CONTRIBUTIONS Luskin

Dollar-Cost Averaging Using the CAPE Ratio: An Identifiable Trend Influencing Outperformance by Jon M. Luskin, CFP®

Jon M. Luskin, CFP®, is a financial planner with Executive Summary Define Financial, a fee-only planning firm based in San Diego, California, and an active member of the • Previous research has usually when ignoring taxes and transac- FPA of San Diego NexGen group. For his master’s shown that dollar-cost averag- tion costs. thesis, Luskin showed how university endowments ing underperformed lump-sum • The likelihood of dollar-cost averag- can generate more wealth and take on less risk by investing. However, the body of ing outperformance over lump-sum adopting simpler strategies. existing research has not closely investing is a function of the examined the circumstances of this cyclically adjusted price-to-earnings Acknowledgement: The author thanks Meghaan outperformance. (CAPE) ratio at the beginning of Lurtz, personal financial planning doctoral student • Concurrent with existing research, the investment period, with higher at Kansas State University, for her editing help. this paper found that lump-sum CAPE ratios linked to dollar-cost investing outperformed dollar-cost averaging outperformance. INVESTMENT ADVISERS have averaging roughly two-thirds of • This paper discusses entry-level continued to practice dollar-cost the time on a nominal return basis, investment analysis. averaging despite its demonstrated inferior returns compared to lump-sum In practice, dollar-cost averaging is invested on the first of every month. investing (Williams and Bacon 1993; most effective as a behavioral finance As mentioned, DCA is traditionally Shtekhman, Tasopoulos, and Wimmer tool (Statman 1995). Investment advis- used as a risk mitigation strategy; DCA 2012). However, lump-sum investing ers proposing a dollar-cost averaging may prevent or palliate buyer’s remorse has not conclusively eclipsed dollar-cost approach have likely done so in an effort in the event of a market crash or correc- averaging; it has outperformed dollar- to reduce risk and minimize potential tion. DCA systematically invests small cost averaging only two-thirds of the emotional regret on behalf of the client, amounts over time and assists clients time (Shtekhman et al. 2012; Williams not grow assets (Dubil 2005). Thus, in mentally navigating the proverbial and Bacon 1993). Certain periods of flat even though dollar-cost averaging is concern of “going all in.” market performance (Williams not conventionally used as a superior Lump-sum investing (LSI) takes the and Bacon 1993), and downward-trend- wealth-generation tool, are there still opposite approach. LSI requires invest- ing markets (Greenhut 2006) point to opportunities for it to be an effective ing the entirety of an available asset at the superior nominal investment return portfolio strategy? the inception of the investment period, with dollar-cost averaging. This presents instead of making smaller the research question: is there a com- Conceptual Framework over time. mon underlying factor that influences The most important concepts and The Shiller Price-to-Earnings (P/E) 10 dollar-cost averaging outperformance of their definitions and acronyms are as is a valuation metric based lump-sum investing? follows: on the average corporate earnings of This study sought to identify an Dollar-cost averaging (DCA) is the domestic companies over the last 10 environmental pattern in dollar-cost process of making a regular deposit at a years. This metric adjusts for inflation averaging’s higher returns over lump- regular time interval. For example, instead and is also known as the cyclically sum investing. of investing $1,200 on January 1, $100 is adjusted P/E (CAPE) ratio.

