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The Journal of Wealth Management

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Article

Building a Better Mousetrap: Enhanced Dollar-Cost Averaging

Lee M. Dunham and Geoffrey C. Friesen
The Journal of Wealth Management Summer 2012, 15 (1) 41-50; DOI: https://doi.org/10.3905/jwm.2012.15.1.041
Lee M. Dunham
is an assistant professor of finance at Creighton University in Omaha, NE.
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  • For correspondence: leedunham@creighton.edu
Geoffrey C. Friesen
is an associate professor of finance in the College of Business Administration at the University of Nebraska-Lincoln in Lincoln, NE.
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  • For correspondence: gfriesen2@unl.edu
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Abstract

This article presents a simple, intuitive investment strategy that improves upon the popular dollar-cost-averaging (DCA) approach. The investment strategy, called enhanced dollarcost-averaging (EDCA), is a simple, rule-based strategy that retains most of the attributes of traditional DCA that are appealing to most investors yet adjusts to new information, which traditional DCA does not. Simulation results show that the EDCA strategy reliably outperforms the DCA strategy in terms of higher dollar-weighted returns about 90% of the time and nearly always delivers greater terminal wealth for reasonable values of the risk premium. EDCA is most effective when applied to high-volatility assets, when cash flows are highly sensitive to past returns, and during secular bear markets. Historical back-testing on equity indexes and mutual funds indicates that investor dollar-weighted returns can be enhanced by between 30 and 70 basis points a year simply by switching from DCA to EDCA.

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The Journal of Wealth Management: 15 (1)
The Journal of Wealth Management
Vol. 15, Issue 1
Summer 2012
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Building a Better Mousetrap: Enhanced Dollar-Cost Averaging
Lee M. Dunham, Geoffrey C. Friesen
The Journal of Wealth Management Apr 2012, 15 (1) 41-50; DOI: 10.3905/jwm.2012.15.1.041

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Building a Better Mousetrap: Enhanced Dollar-Cost Averaging
Lee M. Dunham, Geoffrey C. Friesen
The Journal of Wealth Management Apr 2012, 15 (1) 41-50; DOI: 10.3905/jwm.2012.15.1.041
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  • Article
    • Abstract
    • ENHANCED DCA STRATEGY VERSUS TRADITIONAL DCA STRATEGY
    • EDCA STRATEGY AND VOLATILITY OF UNDERLYING ASSET
    • EDCA STRATEGY AND SENSITIVITY TO MAGNITUDE OF PAST RETURNS
    • BACK-TESTING EDCA WITH HISTORICAL MARKET INDEX RETURNS
    • BACK-TESTING EDCA WITH HISTORICAL MUTUAL FUND RETURNS
    • IS EDCA A REASONABLE STRATEGY?
    • CONCLUSIONS
    • ENDNOTES
    • REFERENCES
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  • PDF (Subscribers Only)

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