Comments on: So How Bad is Dollar-Cost Averaging? My Own Study of VFINX from 1988 – 2007 http://www.thesunsfinancialdiary.com/investing/so-how-bad-is-dollar-cost-averaging-my-own-study-of-vfinx-from-1988-2007/ Fri, 20 Nov 2009 19:09:54 -0800 http://wordpress.org/?v=2.8.6 hourly 1 By: Weekend Linkage - May 18, 2008 http://www.thesunsfinancialdiary.com/investing/so-how-bad-is-dollar-cost-averaging-my-own-study-of-vfinx-from-1988-2007/comment-page-1/#comment-42494 Weekend Linkage - May 18, 2008 Mon, 19 May 2008 03:11:29 +0000 http://www.thesunsfinancialdiary.com/2007/01/08/so-how-bad-is-dollar-cost-averaging-my-own-study-of-vfinx-from-1988-2007/#comment-42494 [...] Over the Past 10 Years: How Did Dollar-Cost Averaging Fare? @ Generation X Finance I looked at the same issue of dollar cost averaging last year with VFINX and the conclusion is: Invest as early as you [...] [...] Over the Past 10 Years: How Did Dollar-Cost Averaging Fare? @ Generation X Finance I looked at the same issue of dollar cost averaging last year with VFINX and the conclusion is: Invest as early as you [...]

]]> By: Raymond http://www.thesunsfinancialdiary.com/investing/so-how-bad-is-dollar-cost-averaging-my-own-study-of-vfinx-from-1988-2007/comment-page-1/#comment-23736 Raymond Mon, 24 Sep 2007 21:22:54 +0000 http://www.thesunsfinancialdiary.com/2007/01/08/so-how-bad-is-dollar-cost-averaging-my-own-study-of-vfinx-from-1988-2007/#comment-23736 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! 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: Pay Ourselves First: The Way We Save and Invest | The Sun’s Financial Diary | A Personal Finance Blog on Saving and Investing http://www.thesunsfinancialdiary.com/investing/so-how-bad-is-dollar-cost-averaging-my-own-study-of-vfinx-from-1988-2007/comment-page-1/#comment-14179 Pay Ourselves First: The Way We Save and Invest | The Sun’s Financial Diary | A Personal Finance Blog on Saving and Investing Tue, 17 Jul 2007 15:35:14 +0000 http://www.thesunsfinancialdiary.com/2007/01/08/so-how-bad-is-dollar-cost-averaging-my-own-study-of-vfinx-from-1988-2007/#comment-14179 [...] from starting early and being consistent. Though I have proved with my own study before that dollar-cost averaging may not be the best investment strategy when it comes to returns, that’s what we are using to invest in mutual funds. Sometimes [...] [...] from starting early and being consistent. Though I have proved with my own study before that dollar-cost averaging may not be the best investment strategy when it comes to returns, that’s what we are using to invest in mutual funds. Sometimes [...]

]]> By: T. Rowe Price Automatic Asset Builder | The Sun’s Financial Diary | A Personal Finance Blog on Saving and Investing http://www.thesunsfinancialdiary.com/investing/so-how-bad-is-dollar-cost-averaging-my-own-study-of-vfinx-from-1988-2007/comment-page-1/#comment-9359 T. Rowe Price Automatic Asset Builder | The Sun’s Financial Diary | A Personal Finance Blog on Saving and Investing Tue, 15 May 2007 15:45:51 +0000 http://www.thesunsfinancialdiary.com/2007/01/08/so-how-bad-is-dollar-cost-averaging-my-own-study-of-vfinx-from-1988-2007/#comment-9359 [...] $3,000 or $2,000 to come up with the initial fund, I can start with as little as $50 a month, and the waiting could be costly over the long term. The best way to invest is to start right away. It’s never too late to start investing. In [...] [...] $3,000 or $2,000 to come up with the initial fund, I can start with as little as $50 a month, and the waiting could be costly over the long term. The best way to invest is to start right away. It’s never too late to start investing. In [...]

]]> By: Dollar-Cost-Averaging: For Higher Return or for Lower Risk? | The Sun’s Financial Diary | A Personal Finance Blog on Saving and Investing http://www.thesunsfinancialdiary.com/investing/so-how-bad-is-dollar-cost-averaging-my-own-study-of-vfinx-from-1988-2007/comment-page-1/#comment-9079 Dollar-Cost-Averaging: For Higher Return or for Lower Risk? | The Sun’s Financial Diary | A Personal Finance Blog on Saving and Investing Fri, 11 May 2007 22:04:51 +0000 http://www.thesunsfinancialdiary.com/2007/01/08/so-how-bad-is-dollar-cost-averaging-my-own-study-of-vfinx-from-1988-2007/#comment-9079 [...] So How Bad is Dollar-Cost-Averaging? My Own Study of VFINX from 1988 - 2007 [...] [...] So How Bad is Dollar-Cost-Averaging? My Own Study of VFINX from 1988 – 2007 [...]

