Comments on: So How Bad is Dollar-Cost Averaging? My Own Study of VFINX from 1988 – 2007

By: Raymond

Raymond — Mon, 24 Sep 2007 21:22:54 +0000

Investment returns have almost always trended upwards in the long run. There will be certain disaster years (mid 80′s, 2000) when tragedy strikes the markets, but I agree as well that it’s usually best to invest sooner than later. It’s almost impossible to reliably time the market.

With that said, it’s good to use the proceeds from a steady job to fund any possible investment opportunities that arise!

By: The Sun

The Sun — Thu, 15 Mar 2007 14:26:23 +0000

Don: Actually the reason I started the analysis from 1988 was that the earliest data I can download from Yahoo Fiance was March 1987. Thus 1987 isn’t a full year and there’s a lot of reasons to make annually comparison starting January.

If we start every thing from March 1987 for both monthly and yearly (invest $1,200 very March instead of January), I doubt the result will be any different. In fact, the yearly plan is likely to be even better. If you look at the history of VFINX, it reached the peak in August and bottomed in November, then started to climb higher until peaked again in March 2000. If you invest annually every March, you will get better return than investing every month since you will avoid the peak totally and the price in March 1988 isn’t far away from that in March 1987. Of course, if the first lump-sum was made in October 1987, it will take a longer time to recover the losses, but over a 20+ year period, I don’t know if a monthly investment plan will come out as a winner since there are far more up years than down years and that will favor annual investments, though I don’t have the data to support it. Just a feeling.

Also for annual investment plan, dividend reinvestment is another benefit as the investment made at the beginning of the year enjoys all the dividend reinvestments throughout the year while monthly plan only enjoy part of it.

By: Don

Don — Sat, 10 Mar 2007 03:42:20 +0000

Actually, I’d like to see this same analysis done starting at October of 1987. In the first graph, it looks to me that you got most of your benefit in that first year. Going back to the historical data, this is right on the tail of a precipitous drop. You’ve effectively “timed the market” by choosing this starting point for backtesting.

What if your first lump sum was a bit earlier, just before the crash of 1987? I suspect the graphs will look a bit differently. It’s just as reasonable an analysis, running from October to October as January to January. The analysis may turn out the same in the very long run, but it will take a while to overcome that first $1200 chunk that underperformed.

In fact, if you do the year-year analysis for each month, Jan-Jan, Feb-Feb, and so on I suspect that what you’ll find at least is that the lump sum is a good bit more variable in its return over time, and especially compared to month-month.

That’s not to say that there isn’t value to being in the market longer. I think it is generally accepted that there is. But surely there is a kind of volatility to making fewer strong moves as opposed to many small moves.

By: The Sun

The Sun — Thu, 01 Feb 2007 22:48:55 +0000

Frank: If you have to save in order to invest a lump sum, the interests earned should also be used to purchase extra shares as you suggested, not just the principles. But I don’t think many people are doing that.

By: frank daar

frank daar — Wed, 31 Jan 2007 07:57:12 +0000

If you have the money in hand, as in your first example, it should be in a money market account. this would have e.iminated a large part of the differential you found–especially if the extra bucks were added to contributions in the later part of the year. If you are taking out of a paycheck you obviously will have to do it as in the second case–no brainer.