8

Comparing the Strategies

This chapter looks at hundreds of simulated markets (as described in Chapter 7) to evaluate dollar cost averaging, value averaging, and several variations that have already been discussed. We have already accomplished this comparison in Chapters 2-6 using actual historical market data. The results you will see using market simulations should not surprise you too much. These results should, however, give you a much better feel for how the various strategies do under different circumstances that you have not seen or been able to evaluate with the historical data. This type of simulated comparison is useful in answering typical questions that interested readers tend to have.

FIVE-YEAR SIMULATION RESULTS

The first 100 simulated runs of our five-year random market (as shown in Figure 7-2) were used to evaluate the dollar cost averaging and value averaging strategies in their “pure” or “fixed-amount” forms. The rates of return are displayed, ordered worst to best from left to right in Figure 8-1. This is not a time-series. You are not looking at how an investment evolves over 100 consecutive periods; instead, each symbol represents the rate of return over a separate, complete 5-year simulated investment. For each simulation, the vertical position of the line shows the IRR (rate of return) for dollar cost averaging, and the symbol above or below the line shows the IRR with value averaging. The rate of return with value averaging exceeds that with dollar cost ...

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