Year: 2005
Type: article
Abstract: Based on a statistic known as "first-passage time probability" that accounts for exposure to loss during the entire investment horizon, it is shown that dollar cost averaging relative to lump sum investing can significantly reduce the probability, magnitude, and duration of enduring a large loss. This is especially relevant to investors with minimum loss thresholds, possible interim withdrawal needs, changing asset allocations, and/or an uncertain retirement date. For investing in stocks with a 5-year horizon, the probability of enduring a loss can be reduced from over 90% to less than 50%, the dollar amount of the conditional expected shortfall can be reduced by 65%, and the expected time one may have to endure a loss is reduced from 1.5 years to 4 months.
Source: Financial Services Review
Author: William J. Trainor
Institution: Western Kentucky University
Language: English
Subfield: Finance
Domain: Social Sciences
Open Access status: diamond
OpenAlex ID: W73601966