]]> By: The Sun http://www.thesunsfinancialdiary.com/investing/so-how-bad-is-dollar-cost-averaging-my-own-study-of-vfinx-from-1988-2007/comment-page-1/#comment-4269 The Sun Thu, 15 Mar 2007 14:26:23 +0000 http://www.thesunsfinancialdiary.com/2007/01/08/so-how-bad-is-dollar-cost-averaging-my-own-study-of-vfinx-from-1988-2007/#comment-4269 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. 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 http://www.thesunsfinancialdiary.com/investing/so-how-bad-is-dollar-cost-averaging-my-own-study-of-vfinx-from-1988-2007/comment-page-1/#comment-3804 Don Sat, 10 Mar 2007 03:42:20 +0000 http://www.thesunsfinancialdiary.com/2007/01/08/so-how-bad-is-dollar-cost-averaging-my-own-study-of-vfinx-from-1988-2007/#comment-3804 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. 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 http://www.thesunsfinancialdiary.com/investing/so-how-bad-is-dollar-cost-averaging-my-own-study-of-vfinx-from-1988-2007/comment-page-1/#comment-2019 The Sun Thu, 01 Feb 2007 22:48:55 +0000 http://www.thesunsfinancialdiary.com/2007/01/08/so-how-bad-is-dollar-cost-averaging-my-own-study-of-vfinx-from-1988-2007/#comment-2019 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. 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: Priority: Paying off Debt or Investing - The Sun’s Financial Diary - Accumulating wealth is like building The Great Wall, one brick at a time http://www.thesunsfinancialdiary.com/investing/so-how-bad-is-dollar-cost-averaging-my-own-study-of-vfinx-from-1988-2007/comment-page-1/#comment-2014 Priority: Paying off Debt or Investing - The Sun’s Financial Diary - Accumulating wealth is like building The Great Wall, one brick at a time Thu, 01 Feb 2007 18:33:01 +0000 http://www.thesunsfinancialdiary.com/2007/01/08/so-how-bad-is-dollar-cost-averaging-my-own-study-of-vfinx-from-1988-2007/#comment-2014 [...] So How Bad is Dollar-Cost-Averaging? My Own Study of VFINX from 1988 - 2007 [...] [...] So How Bad is Dollar-Cost-Averaging? My Own Study of VFINX from 1988 – 2007 [...]

]]> By: frank daar http://www.thesunsfinancialdiary.com/investing/so-how-bad-is-dollar-cost-averaging-my-own-study-of-vfinx-from-1988-2007/comment-page-1/#comment-1956 frank daar Wed, 31 Jan 2007 07:57:12 +0000 http://www.thesunsfinancialdiary.com/2007/01/08/so-how-bad-is-dollar-cost-averaging-my-own-study-of-vfinx-from-1988-2007/#comment-1956 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. 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.

]]> By: Dollar-Cost-Averaging: For Higher Return or for Lower Risk? - The Sun’s Financial Diary - Accumulating wealth is like building The Great Wall, one brick at a time http://www.thesunsfinancialdiary.com/investing/so-how-bad-is-dollar-cost-averaging-my-own-study-of-vfinx-from-1988-2007/comment-page-1/#comment-1349 Dollar-Cost-Averaging: For Higher Return or for Lower Risk? - The Sun’s Financial Diary - Accumulating wealth is like building The Great Wall, one brick at a time Fri, 12 Jan 2007 16:19:32 +0000 http://www.thesunsfinancialdiary.com/2007/01/08/so-how-bad-is-dollar-cost-averaging-my-own-study-of-vfinx-from-1988-2007/#comment-1349 [...] So How Bad is Dollar-Cost-Averaging? My Own Study of VFINX from 1988 - 2007 [...] [...] So How Bad is Dollar-Cost-Averaging? My Own Study of VFINX from 1988 – 2007 [...]

]]> By: January 12th Friday Five : Generation X Finance http://www.thesunsfinancialdiary.com/investing/so-how-bad-is-dollar-cost-averaging-my-own-study-of-vfinx-from-1988-2007/comment-page-1/#comment-1344 January 12th Friday Five : Generation X Finance Fri, 12 Jan 2007 14:39:56 +0000 http://www.thesunsfinancialdiary.com/2007/01/08/so-how-bad-is-dollar-cost-averaging-my-own-study-of-vfinx-from-1988-2007/#comment-1344 [...] So How Bad Is Dollar Cost Averaging? - The Sun does a little research to find out how DCA does compared to lump-sum investing. [...] [...] So How Bad Is Dollar Cost Averaging? – The Sun does a little research to find out how DCA does compared to lump-sum investing. [...]

