Best of the Week
Most Popular
1. Gold vs Cash in a Financial Crisis - Richard_Mills
2.Current Stock Market Rally Similarities To 1999 - Chris_Vermeulen
3.America See You On The Dark Side Of The Moon - Part2 - James_Quinn
4.Stock Market Trend Forecast Outlook for 2020 - Nadeem_Walayat
5.Who Said Stock Market Traders and Investor are Emotional Right Now? - Chris_Vermeulen
6.Gold Upswing and Lessons from Gold Tops - P_Radomski_CFA
7.Economic Tribulation is Coming, and Here is Why - Michael_Pento
8.What to Expect in Our Next Recession/Depression? - Raymond_Matison
9.The Fed Celebrates While Americans Drown in Financial Despair - John_Mauldin
10.Hi-yo Silver Away! - Richard_Mills
Last 7 days
Stock Market Coronavirus Deviation from Overall Outlook for 2020 - Video - 28th Feb 20
Stock Market SPX to Rise back to 3350 - 28th Feb 20
Stock Performance in the Rising Coronavirus Fever - 28th Feb 20
Stock Market SPY Breaks Below Fibonacci Bearish Trigger Level - 28th Feb 20
Will CoronaVirus Pandemic Trigger Stocks Bear Market 2020? - 28th Feb 20
Dow Long-term Trend Analysis - Coronavirus Triggering a Stocks Bear Market? - 27th Feb 20
Trump or Sanders? Both will pile up the Debt - 27th Feb 20
Oil Price Is Now More Volatile Than Bitcoin - 27th Feb 20
A Digital “Fedcoin” May Be Coming… And It Would Be Terrifying - 27th Feb 20
India's Nifty 50 Stocks: Does the Bad Jobs Outlook Spell Trouble for Stocks? - 27th Feb 20
How Crypto Currencies Are Helping Players Go Private - 27th Feb 20 -
Gold and Silver The Die Is Cast - 27th Feb 20
US Economy Permanently Addicted to Zero Interest Rates - 27th Feb 20
Has the Stock Market Waterfall Event Started Or A Buying Opportunity? - 27th Feb 20
Advantages of Enrolling in a Retirement Plan - 27th Feb 20 - LS
South Korea Coronavirus Outbreak Data Analysis Warning Rate of Infection is Exponential! - 26th Feb 20
Gold Price Long-term Trend Analysis Forecast 2020 - 26th Feb 20
Fake Markets Are on Collision Course with Reality - 26th Feb 20
Microsoft is Crushing the S&P 500, Secret Trait Of Stocks That Soar 1,000%+ - 26th Feb 20
Europe's Best Ski Resorts For The Ultimate Adventure - 26th Feb 20
Samsung Galaxy S20+ vs Galaxy S10+ Which One to Buy? - 26th Feb 20
Gold Is Taking on $1,700 amid Rising Coronavirus Fears - 26th Feb 20
Is This What Falling Through the Floor Looks Like in Stocks? - 26th Feb 20
Gold Minsky Moment Coming - 26th Feb 20
Why Every Student Should Study Economics - 26th Feb 20
Stock Market Correction Over? - 26th Feb 20
US Bond Market Yield Curve Patterns – What To Expect In 2020 - 25th Feb 20
Has Stock Market Waterfall Event Started Or A Buying Opportunity? - 25th Feb 20
Coronavirus IN Sheffield! Royal Hallamshire Hospital treating 2 infected Patients, UK - 25th Feb 20
Dow Short-term Trend Analysis - Coronavirus Trigger a Stocks Bear Market? - 24th Feb 20
Sustained Silver Rally Coming? - 24th Feb 20
Should Investors Worry about Repo Market and Buy Gold? - 24th Feb 20
Are FANG Technology Stocks Setting Up For A Market Crash? - 24th Feb 20
Gold Above $1,600 Amid FOMC Minutes and Coronavirus Impact - 24th Feb 20
CoronaVirus Pandemic Day 76 Trend Forecast Update - Infected 540k, Minus China 1715, Deaths 4920 - 23rd Feb 20 -
Ways to Find Startup Capital - 23rd Feb 20
Stock Market Deviation from Overall Outlook for 2020 - 22nd Feb 20
The Shanghai Composite and Coronavirus: A Revealing Perspective - 22nd Feb 20
Baltic Dry, Copper, Oil, Tech and China Continue Call for Stock Market Crash Soon - 22nd Feb 20
Gold Warning – This is Not a Buying Opportunity - 22nd Feb 20
Is The Technology Sector FANG Stocks Setting Up For A Market Crash? - 22nd Feb 20
Coronavirus China Infection Statistics Analysis, Probability Forecasts 1/2 Million Infected - 21st Feb 20
Is Crude Oil Firmly on the Upswing Now? - 20th Feb 20
What Can Stop the Stocks Bull – Or At Least, Make It Pause? - 20th Feb 20
Trump and Economic News That Drive Gold, Not Just Coronavirus - 20th Feb 20
Coronavirus COVID19 UK Infection Prevention, Boosting Immune Systems, Birmingham, Sheffield - 20th Feb 20
Silver’s Valuable Insights Into the Upcoming PMs Rally - 20th Feb 20
Coronavirus Coming Storm Act Now to Protect Yourselves and Family to Survive COVID-19 Pandemic - 19th Feb 20
Future Silver Prices Will Shock People, and They’ll Kick Themselves for Not Buying Under $20… - 19th Feb 20
What Alexis Kennedy Learned from Launching Cultist Simulator - 19th Feb 20
Stock Market Potential Short-term top - 18th Feb 20
Coronavirus Fourth Turning - No One Gets Out Of Here Alive! - 18th Feb 20
The Stocks Hit Worst From the Coronavirus - 18th Feb 20
Tips on Pest Control: How to Prevent Pests and Rodents - 18th Feb 20
Buying a Custom Built Gaming PC From Overclockers.co.uk - 1. Delivery and Unboxing - 17th Feb 20
BAIDU (BIDU) Illustrates Why You Should NOT Invest in Chinese Stocks - 17th Feb 20
Financial Markets News Report: February 17, 2020 - February 21, 2020 - 17th Feb 20
NVIDIA (NVDA) GPU King For AI Mega-trend Tech Stocks Investing 2020 - 17th Feb 20
Stock Market Bubble - No One Gets Out Of Here Alive! - 17th Feb 20
British Pound GBP Trend Forecast 2020 - 16th Feb 20
SAMSUNG AI Mega-trend Tech Stocks Investing 2020 - 16th Feb 20
Ignore the Polls, the Markets Have Already Told You Who Wins in 2020 - 16th Feb 20
UK Coronavirus COVID-19 Pandemic WARNING! Sheffield, Manchester, Birmingham Outbreaks Probable - 16th Feb 20
iShares Nasdaq Biotechnology ETF IBB AI Mega-trend Tech Stocks Investing 2020 - 15th Feb 20
Gold Stocks Still Stalled - 15th Feb 20
Is The Technology Stocks Sector Setting Up For A Crash? - 15th Feb 20
UK Calm Before Corona Virus Storm - Infections Forecast into End March 2020 - 15th Feb 20

