Wait Five Years?

The market is in free fall. What if we just stop worrying about it, wait, and invest heavily five years from now? Would we be better off?

Here are the answers from the Investment Strategy Tester and the Scenario Surfer.

Conditions Examined

I set the calculators to a P/E10=14 Bear Market. I invested $10000 in four different ways.

a) I invested all of the funds from day zero. I made no deposits.
b) I invested $2000 initially and deposited $2000 (i.e., I withdrew $-2000) each year until Year 6. At Year 6, I reduced the deposit to zero.
c) I started with a $1 balance and deposited zero until Year 6. At that time, I deposited $2000 (i.e., I withdrew $-2000) each year.
d) I started with a balance of $1. I deposited $10000 (i.e., I withdrew $-10000) in Year 6 and nothing thereafter.

I ran Conditions a through c on the Investment Strategy Tester. Condition “d” required the Scenario Surfer.

Results

Here are the “Best Possible” Year 10 balances:

a) All funds invested from day zero: 20787.
b) Dollar cost averaged until Year 5: 24157.
c) Dollar cost averaged starting in Year 6: 12755.
d) All funds invested at Year 6: 15,170.

Here are the “Most Likely” Year 10 balances:

a) All funds invested from day zero: 13520.
b) Dollar cost averaged until Year 5: 15351.
c) Dollar cost averaged starting in Year 6: 8754.
d) All funds invested at Year 6: 11,291and 11,059.

Here are the “Worst Possible” Year 10 balances:

a) All funds invested from day zero: 8593.
b) Dollar cost averaged until Year 5: 9758.
c) Dollar cost averaged starting in Year 6: 5833.
d) All funds invested at Year 6: 5,015.

Conclusions

The best choice was dollar cost averaging until Year 5.

The second best choice was a lump sum invested from day zero.

Waiting for five years was a mistake.

Additional Remarks

These results did not include Valuation Informed Indexing. They were strictly for a 100% stock allocation. This limited the actions available to the lump sum investor starting a day zero. Sometimes, the market turns and climbs to high valuations during a long lasting (secular) Bear Market. A prudent investor might well choose to lock in his gains under favorable conditions.

Have fun.

John Walter Russell
March 8, 2009