Backtest the historical performance of a dollar-cost averaging strategy.

The historical performance of a dollar-cost averaging (DCA) strategy reveals its resilience and potential for wealth growth over time, especially in volatile markets. By analyzing backtest data, we can understand its advantages and limitations relative to lump-sum investing.

1. **DCA's Sequence Risk**:
- Backtesting shows that DCA can underperform lump-sum investing if the market moves against the investor early on, due to the dollar-cost averaging effect. This is because DCA spreads investments over time, which can dilute returns if the market declines during the investment period.
- However, over longer periods, DCA tends to recover and often outperform, as it reduces the impact of short-term volatility.
2. **Historical Performance**:
- Over 10 years, DCA has been shown to beat lump-sum investors 10% of the time, with a higher win rate for shorter periods like 10 months, where it beats 27.8% of the time.
- This suggests that while DCA can be less sensitive to market timing, it is not immune to sequence risk, especially in the short term.
3. **Comparison with Lump Sum**:
- In a backtest, reshuffling the sequence of returns from the S&P 500 from 2000 to 2020 showed that DCA's ending balance dropped significantly from $173,949 to $87,396 when the order of returns was changed. This highlights the importance of the sequence of returns on DCA's performance.
- Despite this, DCA remains a popular strategy for long-term investors due to its ability to reduce emotional investing and potential for consistent wealth growth over time.
4. **Enhanced DCA Strategies**:
- More sophisticated DCA strategies, such as dollar-cost deployment with a focus on market trends, can further enhance returns by up to 70 basis points. These strategies involve more active management based on market analysis, which can improve upon simple DCA.
- For instance, a backtest of an enhanced DCA strategy using Python for AAPL from 2017 to 2024 showed a more robust portfolio value over time, taking into account market fluctuations.

In conclusion, while DCA is not without its risks, particularly in the short term, it remains a viable strategy for long-term investors looking to reduce the impact of market volatility and timing. Its performance can be improved by incorporating more advanced analytical techniques into the investment process.