]]> By: 2 Pennies Earned http://www.thesunsfinancialdiary.com/investing/so-how-bad-is-dollar-cost-averaging-my-own-study-of-vfinx-from-1988-2007/comment-page-1/#comment-1250 2 Pennies Earned Wed, 10 Jan 2007 01:05:00 +0000 http://www.thesunsfinancialdiary.com/2007/01/08/so-how-bad-is-dollar-cost-averaging-my-own-study-of-vfinx-from-1988-2007/#comment-1250 I have also read in Andrew Tobias's The Only Investment Guide You'll Ever Need that if you have a lump sum to invest, you should invest it all at once. I think strength of DCA is that it's a more profitable strategy than trying to time the market. Now if only I could decide on my portfolio allocation for 2007... I have also read in Andrew Tobias’s The Only Investment Guide You’ll Ever Need that if you have a lump sum to invest, you should invest it all at once. I think strength of DCA is that it’s a more profitable strategy than trying to time the market. Now if only I could decide on my portfolio allocation for 2007…

]]> By: TJP http://www.thesunsfinancialdiary.com/investing/so-how-bad-is-dollar-cost-averaging-my-own-study-of-vfinx-from-1988-2007/comment-page-1/#comment-1227 TJP Tue, 09 Jan 2007 08:57:42 +0000 http://www.thesunsfinancialdiary.com/2007/01/08/so-how-bad-is-dollar-cost-averaging-my-own-study-of-vfinx-from-1988-2007/#comment-1227 Nice work. It's best to invest money when you have it after all. But since I'm flat broke at the moment, monthly ShareBuilder deposits will have to do for now. If I hit the lottery, then that's another story. Nice work. It’s best to invest money when you have it after all. But since I’m flat broke at the moment, monthly ShareBuilder deposits will have to do for now.

If I hit the lottery, then that’s another story.

]]> By: jersey jen http://www.thesunsfinancialdiary.com/investing/so-how-bad-is-dollar-cost-averaging-my-own-study-of-vfinx-from-1988-2007/comment-page-1/#comment-1224 jersey jen Tue, 09 Jan 2007 05:49:05 +0000 http://www.thesunsfinancialdiary.com/2007/01/08/so-how-bad-is-dollar-cost-averaging-my-own-study-of-vfinx-from-1988-2007/#comment-1224 good post! i use sharebuilder for investing, mostly because it's automatic and i tend not have a big chunk of money on hand. good post! i use sharebuilder for investing, mostly because it’s automatic and i tend not have a big chunk of money on hand.

]]> By: links for 2007-01-08 » Personal Finance - Save Money at Binary Dollar http://www.thesunsfinancialdiary.com/investing/so-how-bad-is-dollar-cost-averaging-my-own-study-of-vfinx-from-1988-2007/comment-page-1/#comment-1216 links for 2007-01-08 » Personal Finance - Save Money at Binary Dollar Tue, 09 Jan 2007 03:39:42 +0000 http://www.thesunsfinancialdiary.com/2007/01/08/so-how-bad-is-dollar-cost-averaging-my-own-study-of-vfinx-from-1988-2007/#comment-1216 [...] You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site. Leave aReply [...] [...] You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site. Leave aReply [...]

]]> By: Wanda http://www.thesunsfinancialdiary.com/investing/so-how-bad-is-dollar-cost-averaging-my-own-study-of-vfinx-from-1988-2007/comment-page-1/#comment-1213 Wanda Mon, 08 Jan 2007 23:18:40 +0000 http://www.thesunsfinancialdiary.com/2007/01/08/so-how-bad-is-dollar-cost-averaging-my-own-study-of-vfinx-from-1988-2007/#comment-1213 Thanks for that analysis! I guess I should've invested the full $4,000 in my Roth IRA instead of spreading it out! Ah well, live and learn, right? ;) Thanks for that analysis! I guess I should’ve invested the full $4,000 in my Roth IRA instead of spreading it out! Ah well, live and learn, right? ;)

]]> By: moneymonk http://www.thesunsfinancialdiary.com/investing/so-how-bad-is-dollar-cost-averaging-my-own-study-of-vfinx-from-1988-2007/comment-page-1/#comment-1211 moneymonk Mon, 08 Jan 2007 23:00:52 +0000 http://www.thesunsfinancialdiary.com/2007/01/08/so-how-bad-is-dollar-cost-averaging-my-own-study-of-vfinx-from-1988-2007/#comment-1211 Good info for people that need a good definition of DCA. I like the way you breakdown the graphs. I think to each it's own. Some invest the only way the can afford, which is so much at a time. Others invest in lump sums. It all depends on the Individual what is best for them. Overall investing little is better than none at all. Good info for people that need a good definition of DCA. I like the way you breakdown the graphs.