Market Oracle FREE Newsletter

Coronavirus-bear-market-2020-analysis

Dollar Cost Averaging Stock Market Investment Strategy Still Works

InvestorEducation / Learning to Invest Aug 11, 2009 - 08:18 AM GMT

By: Money_and_Markets

InvestorEducation

Best Financial Markets Analysis ArticleNilus Mattive writes: More than a year ago — when the S&P 500 had begun to wobble but still sat comfortably near 1,400 — I wrote a column right here in Money and Markets talking about dollar-cost averaging.

I said that the strategy “puts time on your side, and allows you to kick back and relax a lot more in the process.” I went ahead to say that “it’s a great way to deal with the kind of bumpy markets we’re seeing right now.”


And I showed how — even during the throes of the Great Depression — dollar-cost averaging into the Dow could have produced a pretty decent result.

Today, I want to revisit the strategy and show you how it would have worked over the last 12 months, which have proved to be another absolutely brutal time for stock investors. I think you’re going to be very surprised by the result!

But First, a Quick Refresher on The Strategy of Dollar-Cost Averaging …

The idea with dollar-cost averaging is relatively simple: You buy equal dollar amounts of the same investment on a predetermined schedule.

Please note the italics in that last sentence. Dollar-cost averaging IS NOT buying a fixed number of shares on a regular basis. In fact, it is quite the opposite. Here’s why …

Let’s say you’ve decided to invest $10,000 in XYZ Corp. Rather than deploying the entire amount at one time, you might instead opt to purchase $1,000 of XYZ stock on the first day of each of the next 10 months.

What’s the logic behind this approach? Well, you can expect just about any stock’s price to vary substantially over a ten-month period. So, when the price is higher, your $1,000 will buy fewer shares; when the price dips, your $1,000 will buy more shares.

In other words, buying equal dollar amounts over time allows you to reduce your risk to a stock’s short-term price movements, automatically encouraging you to buy more when prices are lower and less when prices are higher.

It also removes much of the emotion from the investing process. You’ve already committed to buying the stock at regular intervals, regardless of market conditions.

And because you’re doing this automatically, it doesn’t require more than a few minutes of your time (if any at all!).

