Theoretical Stock Strategy Returns

jazzed

There was some discussions of stock returns in another thread.

Bean mentioned one interesting reality there. Buy and Hold can work of course. If one accounts for dividend adjustments if any, the numbers can be different. I would like to share another interesting strategy that has worked for me.

Dollar cost averaging is much more effective in a sideways market for example. In such a strategy, one sets a fixed amount to invest every month and buys on a given day during the month. Following the discipline allows for accumulating more when prices are low and less when prices are high. Consistency and diversification makes it work. The theoretical "Dollar Cost Averaging" results below assume buying the same dollar amount of stocks on the last day of the 4th week of each month.

There are other strategies too. Re-balancing a portfolio that can be beneficial. I have used dollar cost averaging and other long term strategies that have worked fine. My favorite was join a growing public company that offers stock options. For me short term strategies are not usually worth the extra effort and incur more unnecessary risk.

There is more to stocks than the DJIA and not everything is in favor or out at the same time. Just something to think about.

The spreadsheet where this summary is derived is attached for scrutiny - any corrections are appreciated.

[TABLE="width: 669"]
[TR]
[TD]Investment Strategy[/TD]
[TD]ETF[/TD]
[TD]Shares[/TD]
[TD] Investment[/TD]
[TD] Balance[/TD]
[TD]%ROI [1][/TD]
[/TR]
[TR]
[TD](2/11/2007 - 7/11/2012)[/TD]
[TD][/TD]
[TD][/TD]
[TD][/TD]
[TD][/TD]
[TD][/TD]
[/TR]
[TR]
[TD]Buy/Hold DJIA[/TD]
[TD]DIA[/TD]
[TD]840.79[/TD]
[TD]   114,389.82[/TD]
[TD]   108,672.11[/TD]
[TD]-5.0%[/TD]
[/TR]
[TR]
[TD]Buy/Hold DJIA [2][/TD]
[TD]DIA[/TD]
[TD]958.60[/TD]
[TD]   114,389.82[/TD]
[TD]   123,899.05[/TD]
[TD]8.3%[/TD]
[/TR]
[TR]
[TD][/TD]
[TD][/TD]
[TD][/TD]
[TD][/TD]
[TD][/TD]
[TD][/TD]
[/TR]
[TR]
[TD]$ Cost Average DJIA [2][/TD]
[TD]DIA[/TD]
[TD]144[/TD]
[TD]        8,908.08[/TD]
[TD]     18,612.00[/TD]
[TD]108.9%[/TD]
[/TR]
[TR]
[TD][/TD]
[TD][/TD]
[TD][/TD]
[TD][/TD]
[TD][/TD]
[TD][/TD]
[/TR]
[TR]
[TD]$ Cost Average Balanced [2,3][/TD]
[TD][/TD]
[TD]670[/TD]
[TD]      39,123.36[/TD]
[TD]     80,887.20[/TD]
[TD]106.7%[/TD]
[/TR]
[TR]
[TD][/TD]
[TD]SPY[/TD]
[TD]132[/TD]
[TD]        8,396.90[/TD]
[TD]     18,443.04[/TD]
[TD]119.6%[/TD]
[/TR]
[TR]
[TD][/TD]
[TD]GLD[/TD]
[TD]140[/TD]
[TD]        9,332.24[/TD]
[TD]     23,308.60[/TD]
[TD]149.8%[/TD]
[/TR]
[TR]
[TD][/TD]
[TD]TLT[/TD]
[TD]164[/TD]
[TD]        9,994.31[/TD]
[TD]     20,336.00[/TD]
[TD]103.5%[/TD]
[/TR]
[TR]
[TD][/TD]
[TD]IWM[/TD]
[TD]234[/TD]
[TD]      11,399.91[/TD]
[TD]     18,799.56[/TD]
[TD]64.9%[/TD]
[/TR]
[TR]
[TD][/TD]
[TD][/TD]
[TD][/TD]
[TD][/TD]
[TD][/TD]
[TD][/TD]
[/TR]
[TR]
[TD]Notes:[/TD]
[TD][/TD]
[TD][/TD]
[TD][/TD]
[TD][/TD]
[TD][/TD]
[/TR]
[TR]
[TD="colspan: 4"]1 Returns do not reflect any tax treatment or effects of inflation.[/TD]
[TD][/TD]
[TD][/TD]
[/TR]
[TR]
[TD]2 Dividend Adjusted Price.[/TD]
[TD][/TD]
[TD][/TD]
[TD][/TD]
[TD][/TD]
[TD][/TD]
[/TR]
[TR]
[TD="colspan: 4"]3 Dollar cost averaging does not include affects of portfolio rebalancing.[/TD]
[TD][/TD]
[TD][/TD]
[/TR]
[/TABLE]

DIA, SPY, GLD, TLT, and IWM are ETF (Exchange Traded Fund) stocks. DIA tracks the Dow Jones Industrial Average, SPY tracks the S&P500 large capitalization stock Index, GLD Tracks the Gold Index, TLT tracks the long term bond index, IWM tracks the Russel 2000 small capitalization stock index.

Please note: This is not a solicitation to buy or sell stocks. It is for information only. Different people have different risk tolerances and as such there is no such thing as a one size fits all investment strategy.

Bean

I have come to the conclusion that the stock market only very slightly better than gambling.

Just because a stock is up or down at the moment has no bearing on whether it will go up or down in the future.

"Good" companies stocks go down with the slightest hint of bad news. "Bad" companies stocks soar on the slightest hint of good new.

The only people who make real consistent profits are the brokers.

For example I have Scottrade account. They charge at least $7 to make a trade. So if I buy $700 worth of a stock, My stock has to gain 2% just for me to break even ($7 to buy, $7 to sell).

I do play the "stock market game", but I look at it as a game and nothing more.

Bean

erco

I've had my best and most consistent short-term results with dividend stocks. They're nearly guaranteed to jump up before the ex-dividend date and drop right afterward. You only need to own the stock for one day to get the whole quarterly dividend, which can be significant. That's why the price jumps right before the ex-dividend date. You have to do your homework to decide when to buy & sell. If you take the dividend, then you must hold the stock long enough for it to recover after the drop. Typically, it drops by nearly the same amount as the dividend paid. Some stocks they recover quicker than others. Another approach is to buy the stock a week or two before the ex-div date, ride the nearly guaranteed rise, but sell just before the dividend is paid, leaving the gambling on recovery to the people who take the dividend.

jazzed

Yes, playing stocks is gambling to a point especially for the uneducated masses who got lured into the market at a peak like happened in 1999-2000. Of course that was a minor catastrophe compared to the real-estate bubble pop. Any sure thing should be scrutinized.

With sufficient knowledge, stocks are less like gambling and more like a savings accounts on steroids.