54 Journal of Financial Planning | January 2017 FPAJournal.org Luskin CONTRIBUTIONS

A Theoretical Overview: Known and allocation in response to changes in vidual domestic equities, LSI usually Hypothetical Relationships equity valuation has been shown to generated superior nominal and Positive -term market returns. produce superior nominal investment risk-adjusted investment returns over On average, LSI has outperformed returns relative to a strategic (i.e., DCA (Williams and Bacon 1993; DCA given the stock market’s historical static) portfolio. Research has shown Shtekhman et al. 2012; Leggio and upward trend. This upward trend is most that in highly valued markets, a tactical Lien 2003). Previous studies provided prominent on long timelines, such as 15 portfolio with equities underweighted insight into DCA’s circumstantial years or greater. Inherent stock market can outperform a static portfolio. The dominance yet neglected a detailed , however, may create -term inverse was also found; given supposed discussion of determining factors. losses. As noted in other literature, vola- low market valuations, a portfolio with This paper intends to pick up where tility and downward markets have proved equities over-weighted would outper- that previous research left off. DCA to be the superior investment form a static portfolio (Solow, Kitces, Shtekhman et al. (2012) reviewed strategy, producing a higher nominal and Locatelli 2011). historical data from the equity investment return than LSI (Greenhut . As markets of three different first-world 2006, Williams and Bacon 1993). mentioned, the traditional risk/return countries from 1926 to 2011, examin- Risk and return. Risk and return are principle posits that greater invest- ing periods between one and 30 positively correlated: a single asset class ment return can only be achieved by years. They found in congruence with generates a greater expected investment enduring greater risk when investing existing research, DCA only outper- return at the consequence of greater in a single asset class. However, a DCA formed LSI one-third of the time. risk. Complimentary to this theory is strategy uses a portfolio composed of In those circumstances where DCA the principle that DCA is traditionally two very distinct asset classes: equities outperformed, the authors explained, less risky than LSI (Dubil 2005; Kitces and cash. Juxtaposing distinct asset “ … we found that DCA performed 2016). A DCA strategy, on average and classes within the same portfolio is a better during market downturns, so over time, holds more cash than a LSI principle of modern portfolio theory, DCA may be a logical alternative for strategy. Holding cash or cash equiva- which posits superior risk-adjusted who prefer some short-term lents has historically proven to be less performance is available when holding downside protection” (page 6). volatile than holding domestic equities. asset classes with low correlation to Williams and Bacon (1993) studied Therefore, a traditional portfolio each other (Markowitz 1952). one-year holding periods, investigat- holding a greater proportion of cash, ing the value of DCA in the domestic on average, will be subject to less risk. Research Question Addressed in market. The period analyzed ran from The opposite is also true; the portfolio This Study 1926 to 1991. The authors reached a holding a greater proportion of equities A multi-year valuation metric has been similar conclusion to Shtekhman et al. will be riskier and should, theoretically, shown to be a successful tool for produc- (2012): LSI outperformed two-thirds generate higher investment returns. ing excess investment returns (Solow of the time. The authors noted the Despite the previous principles, et al. 2011). As such, the CAPE ratio (a following exception: “The success of certain periods have exhibited the multi-year valuation metric) may also be lump-sum investing was somewhat less dominance of a DCA strategy over useful in indicating the standards and during the 1970–91 period because LSI. DCA has produced higher circumstance by which a decision to of the poor performance of the stock nominal investment returns given flat, employ DCA or LSI is made. market during much of the 1970s” downward-trending, or volatile market The research question addressed in (Williams and Bacon 1993, page 66). conditions (Shtekhman et al. 2012). this study is: Can a pattern of market Greenhut (2006) examined Tactical asset allocation and valuation be identified that alerts individual companies, as opposed multi-year valuation metrics. Related investment advisers to when using to market indices, over 10 years to DCA is the concept of tactical asset DCA may be the superior strategy— from 1995 through 2004. His study allocation—adjusting portfolio alloca- generating a higher nominal invest- highlighted the same observation: “ tion in response to dynamic market ment return over LSI? … the performance of DCA rests on variables. One variable that affects allo- the trend in stock prices, with DCA cation is equity valuation (the CAPE Literature Review outperforming in downward markets ratio is one method for measuring When back-testing historical data and lump sum outperforming in equity valuation). Adjusting portfolio using one or more indices or indi- upward markets” (page 76).

