The power of dollar cost averaging

[Snodog]

In March of 2007 the wife and I started Roth IRA's for each of us at Vanguard. We lumped summed our 2006 contribution at that time and the rest (2007-2010) we dollar cost averaged into low cost foriegn and domestic funds. These were equity funds as I like to keep the highest expected returning assets in Roths.

Here are the stats:
Total contributions: $46,000
Current value: $55,524

This period includes the worst global stock market crash since the Great Depression (Oct 07-March 09). The DOW in March 2007 was a little over 1000 points higher than it is now and I still managed to average almost a 6% annual return. And don't forget the fact that our 2006 contribution was lumped.

This post was not meant to be me bragging about my returns but rather an encouragement to younger folks who may be hesistant to get their feet wet.

[disneysteve]

This is an EXCELLENT post! It is a message that so many people, even the "experts", often overlook. Just because the stock market has essentially done nothing for 10 years does not mean that individual investors earned nothing during that time.

No matter what happens, time IN the market is always what wins, not timing the market.

[Snodog]

This is an EXCELLENT post! It is a message that so many people, even the "experts", often overlook. Just because the stock market has essentially done nothing for 10 years does not mean that individual investors earned nothing during that time.

No matter what happens, time IN the market is always what wins, not timing the market.

Thank you Steve.

Its so important to resist the urge of discontinuing investing when the markets are down. Thats where my profit came from. I admit there was a part of me that felt like a fool for putting more in when the markets are going down every day and we were $7,000 in the hole. Its like they say "When theres a sale on Wall St everyone goes running for the exits."

[Scanner]

Yeah, I get it. . .but also. . .I do think it says something (what. . .can be debated) that for essentially 10 years the markets have done nothing. Yeah, you made 6%. . .but at what risk? Minimal? A lot?

I mean, I am not sure what interest rates on CD's were in 2006. . .but what if I had put all my money in CD's in 2006? The real estate market was humming so I assume a CD could have been gotten for 3 or 4% at least. Then I wouldn't have had any principal risk but yet had nearly the same return.

I think the market, for the risk endured, has been terrible the last 10 years. And 10 years is an awful long time to be patient. They used to say 7 years. What is it now? 15 years? And that's my point.

Of course, people here know me as a bit contrarian (not entirely though - I am probably half contrarian in my philosophy and half mainstream).

[disneysteve]

But Scanner, the point is that "for essentially 10 years the markets have done nothing" isn't really true. Someone who has been DCAing into their account for 10 years has done just fine because when the market was dropping, they were getting more shares and when the market rebounded, they benefited more from that recovery.

[Snodog]

Yeah, I get it. . .but also. . .I do think it says something (what. . .can be debated) that for essentially 10 years the markets have done nothing. Yeah, you made 6%. . .but at what risk? Minimal? A lot?

Sorry I should have been more clear. It wasn't my intention to recommend an all stock portfolio.
Our Roths are only a part of our portfolio. I guess my point was even if you were all stocks during one of the worst times in US history to be investing you still made money by dollar cost averaging.

I think the market, for the risk endured, has been terrible the last 10 years. And 10 years is an awful long time to be patient. They used to say 7 years. What is it now? 15 years? And that's my point.

It may be 15 years it may be even longer. No one knows. But you greatly decrease your risk of underperforming by holding a diversified portfolio.

2000-2010 Average Annual Returns

Money Market - 2.50%
S&P - 0.33%
60/40 - Total Stock Market / 5 Year Treasuries - 4.00%
30/30/40 - TSM / Total International / 5 Year Treasuries - 4.73%
15/15/15/15/40 - TSM / Small Cap Value / Total Int / Int Small Cap Value / 5 Year Treauries - 7.58%
15/15/15/15/25/15 - TSM / Small Cap Value / Total Int / Int Small Cap Value / 5 Year Treauries / Gold - 8.75%

Returns assume annual rebalancing back into the desired percentages.

And these are the returns if you invested all your money at the worst possible time - 2000. You would have faired better if were dollar cost averaging.

[Scanner]

Mmm.

Good counterpoint. I was assuming a 100% S&P portfolio or something like that. Who's portfolio is 100% equities? (only mine, lol ) So. . .I have to say that most didn't have that risk I was initially thinking of.

Now. . .that being said. . .10 years ago. . .they didn't recommend a 15% position in precious metals. The most I have seen a pundit recommend is 10% and most want you around 5%. So, that last example, while I think isn't bad right now. . .wasn't "in" in 2010.

In fact, I can remember discussions here almost 3-4 years ago stating precious metals aren't really investments.

[disneysteve]

I was assuming a 100% S&P portfolio or something like that.

Exactly. When the pundits talk about the S&P 500 being flat for 10 years, they disregard the fact that few if any people have 100% of their money in the S&P 500.

