Investing in Mutual Funds:ump Sum vs. Dollar Cost Averaging
Date Issued
2009
Date
2009
Author(s)
Fu, Ming-Lan
Abstract
Through the Monte Carlo Simulation approach, we found that neither Lump Sum (LS) nor Dollar Cost Averaging (DCA) can be a dominant strategy for the diverse conditions we set to simulate the Taiwanese fund market, under the account method.ur research simulates the stock fund and the balanced fund, to observe the returns of LS and DCA strategies, and we found that most of the time, these two types of funds act similarly, although the balanced fund is less volatile than the stock fund, as reflected with its lower return (μ) and standard deviation parameters (σ). After considering risk, the balanced fund type brings higher rewards than the stock fund in most situations. However, if we consider investing returns only, the issue of adopting LS or DCA dominates over fund types.y setting different conditions and running different scenarios we can claim that DCA is a more conservative and long term strategy than LS, so that DCA yields better performance under longer investing periods and in a strong downturn, if the investor can tolerate the losses, as the DCA investor will benefit from the cost-averaging effect. By relaxing constraints in buying units and leaving the market, both LS and DCA can yield better annualized investing returns compared to the original scenarios, but the DCA investor tends to see a better yield if he continues to “keep the faith” and tolerates the losses so as to follow the more disciplined investing strategy in a down market.
Subjects
Dollar Cost Averaging
Lump Sum
Type
thesis
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