FPAJournal.org January 2017 | Journal of Financial Planning 55 CONTRIBUTIONS Luskin

process for one to postpone investing Figure 1: 15-Year Annualized S&P 500 Price Appreciation vs. the CAPE Ratio at the Beginning of 15-Year Periods, the majority of their asset pool. The 1881–2016 using DCA has the opportunity to buy lower later, after market valua- 18% tions have normalized or inverted below mean valuations. 13% What makes this study significant, with respect to the existing literature, is 8% the evaluation technique. Previous work has evaluated whether LSI or DCA is 3% better. This study sought to determine why. Again, the prior literature on DCA –3% has fallen short of offering a possible strategy to capitalize on those identified Annualized Price Appreciation Price Annualized –8% market trends where DCA outper- 4 9 14 19 24 29 34 39 44 formed. This paper utilized a demon- CAPE Ratio at Beginning of 15-Year Period strated evaluation strategy, CAPE/Shiller P/E 10, to inform and enable advisers so they make take advantage of DCA. Using the CAPE Ratio has some predictive power as a valu- The CAPE ratio at the beginning of each Distinct from DCA, previous research ation metric. Figure 1 juxtaposes S&P hypothetical 15-year holding period has been done using a five-year normal- 500 price appreciation to valuation, as was considered relative to historical ized price-to-earnings (P/E) ratio. This measured by the CAPE ratio. Note the averages. The performance of both DCA five-year normalized P/E ratio has been trend line in red in Figure 1. The data and LSI strategies were considered used as a guide for equity weightings in shows a significant negative correla- over the same period. The difference in a portfolio, tilting portfolio allocations tion (–0.41) between S&P 500 price investment performance between the (toward more or less equity). Solow appreciation and the CAPE ratio at the two investment strategies (and which et al. (2011) reviewed monthly data of beginning of the 15-year periods. one is superior) was considered relative domestic equities and United States Challenges of using the CAPE ratio. to that period’s starting CAPE ratio. government bonds from 1926 through The CAPE ratio may be an imperfect 2010; five-year investment returns were valuation metric. One challenge of using Methodology analyzed. The results suggested that the CAPE ratio is that it covers 10 years Data. The investment returns of the high market valuations should prompt of data. Ten years may be longer than a LSI strategy and the DCA strategy were investors to lower equity allocation business cycle. Further, while the CAPE compared for rolling 15-year periods. His- (and vice versa). In the Solow et al. ratio does adjust for inflation (i.e., it is toric CAPE ratio metrics were sourced (2011) study, the five-year normalized normalized), the technique for measur- from Robert Shiller’s webpage at Yale P/E ratio was demonstrated to be a ing inflation has changed with time. University (www.econ.yale.edu/~shiller/ valid metric for selecting the “tilting” Accounting standards and corporate data.htm). Ten- and five-year periods to generate the taxation have also changed over time were also tested, but 15 years was used greatest wealth. Therefore, this signaled (Wilcox 2011). because it enabled the greatest chance for using a multi-year valuation ratio as the The existing research has only sum- the outperformance by DCA. basis for analysis for employing a DCA marily stated that DCA has performed The adjusted close price of the S&P strategy. The CAPE ratio was selected as well in periods of volatility, and has fallen 500 was sourced from Yahoo! Finance the multi-year valuation metric given its short of researching, employing, and (finance.yahoo.com). The adjusted close ubiquity and the ease at which advisers offering strategies for executing DCA. price incorporates re-investment can access CAPE ratio data (from Robert The concept is relatively simple: buy and stock splits (instead of price apprecia- Shiller’s webpage at Yale University, low and sell high. If the investment tion alone) to arrive at the greater figure of www.econ.yale.edu/~shiller/data.htm). adviser is confident that future market total return. Using the adjusted close price The CAPE ratio as a predictor of lows are coming (because of a current mimics the investment return available to price appreciation. Shiller’s CAPE ratio market high), DCA gives reason and an investor re-investing .

56 Journal of Financial Planning | January 2017 FPAJournal.org Luskin CONTRIBUTIONS

Historical risk-free rate (three-month Figure 2: Evaluating the Representatives of the Time Period Treasury bill) performance data was Studied sourced from the Board of Governors of the Federal Reserve System (federal reserve.gov/releases/h15/data.htm). 40%

The period analyzed spanned January 30% 1950 through December 2015. This investment data was available monthly. 20% This particular period was chosen 10% because of the availability of perfor- 0% mance data of the S&P 500 total returns 36+ 35.99 – 31 30.99 – 26 25.99 – 21 20.99 – 16 15.99 – 11 10.99 – 6 5.99 – 0 (i.e., dividends re-invested, etc.). Percent of Months with CAPE of Months Percent for Each Respective Time Period Time Each Respective for Calculating Nominal Investment Returns CAPE Ratio LSI returns were computed by dividing 1950 – 2015 1871 – 2015 the S&P 500 ending adjusted close price by the beginning adjusted close price and subtracting 1. DCA returns were Limitations on Available Data Hypotheses calculated by making equal monthly The period explored in this study Previous research has shown DCA to investments over the equivalent period, ran from 1950 through 2015. While outperform LSI one-third of the time 180 investments for each 15-year period. the period was more extensive than on a nominal return basis (Shtekhman Cash in the DCA portfolio not yet some previous studies, it did not et al. 2012; Williams and Bacon 1993). invested grew at the risk-free rate for cover the entirety of the market’s Moreover, it was observed through the respective period (i.e., 1.07 percent history. The limitations on easily Shiller’s webpage (www.econ.yale. in January 1950, 10.12 percent in July accessible data on risk-free rates edu/~shiller/data.htm) that two-thirds 1984, etc.). The geometric mean of the (three-month Treasury bill) as well of the time, CAPE ratio valuations have portfolio employing LSI was compared as the total return (with dividends been less than 18.6 when looking at to the geometric mean of the portfolio re-invested, etc.) of the domestic CAPE ratio valuations monthly from employing DCA to determine which equity market prevented this study 1871 through 2015. Therefore, it was portfolio offered the greatest return. from spanning back to the late 1800s hypothesized for this paper that: All returns are nominal. There was no when Shiller’s data on the CAPE Null hypothesis: CAPE ratio valu- consideration for inflation or risk- ratio begins. ations greater than 18.6 (as measured adjusted return. With respect to CAPE ratio valu- at the beginning of 15-year rolling time Taxes and transaction costs were ations, the period analyzed (1950– periods) will not manifest superior ignored. Additionally, there was no con- 2015) was somewhat representative nominal investments returns when sideration for expense ratios, loads, or of the broader historical market using DCA, with CAPE ratio valuations commissions. In a real-world scenario, data, according to data from the Fed, below 18.6 not showing superior invest- the absence of taxes and transaction Yahoo! Finance, and Damodaran ments returns with LSI. costs could occur in a tax-sheltered 2016 (see Figure 2). The period Alternative hypothesis: CAPE ratio account using commission-free and analyzed by Shiller, 1871–2015, valuations greater than 18.6 (as mea- load-free investments. For example, (illustrated in orange in Figure 2) sured at the beginning of 15-year rolling one real-life possibility could be an IRA displays more of a conventional bell time periods) will manifest superior account held at an investment custodian curve distribution of valuations. nominal investments returns when that issues their own proprietary index The shorter time period examined using DCA, with CAPE ratio valuations funds. Being an index fund, there would (illustrated in blue) skews higher below 18.6 showing superior investment only be a nominal expense ratio. Being market valuations than the historic returns with LSI. a proprietary fund offered directly average. Note the fat tail for extreme through the investment custodian, there market valuations (36+), and the Findings could be no commission, no load, and lack of any exceptionally low market Nominal investment return: DCA no account maintenance fees. valuations (5.99 – 0). and the CAPE ratio. When breaking

FPAJournal.org January 2017 | Journal of Financial Planning 57 CONTRIBUTIONS Luskin

Table 1: Starting CAPE Ratio vs. Degree of Outperformance of DCA Relative to LSI Over Each 15-Year Period

