When I initially ran the study, I arbitrarily chose a buy rule in order to conceptually see if buying weakness (i.e., buy more incremental units only when SPY closes lower than the previous month).on an equal weighted dollar cost averaging basis improved results over simply buying the same dollar amount of units every month.
This got me thinking. The study potentially demonstrated a close to a 25 bps improvement by buying weakness. But, this rule is terribly arbitrary. I think the rule should actually be something along the lines of:
"Once cumulative compound return turns negative, relax the monthly lower closing price rule and double down on allocations", in a nutshell, double the amount of capital contributions and actually buy weakness.
The initial rule prevents too much capital allocation into a rising market, and the relaxation of this rule contingent on cumulative compound returns turning negative enables an investor to take advantage of buying cheap.
Here is a chart comparing the performance in simply buying monthly equal dollar weight units in SPY vs. buying double SPY once cumulative compound return turns negative:
The difference in cumulative compound returns is almost 100 bps by allocating more capital to the buy program once cumulative compound return goes negative.
I think I'm going to add a link to a similar study on the blog using SPY starting at the end of August 2015 using monthly closes. I'm darn curious now to see how this works in real time. I'll be using the actual results of the monthly closes and cumulative performance to allocate my own capital in real time.