Question: Does the (3rd party) tracker you’re using “purchase” additional amounts each period?  It looks like it just changes the existing/starting allocation, so that the comparison is like the usual “$10k invested at time x and then manipulated with our portfolio strategy would be worth $y today”.  But that’s not really how your Newsletter works.  It advises on how to invest each pay period’s existing assets plus the new investment coming in that period.

Ideally, the tracker would allow me to compare returns from Date x to Date y, and it would incorporate some investment amount per period z, starting with 0 at Date x (otherwise you can always rig the results with a bigger or smaller starting value at Date x).  And it would allow comparisons to indices (such as the S&P 500) using the same mechanism.  I suppose you could make the starting value a variable to be entered by the user, but leaving it unvariable and fixed at some amount determined by you (even if seemingly reasonable, like $10k) just opens you up to the criticism of manipulation.

Response: A lot of people think that each strategy has a particular return, but, as you point out, things are not that simple.

Even if two people follow the exact same strategy, their return might be different. This is because each person has some initial amount and some amount they are contributing throughout the investment period. We can think of there being two returns: a return on the initial amount (the lump sum return) and a return on the money contributed throughout (the dollar cost averaging return). The personal return is a linear combination of the two, with weights being proportional to the two sums of money (initial sum and the sum being contributed throughout). Since these sums differ between different people, so do returns, even if following the same strategy.

My methodology does not seek to simply maximize return — it seeks to maximize performance, of which return is an important part, but which has other components as well. Ideally, the goal is for the profit curve to go up more or less smoothly. This behavior achieves good returns, both lump sum and dollar cost averaging.

I haven’t seen a lot of discussion of this fact that each strategy has two returns. Whenever I see returns discussed, it is only the lump sum return that are being discussed. The ridiculous statement that “stocks go up in the long term” becomes even more ridiculous when we take dollar cost averaging into account. For example, stocks have lost money over the past 10 years, both on a lump sum and dollar cost averaging basis.

I think one reason why everyone just focuses on lump sum returns might be that this assigns just one easy number to each strategy. If you do things properly then strategy rankings would depend on each investor, which might be too confusing for some people.

Now, to answer your question. The third party tracker that I use reports only the lump sum return. I realize that that’s not how retirement savings works, but that’s what they report. I do not know of any service that accounts for DCA. If you do, please let me know. Also, you might want to email TimerTrac about this.

However, even though they only report the lump sum return, they also show you the full profit curve. They also allow you to see some “statistics” (if you click on “Graph with Statistics”). However, besides the maximum drawdown, I see those as being largely meaningless.

Related posts:

1. Personal Investment Performance (PIP) calculation
2. Dollar cost averaging does not turn bad investments into profitable ones
3. Buy and hold stocks for the long term
4. Focus on return and risk, not price; losses are locked in as they occur
5. Going strong after a year

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