Dollar Cost Averaging vs. Lump Sum Strategy Backtest — Managing Sequence of Return Risk Analysis
This post defines the difference between dollar-cost averaging and lump-sum investing. We explain what it is, why lump-sum investing is the best option, and finally, we look at how dollar-cost averaging is exposed to sequence of return risks. As our backtests prove in this article, you might underperform massively by dollar-cost averaging if you are “unlucky” with your timing and sequence of returns.
We backtest the following trading rules:
We invest 250 USD on the first day of a new month and continue all the way up until December 2019. This equals 60 000 invested in both good and bad times, but we would have idle cash at the start that only gradually were invested.
The equity chart looks like the image shown below.
You can find more info about this trading strategy here:
https://www.quantifiedstrategies.com/dollar-cost-averaging-vs-lump-sum-investing/