CitricAcid
Full time employment: Posting here.
- Joined
- May 12, 2008
- Messages
- 546
OK, I haven't checked out any of the old threads, but I am sure there are many threads out there discussing how Lump Sum beats out DCA (Using S&P returns and reinvested dividends) in the long run. To me, however, this is not good enough.
Simply because in the past 50 years or so we have averaged about 8-9% a year (reinvesting dividends), it should be obvious that at the end of the year, it will cost more to buy in on average than the beginning of the year, at a greater margin than the benefits of DCA would give. This gives a quite obvious tell that Lump Sum beats out DCA in the long run, but I think there is something missing out of the DCA calculations.
The reason I am writing this is because I need to see the calculations myself. EVERY CALCULATION I HAVE SEEN has assumed 0% return on the cash waiting for the DCA. Given a pretty modest 3% on money market/CDs, I want to do my own calculation of instead of comparing 6000 at the beginning of the year to 500 in the first month, 500 + 1 month's interest second month, 500 + 2 month's interest third month, etc.
The question I have is threefold: First, I started assuming putting in $600 a year, and obviously as I started some of the data mining, it eventually became obvious that over time you would put more money in per year. I was wondering all of your thoughts on how to model that (starting at $600 a year in 1960, maybe an increase in $120 per year??). If I do not model that, then the strategy that will matter the most is simply how well you start, and I want a realistic assumption. Secondly, how far back should I do the S&P returns and the time span I should use? I supposed I could just Monte Carlo it, but would prefer to control it in Excel. I was going to do the 27 different 25 year spans from 1957-2007 (Jan. 1957- Dec.1981 all the way to Jan. 1983 - Dec. 2007), but was wondering your thoughts on it also. Finally, a point that I think won't make too much difference. When calculating dividends would it be useful to just calculate them quarterly (March, June, Sept, Dec) or monthly?
P.S. While I am at it, if anyone else has any thoughts or inquiries about the differences, I could potentially test those out as well, so let me know!
Simply because in the past 50 years or so we have averaged about 8-9% a year (reinvesting dividends), it should be obvious that at the end of the year, it will cost more to buy in on average than the beginning of the year, at a greater margin than the benefits of DCA would give. This gives a quite obvious tell that Lump Sum beats out DCA in the long run, but I think there is something missing out of the DCA calculations.
The reason I am writing this is because I need to see the calculations myself. EVERY CALCULATION I HAVE SEEN has assumed 0% return on the cash waiting for the DCA. Given a pretty modest 3% on money market/CDs, I want to do my own calculation of instead of comparing 6000 at the beginning of the year to 500 in the first month, 500 + 1 month's interest second month, 500 + 2 month's interest third month, etc.
The question I have is threefold: First, I started assuming putting in $600 a year, and obviously as I started some of the data mining, it eventually became obvious that over time you would put more money in per year. I was wondering all of your thoughts on how to model that (starting at $600 a year in 1960, maybe an increase in $120 per year??). If I do not model that, then the strategy that will matter the most is simply how well you start, and I want a realistic assumption. Secondly, how far back should I do the S&P returns and the time span I should use? I supposed I could just Monte Carlo it, but would prefer to control it in Excel. I was going to do the 27 different 25 year spans from 1957-2007 (Jan. 1957- Dec.1981 all the way to Jan. 1983 - Dec. 2007), but was wondering your thoughts on it also. Finally, a point that I think won't make too much difference. When calculating dividends would it be useful to just calculate them quarterly (March, June, Sept, Dec) or monthly?
P.S. While I am at it, if anyone else has any thoughts or inquiries about the differences, I could potentially test those out as well, so let me know!