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Author: repoonsatad Big red star, 1000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 18386  
Subject: Yesterday's column Date: 3/14/2001 4:22 PM
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In a rule maker column ironically entitled: "Secrets of Beating the Bear Market" http://www.fool.com/portfolios/rulemaker/2001/rulemaker010313.htm TMFMycroft gives an example of the effectiveness of dollar cost averaging by retroactively choosing a company that's been a huge success during the past seven years:

Consider your results had you invested $1,000 every six months in Cisco for the last seven years. Below is a table of the prices you would have paid, all split-adjusted:
<Table omitted>
At the end of seven years, your $14,000 investment would have become $61,121 -- even after the recent huge drop. The average price of your 3175.11 shares would be $4.41 per share. That would give you a 336.7% total return in seven years, or about 23.4% annualized.


So we learn that if we can go back in time and choose a known winner dollar cost averaging works! Interestingly, by avoiding dollar cost averaging and investing all $14,000 seven years ago the average price per share is $1.78 giving a 1,772% total return, or 52% annualized. It seems that in this example dollar cost averaging is a grossly inferior strategy.

More realistically we can't go back in time and therefore a better example would have us dollar cost averaging into Cisco after the stock was selected by the rule maker portfolio on 6/23/98. The following table gives the results from a strategy similar to the one presented in the rule maker column:

Price #Shares Value
6/23/98 $14.48 69.06 $1,000.00
12/23/98 $24.13 41.44 $1,000.00
6/23/99 $30.94 32.32 $1,000.00
12/23/99 $52.23 19.15 $1,000.00
6/23/00 $62.63 15.97 $1,000.00
12/23/00 $41.50 24.10 $1,000.00

Total $29.70 202.03 $6,000.00

Value today $20.00 202.03 $4,040.66

By investing $1,000 in Cisco stock every six months starting the day it was picked by the rule maker portfolio we would have spent $6,000 to purchase 202.03 shares at an average price of $29.70 per share. Unfortunately today the price is $20 so that our position is worth only $4,041. We've lost a third of the money invested! Had we instead invested all $6,000 on 6/23/98 our position would have been worth $8,287 today, or more than twice the outcome of dollar cost averaging. Notice that I'm ignoring the financial benefits of dollar cost averaging (interest income or saved interest expense) for simplicity.

See also: http://boards.fool.com/Message.asp?mid=14542871&sort=postdate and
http://boards.fool.com/Message.asp?mid=14546181&sort=postdate

Datasnooper.
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