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Author: madmarv Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 36488  
Subject: Dollar Cost Averaging Date: 9/7/2000 3:15 AM
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Warning, long post ahead

I've just finished analyzing the backtest data the March 28th Drip port article. It's a very impressive analysis and to GLSmyth I'd like to extend my thanks for putting together the data.

There is one rather large point that was overlooked. The focus of the backtest was on trying to measure the volatility of the stock over several periods. However, it neglected to show the power of dollar cost averaging. I've finished a backtest of 24, 12, 8, 6 and 4 equally spaced purchases per year. My conclusion is almost totally opposite of the volatility analysis. I've found that you can setup monthly, bi-monthly or even quarterly purchase schedule and there will only be a negligible impact on your average purchase price.

For a baseline, I calculated what the average purchase price would be if I purchase an equal dollar amount on every trading day between 1/3/95 and 12/31/99, at the midpoint between the high and low price of the day. I'm using the midpoint price for the blind purchases as well.

All dates for the blind purchases are either the 1st or 15th of the month unless it happens to fall on a weekend/holiday. In that case, the previous day's price is used. All commissions, fees and dividend reinvestment are ignored. Also, since all companies have drip programs, it should be noted that I haven't tested this using the actual purchase dates of the Drip program. This backtest should not be considered the final word on dollar cost averaging, the test only encompasses 5 year (the same 5 years that the S&P500 returned > 20% annually). The companies chosen (with the possible exception of Coke) generally appreciated over the years and a prolonged bear market could have different results.

Baseline (Daily purchases)
Company Avg Purchase Price using
High Daily Low Daily Midpoint %variance
Price Price Price

KO $48.80 $47.79 $48.29 1.2%
ENE $21.08 $20.62 $20.85 1.1%
INTC $26.08 $25.32 $25.70 1.5%
PFE $15.13 $14.78 $14.96 1.2%

24 purchases / year:
Purchases on 1st and 15th of the month.

Company Average %difference
Purchase from
Price Baseline

KO $48.00 -0.6%
ENE $20.67 -0.9%
INTC $25.19 -2.0%
PFE $14.81 -1.0%

Start1 = 1st of month
Start2 = 15th of month

5-Year %difference from
Avg Price baseline
Start1 Start2 Start1 Start2
KO $47.91 $48.09 -0.8% -0.4%
ENE $20.50 $20.83 -1.7% -0.1%
INTC $24.74 $25.67 -3.7% -0.1%
PFE $14.75 $14.87 -1.4% -0.6%

8 purchases / year:
Start1 = Every 1 1/2 months starting Feb 1st
Start2 = Every 1 1/2 months starting Jan 15th
Start3 = Every 1 1/2 months starting Jan 1st

5-Year Avg Price %difference from baseline
Start1 Start2 Start3 Start1 Start2 Start3
KO $48.64 $47.93 $47.43 0.7% -0.7% -1.8%
ENE $20.78 $20.71 $20.51 -0.3% -0.7% -1.6%
INTC $25.74 $25.14 $24.72 0.1% -2.2% -3.8%
PFE $15.13 $14.75 $14.55 1.2% -1.4% -2.7%

6 purchases / year:
Start 1 = Bi-monthly starting Jan 1st.
Start 2 = Bi-monthly starting Jan 15th.
Start 3 = Bi-monthly starting Feb 1st.
Start 4 = Bi-monthly starting Feb 15th.

5-Year Avg Price %difference from baseline
Start1 Start2 Start3 Start4 Start1 Start2 Start3 Start4
KO $48.50 $48.56 $47.68 $47.27 0.4% 0.6% -1.3% -2.1%
ENE $20.92 $20.51 $20.75 $20.49 0.3% -1.6% -0.5% -1.7%
INTC $26.20 $25.20 $25.16 $24.30 1.9% -2.0% -2.1% -5.5%
PFE $15.33 $15.09 $14.44 $14.42 2.5% 0.9% -3.5% -3.6%

4 purchases / year:
Start 1 = Quarterly starting Jan 1st
Start 2 = Quarterly starting Jan 15th
Start 3 = Quarterly starting Feb 1st
Start 4 = Quarterly starting Feb 15th
Start 5 = Quarterly starting Mar 1st
Start 6 = Quarterly starting Mar 15th

5-Year Avg Price %difference from baseline
Start1 Start2 Start3 Start4 Start5 Start6 Start1 Start2 Start3 Start4 Start5 Start6
KO $49.19 $49.26 $48.46 $48.09 $46.68 $46.45 1.9% 2.0% 0.3% -0.4% -3.3% -3.8%
ENE $21.29 $20.94 $20.74 $20.29 $20.49 $20.29 2.1% 0.4% -0.5% -2.7% -1.7% -2.7%
INTC $26.27 $26.01 $26.51 $25.23 $24.33 $23.16 2.2% 1.2% 3.1% -1.8% -5.3% -9.9%
PFE $15.29 $15.08 $14.90 $14.98 $14.44 $14.21 2.2% 0.8% -0.4% 0.2% -3.4% -5.0%

On a year to year basis the most extreme %difference compared to the baseline was:

Over Below
Schedule Baseline Baseline
24/year 1.3% -3.9%
12/year 3.3% -10.2%
8/year 4.6% -6.5%
6/year 5.1% -10.9%
4/year 9.2% -12.1%

Now, the negative %difference is a good sign. It means your average purchase price dropped below the baseline. And keep in mind that this is by buying less frequently, therefore saving on commissions. Even in the quarterly purchase scenario, in half of the starting dates your average purchase price will end up less than the baseline. And those that end up above the baseline exceed it by 3.1% at most. Given the assumption of midpoint daily purchase prices and the 1% to 2% daily price range, any absolute %difference < 2% compared to the baseline is insignificant. Intuitively, over a longer period of time, the monthly/bi-monthly/quarterly average purchase price should revert even closer to the baseline. In conclusion, among the monthly/bi-monthly/quarterly DCA strategies, there is only a negligible difference in the average purchase price in the long term relative to daily average purchase price.

I'll post the whole spreadsheet to my webpage (www.geocities.com/madmarv00) shortly. That is if George doesn't mind me re-posting his work.

Marv
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