A Monte Carlo study of the strategies for 401(k) plans
dollar-cost-averaging, value-averaging, and proportional rebalancing
DOI:
https://doi.org/10.61190/fsr.v19i2.4967Keywords:
Simulation, Proportional rebalancing, Value-averaging, Dollar-cost-averaging, 40l(k) investingAbstract
This study conducts Monte Carlo simulations to compare the performances of three popular asset allocation strategies in the financial press, that is, dollar-cost-averaging, value averaging, and proportional rebalancing, in the 40l(k) plan framework. Value-averaging generates a higher terminal value for a retirement portfolio than the other two strategies. Total risk of the portfolio is lower under value averaging than under dollar cost averaging. Value averaging provides the highest reward-to-risk ratio as well as the highest likelihood of meeting the investment goal. Based on the overall consideration of terminal value, total risk, modified Sharpe ratio, modified Sortino ratio, and dominance frequency, a targeted annual growth rate of between 9% and 11% for the equity account should be used as the target growth rate in conducting value averaging.
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