The Dollar Cost Averaging Experiment – Final Results 2006

I am not going to try to put any lip stick on it – the dollar cost averaging experiment was a disappointment for 2006.  The goal is to not only outperform the S&P 500, but return double digits with little thought – simply discipline.  The thesis is that the stock market runs in 34 year cycles.  Stocks outperform hard assets like gold and silver in the first half of the cycle.  In the second half the the cycle, hard assets outperform stocks.  My assumption is that we are in the commodity phase of the cycle.  Read the “The No-Brainer Investment Strategy to Double-Digit Returns” for more details. 

Using Central Fund of Canada (CEF) as the proxy for gold and silver, it returned 6.5% vs. 8.5% for the S&P 500 over the tracking period.  This is based on monthly dollar cost averaging over a one year time frame. 

Table 1. CEF vs. S&P 500

  CEF S&P 500 CEF S&P 500
  Closing Price Closing Price Mon. Return Mon. Return
1/4/07 9.12  1418.34  -6.08%  0.65% 
12/4/06 9.71 1409.12 9.97% 2.13%
11/6/06 8.83 1379.78 10.38% 2.19%
10/4/06 8.00 1350.22 -12.76% 2.82%
9/5/06 9.17 1313.25 0.00% 2.65%
8/4/06 9.17 1279.36 2.80% 0.66%
7/5/06 8.92 1270.91 -2.09% 0.44%
6/5/06 9.11 1265.29 -9.80% -3.58%
5/4/06 10.10 1312.25 24.23% 0.25%
4/4/06 8.13 1309.04 3.57% 2.41%
3/6/06 7.85 1278.26 2.08% 1.05%
2/6/06 7.69 1265.02 8.31% -0.66%
1/4/06 7.10 1273.46    

Note: $1000 invested each month in CEF (total $12000) is worth $12,781 (6.51%).
Note: $1000 invested each month in S&P 500 (total $12000) is worth $13,019 (8.5%).

Table 2. GDX vs. S&P 500

  GDX S&P 500 GDX S&P 500
  Closing Price Closing Price Mon. Return Mon. Return
1/4/07 37.72  1418.34  -10.38%  0.65% 
12/4/06 42.09 1409.12 9.62% 2.13%
11/6/06 38.43 1379.78 13.80% 2.19%
10/4/06 33.77 1350.22 -19.79 2.82
9/5/06 42.10 1313.25 6.34% 2.65%
8/4/06 39.59 1279.36 0.56% 0.66%
7/5/06 39.37 1270.91 3.25% 0.44%
6/5/06 38.13 1265.29    

Note: $1000 invested each month in GDX (total $7000) is worth $6790 (-1.76%).
Note: $1000 invested each month in S&P 500 (total $7000) is worth $6461 (8.40%).
Data starts on 6/5 since GDX was launched on 5/25/06

I can’t recall why I started tracking CEF on the close of January 4th instead of the close on December 30.  It is hard to believe, but the four trading days 1/3/06, 1/4/06, 1/3/07 and 1/4/07 made a tremendous difference.  On day one of 2006, CEF started the year off with a bang gaining 4% versus 1.6% for the S&P 500.  Then in the first two days of 2007 CEF has tanked 2.4% vs a flat S&P 500.  Obviously investing over a one year period should not be this sensitive to 4 lousy trading days, but it was.  CEF dollar cost average returned measured from the close on 12/30/05 to the close of 12/29/06 was 11.2% vs 8.9% for the S&P 500. Unbelievable! 

There are many ways in which the return could have been improved.  One idea is to employ stops and tighten them as the year progresses.  CEF was able to bounce back from the May melt down, but December’s collapse  was too much to overcome.  Another idea would be to employ my once a year dollar cost averaging strategy.  I call it “lump sum investing with a twist.”  This has actually worked quite well over the last few years.  I will talk more about that at a later date.

Although, the experiment that we have been tracking was a disappointment.  Dollar cost averaging into CEF returned double digits in 2006.  This is one of the many mysteries of investing.  At the end of the year, Wall Street touts its great achievements.  However, looking at your portfolio – you wonder what happened.

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  • Mark H.

    Mike,
    No mystery…dollar cost averaging works well when the underlying asset is moving up or sideways. When the underlying asset is moving down, dollar cost averaging will not save your bacon! If you bought CEF on 1/4/06 and held it for the rest of the year, you would have lost 22%…coming out ahead by 6.51% is a minor miracle if you consider that, and proves the value of dollar cost averaging!

  • Good points….