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Stock Investments for Old-Age: Less Return, More Risk, and Unexpected Timing

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  • Dirk Ulbricht

Abstract

Returns merely based on one purchasing price of an asset are uninformative for people regularly contributing to their old-age provision. Here, each purchase has an influence on the outcome. Still, they are commonly used in finance literature, giving an overly optimistic view of expected long-term stock market returns and risks. Moreover, around business cycle turning points when volatility is high, these differences are accentuated so that the timing of market entries and exists differ substantially. This article compares risk and returns for regular and lump-sum investors for all possible intervals of investments in the Dow Jones Industrial Average ranging from one to 480 months from January 1934 to April 2013. Moreover, the optimal timing for the two types of investors in the run-up to business cycle turning points are contrasted. Lump-sum returns for forty year-horizons overstate regular contributors yields by 1.4 percentage points implying a forty percent higher terminal value. The Sharpe ratio of lump-sum investments is about 260 percent higher than for regular contributors, and the risk of negative returns disappears for horizons that are six years shorter. Increasing contributions deteriorate risk and returns. While lump-sum investors have eight months more time to switch to riskless assets before a contraction, regular contributors may return five months earlier to the stock market than lump-sum investors.

Suggested Citation

  • Dirk Ulbricht, 2013. "Stock Investments for Old-Age: Less Return, More Risk, and Unexpected Timing," Discussion Papers of DIW Berlin 1324, DIW Berlin, German Institute for Economic Research.
  • Handle: RePEc:diw:diwwpp:dp1324
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    File URL: http://www.diw.de/documents/publikationen/73/diw_01.c.426766.de/dp1324.pdf
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    References listed on IDEAS

    as
    1. Michael Brennan & Feifei Li & Walter Torous, 2005. "Dollar Cost Averaging," Review of Finance, Springer, vol. 9(4), pages 509-535, December.
    2. Fama, Eugene F. & French, Kenneth R., 1989. "Business conditions and expected returns on stocks and bonds," Journal of Financial Economics, Elsevier, vol. 25(1), pages 23-49, November.
    3. Ronald J. Balvers & Douglas W. Mitchell, 1997. "Autocorrelated Returns and Optimal Intertemporal Portfolio Choice," Management Science, INFORMS, vol. 43(11), pages 1537-1551, November.
    4. Michael DeStefano, 2004. "Stock Returns and the Business Cycle," The Financial Review, Eastern Finance Association, vol. 39(4), pages 527-547, November.
    5. repec:wsi:ijtafx:v:15:y:2012:i:02:n:s0219024912500136 is not listed on IDEAS
    6. Constantinides, George M., 1979. "A Note on the Suboptimality of Dollar-Cost Averaging as an Investment Policy," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 14(02), pages 443-450, June.
    7. Malliaris, A.G. & Malliaris, Mary E., 2008. "Investment principles for individual retirement accounts," Journal of Banking & Finance, Elsevier, vol. 32(3), pages 393-404, March.
    Full references (including those not matched with items on IDEAS)

    More about this item

    Keywords

    Retirement Accounts; Risk and Return; Business Cycle; Investment Management; Dollar-Cost Averaging;

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy

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