Here are 10-year returns for some of my holdings:

VFINX 0.71% (S&P 500 fund that gets all the attention)
VGHCX 4.81% (health care fund)
VBMFX 5.88% (bond fund)
VHGEX 6.99% (global fund)
HRTVX 9.22% (domestic value fund)
CSRSX 11.54% (REIT)
OPGSX 26.71% (gold/precious metals fund)

So yes, my S&P fund went nowhere. But many of my other holdings did fine and a couple did incredibly well, though they represent very small portions of our portfolio unfortunately. Overall, the portfolio did ok. I don't track performance to be able to give an overall return but it isn't nearly as bad as the talking heads would lead you to believe.

[Snodog]

Now. . .that being said. . .10 years ago. . .they didn't recommend a 15% position in precious metals. The most I have seen a pundit recommend is 10% and most want you around 5%. So, that last example, while I think isn't bad right now. . .wasn't "in" in 2010.

In fact, I can remember discussions here almost 3-4 years ago stating precious metals aren't really investments.

Fair enough I'll let you throw out the gold portfolio.

Still the portfolio which is diversified between stocks/bonds/large cap/small cap/domestic/foreign did very respectable.

Personally our investments look very much like this with even more small cap value tilt. We've been investing this way since the late 90's and its worked very well.

Gold I have mixed emotions about. I like that it is a great diversifier, however I don't like that its long term expected real return is near 0.

Add to that the fact that gold lost value 12 out of 13 years between 1988-2000 and I don't think I would've had the discipline to rebalance into it every year when stocks were flying high. So for these reasons I personally don't own gold.

[kv968]

One other thing that has to be thrown in the mix here besides DCA'ing is rebalancing your portfolio at some point. This also helps in the long run with the "buy low/sell high" theory.

[krantcents]

In March of 2007 the wife and I started Roth IRA's for each of us at Vanguard. We lumped summed our 2006 contribution at that time and the rest (2007-2010) we dollar cost averaged into low cost foriegn and domestic funds. These were equity funds as I like to keep the highest expected returning assets in Roths.

Here are the stats:
Total contributions: $46,000
Current value: $55,524

This period includes the worst global stock market crash since the Great Depression (Oct 07-March 09). The DOW in March 2007 was a little over 1000 points higher than it is now and I still managed to average almost a 6% annual return. And don't forget the fact that our 2006 contribution was lumped.

This post was not meant to be me bragging about my returns but rather an encouragement to younger folks who may be hesistant to get their feet wet.

Totally agree! Dollar cost averaging can be done manually as you did or automatically through a payroll deduction. I generally go with the payroll deduction. Either way works!

[Snodog]

One other thing that has to be thrown in the mix here besides DCA'ing is rebalancing your portfolio at some point. This also helps in the long run with the "buy low/sell high" theory.

Great point! I primarily rebalance to control risk but depending on how correlated and close in returns your asset classes are it can also increase returns.

Here is a good example using 2 low correlated assets where rebalancing actually increased returns.

CAGR 1972-2009

Domestic Small Cap Value - CAGR 13.97% Down Standard Deviation- 11.73%
International Small Cap Value - CAGR 15.44% Down Standard Deviation- 12.60%
50/50 - Domestic Small Cap Value/International Small Cap Value (annual rebalancing) - CAGR 15.61% Down Standard Deviation- 10.77%

[Andrew Jackson]

Is DCAing once a year okay? I bought my very first fund, VFINX, back on March 17th I believe. Since it was a Vanguard fund I needed $3,000 to start up. I am planning on adding another $3,000 this march.

[Snodog]

Is DCAing once a year okay? I bought my very first fund, VFINX, back on March 17th I believe. Since it was a Vanguard fund I needed $3,000 to start up. I am planning on adding another $3,000 this march.

I prefer monthly but yearly would probably be ok too. The most important thing is to invest - not when IMO.

[buildmybudget]

Dollar Cost Averaging is really just the concept of investing a consistent amount of money each period, say for example, $100 each month for twelve months. So as the stock price goes up and down, so will the number of shares you will be able to purchase with your $100. The idea is that in the long run the investment will hopefully continue to increase in value and you will reap the benefits of your monthly investment because you were able to purchase more shares during down months.

Perhaps you can rationalize that a one time annual contribution of $3000 falls within the DCA concept, however you may want to revisit this strategy. I mean, take for example a stock like McDonalds (MCD). The stock price a year ago was roughly $61 and today the price reached a high of $76.86. Naturally, you won't be able to purchase as many shares with a $3000 lump investment today as you would have if you would have purchased shares throughout the year using DCA. You would also receive dividends on your stock purchases made throughout the year, which is another reason to DCA. Hope this helps!