Starting CAPE Ratio Chance of DCA Average DCA Average LSI Outperformance Outperformance Outperformance 36+ 100% 2.0% N/A 35.99-31 100% 0.5% N/A 30.99-26 0% N/A 0.7% 25.99-21 71% 2.4% 2.1% 20.99-16 36% 2.2% 1.9% 15.99-11 25% 1.6% 3.5% 10.99-6 17% 0.4% 1.9%

as different time periods than those Figure 3: Starting CAPE Ratio vs. Degree of Outperformance of DCA Relative to LSI Over Each 15-Year Period examined in the literature review Conclusions

4% The results failed to reject the null hypothesis: CAPE ratio valuations above

2% 18.6 proved to provide, on average, superior nominal investment returns

0% when using DCA. This paper sought to examine –2% possible, identifiable trends influencing DCA outperformance over LSI. As

DCA Outperformance –4% demonstrated by the analysis, CAPE ratio valuations at the beginning of a –6% 15-year investment period proved to be 5 10 15 20 25 30 35 40 45 a valuable indicator for selecting the Starting CAPE Ratio for the 15-Year Investment Period optimum investment strategy that will generate the greatest investor wealth. As shown in Figure 3, there was a up the starting Shiller P/E 10 for a the 15-year period. clear positive correlation between the 15-year period and the frequency of Although a higher CAPE ratio at the chance of DCA outperformance and outperformance of DCA (relative to start of the 15-year investment period the starting CAPE ratio of the 15-year LSI), a correlation of 0.43 existed (see delivered a higher probability of DCA period. The greater the starting CAPE Figure 3). The visualization of the data outperformance, the relationship is not ratio, the greater the likelihood of, demonstrates the positive relationship strictly linear (see Figure 4). and degree of, DCA outperformance. between an increase in the beginning Extreme market valuations (those with a CAPE ratio of the 15-year time period Frequency of DCA Outperformance CAPE ratio above 31) consistently (100 and the degree of DCA outperfor- Investment periods with a starting percent of the time) provided superior mance: a higher starting CAPE ratio CAPE ratio below 18.6 averaged invest- investment returns using DCA. In short, usually meant greater outperformance ment returns of 1.44 percent per annum a high CAPE ratio warrants serious with DCA. higher when employing a LSI strategy. consideration of a DCA strategy—not Note the red trend line in Figure 3. For those investment periods with a because of risk reduction or client Extreme-valued environments (defined beginning CAPE ratio greater than mollification, but because of superior by a CAPE ratio greater than 31) always 18.6, DCA averaged investment returns wealth generation. produced superior results with a DCA 0.45 percent greater than LSI. As per Previous research showed that LSI strategy. the literature, DCA did outperform LSI was superior to DCA most of the time Table 1 breaks down the frequency roughly one-third of the time, or 234 (Atra and Mann 2001; Shtekhman et and degree of outperformance for a out of 613 periods. This is despite the al. 2012; Greenhut 2006; Williams and given range of starting CAPE ratio for use of different methodologies, as well Bacon 1993). This research has added to

58 Journal of Financial Planning | January 2017 FPAJournal.org Luskin CONTRIBUTIONS the literature in that it provided advisers Figure 4: Chance (%) of DCA Outperformance by CAPE Ratio with a process for how to recognize and capitalize on market environments in which DCA outperforms LSI. This study 100% identified, using previous literature, trends that support DCA as a wealth 90% optimization strategy, and then hypoth- 80% esized how to best measure and imple- 70% ment the profitability of a DCA strategy. 60% This study demonstrates and provides a 50% repeatable process for advisers to look at 40%

DCA as an effective tool for investors in 30% high CAPE ratio environments. 20% Using DCA amidst high market valua-

Chance (%) of DCA OutperformanceChance 10% tions is similar to the Solow et al. (2011) 0% strategy utilizing tactical asset alloca- 36+ 35.99 – 31 30.99 – 26 25.99 – 21 20.99 –16 15.99 – 11 10.99 – 6 tion. Both strategies suggest placing less of the available funds into equities in Range of Starting CAPE Ratio for the 15-Year Investment Period highly valued markets. The strategies instead allocate funds to more conserva- tive holdings. Therefore, it should come Figure 5: CAPE Ratio by Year as no surprise that both studies (which tested extremely similar strategies) reached the same conclusion; superior nominal investment performance was 45 1999, 44.20 available when less of the available 40 35 amount for investment was put into 1929, 32.56 equities during a highly valued market. 30 25

Practical Recommendations and CAPE Ratio 20 Applications 15

If an investment adviser is consider- 10 ing utilizing DCA for its potential to 5 generate superior investment returns, 1881 1884 1887 1891 1894 1897 1901 1904 1907 1911 1914 1917 1921 1924 1927 1931 1934 1937 1941 1944 1947 1951 1954 1957 1961 1964 1967 1971 1974 1977 1981 1984 1987 1991 1994 1997 2001 2004 2007 2011 2014 then that adviser should review 1881–2016 1950–2015 current market valuations using the CAPE ratio. This paper reached the Source: Robert Shiller’s webpage at Yale University, www.econ.yale.edu/~shiller/data.htm same conclusion as previous research: DCA outperformed LSI one-third of Evaluating the current domestic above 18.6 (0.45 percent), and that equity the time on a nominal return basis. equity market valuation is easily markets return 6 percent annually. Yet, this paper added an investigation accessible (at no cost) via the data on This study also showed that of market trends and found that when Robert Shiller’s website at Yale. during the tech bubble mere above- market valuations as measured by the To put the potential value of using a average valuations (CAPE ratio of 21 CAPE ratio were above roughly 18.6, DCA strategy into context, consider an to 26) climbed even higher amidst this correlated with DCA outperfor- example: given an initial investment of $1 the irrational exuberance of investors mance (average CAPE ratio valuations million DCA presents the opportunity to (Shiller 2000). It was the process of being roughly 16). Therefore, if generate an additional $150,000 in wealth moving from an already high to an even market valuations are above 18.6, an over the 15-year period. This assumes the higher valued market that made for the adviser should consider DCA for its average investment return premium of underperformance of DCA during that superior ability to generate wealth. DCA over LSI at CAPE ratio valuations period (see Figure 5).

