Business Commons^™

Building A Better Mousetrap: Enhanced Dollar Cost Averaging, Lee Dunham, Geoffrey C. Friesen

Department of Finance: Faculty Publications

This paper presents a simple, intuitive investment strategy that improves upon the popular dollarcost- averaging (DCA) approach. The investment strategy, which we call enhanced dollar-costaveraging (EDCA), is a simple, rule-based strategy that retains most of the attributes of traditional DCA that are appealing to most investors but yet adjusts to new information, which traditional DCA does not. Simulation results show that the EDCA strategy reliably outperforms the DCA strategy in terms of higher dollar-weighted returns about 90% of the time and nearly always delivers greater terminal wealth for reasonable values of the risk premium. EDCA is most effective when applied …