Investment Plans, Part 3: ETF Example

“Now, what should happen when you make a mistake is this: You take your knocks, you learn your lessons, and then you move on. That’s the healthiest way to deal with a problem… You know, by the time you reach my age, you’ve made plenty of mistakes. And if you’ve lived your life properly — so, you learn. You put things in perspective. You pull your energies together. You change. You go forward”

– Ronald Reagan regarding the Iran-Contra Scandal

This quote begins this week’s post because it is how I felt about the results of my analysis of a stock investment strategy.  I hope you find the following data useful.  This is a result of over 2,000 data points and my submission of the

This graph shows how an investor would apply their capital over the past ten years in IJH, a mid-cap ETF.  The green represents the weekly closing price of the ETF.  The blue indicates the monthly shares purchased from the ETF under the Dollar Cost Averaging (DCA) method.  Finally, the yellow represents the number of shares purchased under the Price/Volume method (PV) discussed last week.

The inputs into this model are as follows:

  1. The DCA method invested a set amount the first Monday of each month over the ten years.
  2. The DCA method invested the full amount of the investment funds, this is a bit unrealistic because an ETF would require the purchase of at least one full share.  However, this was used to develop the chart because many investors use the DCA method in their personal investment accounts and their investment accounts with their employers.  The reader should note that many employers deposit their investment funds into a holding account until a set date and then apply it into their preferred investments.
  3. The DCA method determined the amount of money to be used by the PV method.
  4. The PV method invested 2.55% of the total investment balance each time the market dropped on high volume and the next week’s share prices included a 2.5% discount to the previous week’s close.  This allows the investor to place an order at the conclusion of the past week at a discount and only purchase if the market drops to that price level.
  5. A buy and hold method was used as a base line investment style.

Key assumptions that may change future application of these methods:

  1. During these ten years, the market had the financial crisis associated with the housing bubble.
  2. This market drop was significant and occurred in the first half of the investment application period.
  3. The investor would require financial stability in order keep the money invested in any of the methods.

Results of these methods are as follows off of a $100,000 investment:

  1. The DCA method purchased a total of 1063.608 shares and the ending value of the investment not including dividends was a respectable $174,570.01.
  2. The PV method purchased a total of 1,392 shares and the ending value of the investment not including dividends was an amazing $225,888.18!
  3. Placing the entire $100,000 into the ETF at the beginning of the ten years purchased 1,226 shares and the ending price not including dividends was $201,223.38.

Conclusions:

  1. Technical investing can add value to your portfolio.
  2. This metric does not seem to be as successful for investment amounts smaller than roughly $20,000.  This is probably due to the economy of scale involved with the larger investment values.
  3. The PV outperformed the tried and true and widely accepted DCA by a gain of more than 58%.
  4. A complete application of investment funds doubled the investment over a ten year period.

The most surprising of these conclusions for me was the first.  I have spent most of my life thinking that technical investing is like reading tea leaves.  This was a very surprising result to me and makes me want to question some of my other mindsets with respect to investing.

ACTION ITEM: Determine what will be the best investment plan for you-DCA, PV or buy and hold.

 

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