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It is impossible to know if today’s be appropriate when investing proceeds Damodaran, Aswath. 2016. “Annual Returns on above-average (but not extreme) from an inheritance, lump-sum pension Stock, T. Bonds and T. Bills: 1928–Current.” An valuations are on their way to even distribution, or illiquid investment (i.e., online compilation found at: pages.stern.nyu. higher levels. Just as the tech mania hard real estate) liquidation. edu/~adamodar/New_Home_Page/datafile/ pushed investors to pour money into an As of this writing in September 2016, histretSP.html. over-valued market, one could make the the CAPE ratio was 26.5. Since that Dubil, Robert. 2005. “Lifetime Dollar-Cost Averag- case that the Federal Reserve’s actions CAPE ratio of 26.5 is well above both ing: Forget Cost Savings, Think Risk Reduction.” have pushed investors to chase from the historic average (~16) and the one- Journal of Financial Planning 18 (10): 86–90. dividend-paying companies. Consider third of the time that DCA has shown Greenhut, John G. 2006. “Mathematical Illusion: a recent manifestation of this: the to generate superior wealth (CAPE Why Dollar-Cost Averaging Does Not Work.” The investment company Vanguard Group ratio above 18.6), this may suggest that Journal of Financial Planning. 19 (10) 76–83. recently closed one of their dividend- DCA could be utilized for investors Kitces, Michael. 2016. “Dollar Cost Averaging May focused equity funds to new investors seeking higher nominal returns over a Help to Manage Risk but on Average It Just (see personal.vanguard.com/us/insights/ long period. Given such a highly valued Reduces Returns.” March 2016. Available at: article/fund-announcement-072016). environment, valuation should normal- kitces.com/blog/dollar-cost-averaging-versus- Such a phenomenon of investors pushing ize—generating greater wealth for lump-sum-how-dca-investing-can-manage-risk- money into dividend-paying equities those who put a DCA strategy in place but-on-average-reduces-returns. would cause already high valuations to now. Another word of caution: while Leggio, Karyl B., and Donald Lien. 2003. “Compar- further increase. valuations are well above average (~16), ing Alternative Investment Strategies Using Again, this study showed that CAPE they are not extreme (31+). Risk-Adjusted Performance Measures.” Journal of ratios above 18.6 averaged superior Financial Planning 16 (1): 82–86. nominal investment returns of 0.45 Suggestions for Future Research Markowitz, Harry. 1952. “Portfolio Selection.” The percent when using DCA. However, were This study explored the nominal invest- Journal of Finance 7 (1): 77–91. advisers reluctant to implement a DCA ment return offered by two strategies for Shiller, Robert J. 2000. Irrational Exuberance. strategy unless given more robust results, investing in the market. Further analysis Princeton, N.J.: Princeton University Press. advisers could delay implementing a could include the impact of loads, Shtekhman, Anatoly, Christos Tasopoulos, and DCA strategy until market valuations commissions, and taxes. Taxes would be Brian Wimmer. 2012. “Dollar-Cost Averaging reach a point where the research has manifest from capital gain distributions Just Means Taking Risk Later.” A Vanguard shown DCA to outperform LSI 100 as well as income on cash and dividends. research paper available at: pressroom. percent of time: at valuations above 31, as Additional time periods and strategies vanguard.com/nonindexed/7.23.2012_Dollar- measured by the CAPE ratio. could also be explored. And other valu- cost_Averaging.pdf. Advisers looking to further validate the ation metrics could be explored, such Solow, Kenneth, Michael Kitces, and Sauro Locatelli. employment of DCA may examine an as the five-year normalized P/E (as per 2011. “Improving Risk-Adjusted Returns Using additional valuation metric: the five-year Solow et al. 2011), and the conventional Market-Valuation-Based Tactical Asset Allocation normalized P/E ratio. Solow et al. 2011 one-year P/E ratio. Strategies.” Journal of Financial Planning 24 (12): titled hypothetical portfolios toward Lastly, analysis beyond 1950 could be 48–59, 68. fixed-income when the five-year normal- performed. Recall Figure 5. Particularly Statman, Meir. 1995. “A Behavioral Framework ized P/E ratio was in its highest decile. relevant is the time period of the market for Dollar-Cost Averaging.” Journal of Portfolio This study found success in employing crash (and high valuations preceding Management 22 (1): 70–78. DCA when CAPE ratio valuations it) of 1929. Investigation of this period, Wilcox, Stephen E. 2011. “A Cautionary Note About were roughly in their highest tercile. being the second-highest peak in market Robert Shiller’s CAPE.” CFA Digest 42 (1): 38–39. In addition to considering the five-year valuations, would be interesting and Williams, Richard E., and Peter W. Bacon. 1993. normalized P/E ratio, advisers may also valuable in order to corroborate and “Lump Sum Beats Dollar-Cost Averaging.” Journal consider the conventional P/E ratio. extend the findings of this research. of Financial Planning 6 (2): 64–67. This study examined the efficacy of a DCA strategy over 180 consecutive References Citation months (15 years), with 1/180 (0.55 Atra, Robert J., and Thomas L. Mann. 2001. Luskin, Jon. M. 2017. “Dollar-Cost Averaging percent) of an available investment pool “Dollar-Cost Averaging and Seasonality: Some Using the CAPE Ratio: An Identifiable Trend being moved monthly from Treasury bills International Evidence.” Journal of Financial Influencing Outperformance.” Journal of into the S&P 500. A DCA strategy could Planning 14 (7): 98–105. Financial Planning 30 (1): 54–60.

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