Okay, But Surely Dollar-Cost Averaging Wouldn’t Have Worked in the Last Year, Right?

When I wrote that original Money and Markets piece on dollar-cost averaging back on June 17, 2008 … the S&P 500 was sitting at 1,400. Now, it’s more like 1,000. And I don’t have to tell you just how low it went in between.

Day of my original dollar-cost averaging story ...

So clearly someone who started dollar-cost averaging on the day of my column lost out, right?

WRONG.

In fact, as you’ll soon see, an investor who began using dollar-cost averaging in June 2008 has actually come out better than someone who regularly put their funds into a money market account over the same time period!

Let me give you the math behind that bold claim …

Frankly, it really doesn’t make much of a difference whether we pick a daily, weekly, or monthly approach. But for simplicity’s sake, let’s stick with monthly.

We will assume that our hypothetical investor chose to buy a very common index exchange-traded fund such as the S&P 500 SPDR (SPY). As you probably know, that popular ETF attempts to match the broad performance of its namesake U.S. stock index.

And while I could certainly assume that our investor bought on the 17th of every month (the day my original column was published) I’m going to just use the first trading day of each month.

Lest you think I’m trying to avoid including June 2008, I simply pretended that the day of my column counted as the buy date for that month.

I figured our investor would put in $1,000 every time.

So, here’s what the purchases looked like…

A Recent Dollar-Cost Averaging Case Study …
Date
SPY Price
Shares Purchased
$ Invested
06/17/2008
124.62
8.02439
$1,000
07/01/2008
123.5
8.09717
$1,000
08/01/2008
125.41
7.97385
$1,000
09/02/2008
113.6
8.80282
$1,000
10/01/2008
94.83
10.54519
$1,000
11/03/2008
88.23
11.33401
$1,000
12/01/2008
89.1
11.22334
$1,000
01/02/2009
81.78
12.22793
$1,000
02/02/2009
72.99
13.70051
$1,000
03/02/2009
79.07
12.64702
$1,000
04/01/2009
86.93
11.50351
$1,000
05/01/2009
92.01
10.86838
$1,000
06/01/2009
91.95
10.87548
$1,000
07/01/2009
98.81
10.12043
$1,000
08/03/2009
101.2
9.88142
$1,000
TOTALS =
 
157.82545
$15,000
Today’s Value
101.2
X 157.82545
$15,971.94
Profit =
 
 
$971.94

As you can see, our hypothetical investor’s $1,000 bought far more shares of the SPY during the market’s decline and far fewer shares when prices were higher.

The end result of all that buying is that our investor is sitting on 157.82545 shares of SPY today. And based on a recent price of 101.2, that means the total holdings are worth $15,971.94.

Remember, we’re talking about a 15-month period. So that means a total of $15,000 was invested.

End result: Our hypothetical investor is up $971.94, a return of 6.48 percent on the original $15,000 investment.

Yet over the same timeframe, the underlying investment — the S&P 500 index — is DOWN about 28 percent!

Amazing, isn’t it?

Meanwhile, had our investor played it “safe” and just put $1,000 into a money market fund every month … the overall return would have probably been less than 1 percent given current rates.

As you can see, dollar-cost averaging is truly a powerful way to “cut through the market chop” and steer your portfolio through major storms.

But, I want to point a couple things out …

Final Words on Dollar-Cost Averaging, And Investment Strategies in General …

First, dollar-cost averaging is clearly not right for every investor. It requires a steady stream of investment money and could entail regular brokerage commissions. That makes it ideal for a regular company retirement account such as a 401(k) plan.

But please note that it is the same principle at work when you reinvest dividends. And I’d also say it’s a great way for an investor to gradually invest a large lump sum, such as an inheritance.

Of course, the more important thing to note is that dollar-cost averaging takes guts. How many people — having invested thousands of dollars when the S&P 500 was at 1,300 and 1,400 — would have still been able to put more money in at 700?

In most cases, that is precisely the point at which the majority of investors would switch their investment allocation to something else!

My point? Human nature is perhaps the biggest threat to your wealth.

I don’t care if it’s dollar-cost averaging into an index fund … trading commodities … or buying and selling real estate. As long as you do your homework and pursue a time-tested investment strategy — consistently and without fail — I believe you will come out ahead in the long run.

Best wishes,

Nilus

This investment news is brought to you by Uncommon Wisdom. Uncommon Wisdom is a free daily investment newsletter from Weiss Research analysts offering the latest investing news and financial insights for the stock market, precious metals, natural resources, Asian and South American markets. From time to time, the authors of Uncommon Wisdom also cover other topics they feel can contribute to making you healthy, wealthy and wise. To view archives or subscribe, visit http://www.uncommonwisdomdaily.com.

Uncommon Wisdom Archive

© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules