusions are similar when starting from a $10000 balance.

Recommendations

I recommend that today’s accumulators proceed with care.

There is a lot to be gained by investing in stocks now in terms of learning.

It will not be long before investing in stocks becomes compelling. It is likely to become compelling as soon as the market stabilizes for a few months. Regardless, it will be compelling if P/E10 falls to 8.

Have fun.

John Walter Russell
March 7, 2009