The data was obtained from Yahoo Finance API and. Till we find our King Arthur, all of us average Joes can rest easy knowing that there is no simple trick that can give you a better return than a vanilla DCA strategy. Since this is an optimization problem, I am sharing all the data and my analysis in the hope that someone can tweak the strategy to finally give us that elusive risk-adjusted market-beating returns. In none of the cases did any of the strategies beat average Joe in the total returns.
I also checked for various time frames and various endpoints. I started off the analysis thinking that it would be pretty straightforward to find a winning strategy given that we are using nuanced strategies instead of randomly putting money in every month. While we have analyzed the trends using the last 30 years’ worth of SPY data, the overall outcome might be different if we change the time period to say 40, 50, or even 100 years. Since I am only using the monthly data for the P/E ratio and my SPY investments (due to data constraints), a much more complicated strategy involving intra-month price changes might have a better chance of beating the market (at the same time making it more difficult to execute).Ĭ. Both of these would adversely affect the overall returnsī. Tax on the gain on sale of treasury bills and transactions costs are not considered in the analysis. There are some limitations to the analysis.Ī. The least amount of returns were generated by Cautious Charlie who only invested if the PE ratio was lesser than the last 5-year average (basically by trying to avoid over-valued rallies, he ended up missing on all the gains), followed by the Analyst Alan persona who waited for a 10% drop from ATH before investing. A close second was Analyst Alan who accumulated money in T-Bills and only invested when the market dropped more than 1% from its all-time high. No matter what strategy we use, the most amount of returns were made by the Average Joe who invested every month no matter how the market was trending. Once it’s below the limit, he will convert all the T-bills and invest them into SPY.īased on the time period of our analysis, we would have invested a total amount of $33,400 till now. I.e, in the case of Cautious Charlie, he will keep on accumulating T-Bills every month if the PE ratio is not within his set limit. In all the above strategies, we will only hold treasury bills till the investment requirements are satisfied. So the analysis is based on someone who invested $100 every month since 1994.
Given that we need to have some historical data before we start our first investment, I have considered the starting point to be 1st Jan 1994. We will have different personas for reflecting different investment styles (all of them would be investing the same amount - $100 every month but following different strategies)Īverage Joe: Invests on the first of every month no matter how the market is trending (this would be our benchmark)Ĭautious Charlie: Invests in the market only if the Price to Earnings Ratio is lesser than the last 5-year rolling average, else will hold Treasury-Bills īalanced Barry: Invests in the market only if the Price to Earnings Ratio is within +20% of the last 5-year rolling average, else will hold T-BillsĪnalyst Alan: Invests whenever the market pulls back a certain percentage from the last all-time high, else will hold T-Bills. Now we have to devise different methods to do the Dollar-cost averaging that will maximize our long-term return. Given that dollar-cost averaging is about holding investments long-term, we need data, lots and lots of data! For this, I have pulled the adjusted daily closing price & Shiller P/E ratio of SPY for the last 30 years. So in this week’s analysis, we will explore various methods to do DCA and see which one would end up giving you the best returns! Theoretically, there must be a better way than to randomly throw your hard-earned money once a month into SPY, right? Time in the market beats timing the marketīut what is interesting is that I could not find any research that has been done on the best way to do dollar-cost averaging. Basically, it has been repeated ad nauseam that By now we have all heard the virtues of Dollar-Cost Averaging (DCA) and that you should never try to time the market.
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