I think to each it’s own. Some invest the only way the can afford, which is so much at a time. Others invest in lump sums.

It all depends on the Individual what is best for them.

Overall investing little is better than none at all.

]]> By: AllFinancialMatters » Blog Archive » JLP’s Weekly Roundup XL http://www.thesunsfinancialdiary.com/investing/so-how-bad-is-dollar-cost-averaging-my-own-study-of-vfinx-from-1988-2007/comment-page-1/#comment-1210 AllFinancialMatters » Blog Archive » JLP’s Weekly Roundup XL Mon, 08 Jan 2007 22:54:20 +0000 http://www.thesunsfinancialdiary.com/2007/01/08/so-how-bad-is-dollar-cost-averaging-my-own-study-of-vfinx-from-1988-2007/#comment-1210 [...] The Sun’s Financial Diary. [...] [...] The Sun’s Financial Diary. [...]

]]> By: Deep http://www.thesunsfinancialdiary.com/investing/so-how-bad-is-dollar-cost-averaging-my-own-study-of-vfinx-from-1988-2007/comment-page-1/#comment-1209 Deep Mon, 08 Jan 2007 22:24:51 +0000 http://www.thesunsfinancialdiary.com/2007/01/08/so-how-bad-is-dollar-cost-averaging-my-own-study-of-vfinx-from-1988-2007/#comment-1209 Very Interesting and informative for a person like me who is contemplating DCA. Thanks!!!!!!!!! Very Interesting and informative for a person like me who is contemplating DCA. Thanks!!!!!!!!!

]]> By: Jonathan http://www.thesunsfinancialdiary.com/investing/so-how-bad-is-dollar-cost-averaging-my-own-study-of-vfinx-from-1988-2007/comment-page-1/#comment-1206 Jonathan Mon, 08 Jan 2007 19:14:52 +0000 http://www.thesunsfinancialdiary.com/2007/01/08/so-how-bad-is-dollar-cost-averaging-my-own-study-of-vfinx-from-1988-2007/#comment-1206 Very interesting. There will be years when the monthly scenario beats the once-a-year, but I think your data provides us another example that, in the long-run, it's better to just get your money invested as soon as possible. Very interesting. There will be years when the monthly scenario beats the once-a-year, but I think your data provides us another example that, in the long-run, it’s better to just get your money invested as soon as possible.

]]> By: The Sun http://www.thesunsfinancialdiary.com/investing/so-how-bad-is-dollar-cost-averaging-my-own-study-of-vfinx-from-1988-2007/comment-page-1/#comment-1205 The Sun Mon, 08 Jan 2007 19:00:06 +0000 http://www.thesunsfinancialdiary.com/2007/01/08/so-how-bad-is-dollar-cost-averaging-my-own-study-of-vfinx-from-1988-2007/#comment-1205 Indeed all the four schemes I considered are DCA (I modified my post after your comments), with only difference being the investment frequency and amount invested each time. While we always want to maximize our returns, the main message, as you said, is to invest regular. Over time, the market will take care of the return for us, as long as we have faith in it :D. Indeed all the four schemes I considered are DCA (I modified my post after your comments), with only difference being the investment frequency and amount invested each time. While we always want to maximize our returns, the main message, as you said, is to invest regular. Over time, the market will take care of the return for us, as long as we have faith in it :D .

]]> By: AllFinancialMatters » Blog Archive » JLP’s Weekly Rounup XL http://www.thesunsfinancialdiary.com/investing/so-how-bad-is-dollar-cost-averaging-my-own-study-of-vfinx-from-1988-2007/comment-page-1/#comment-1204 AllFinancialMatters » Blog Archive » JLP’s Weekly Rounup XL Mon, 08 Jan 2007 18:32:34 +0000 http://www.thesunsfinancialdiary.com/2007/01/08/so-how-bad-is-dollar-cost-averaging-my-own-study-of-vfinx-from-1988-2007/#comment-1204 [...] The Sun’s Financial Diary. [...] [...] The Sun’s Financial Diary. [...]

]]> By: Jeremy http://www.thesunsfinancialdiary.com/investing/so-how-bad-is-dollar-cost-averaging-my-own-study-of-vfinx-from-1988-2007/comment-page-1/#comment-1202 Jeremy Mon, 08 Jan 2007 17:50:35 +0000 http://www.thesunsfinancialdiary.com/2007/01/08/so-how-bad-is-dollar-cost-averaging-my-own-study-of-vfinx-from-1988-2007/#comment-1202 Very nice data and presentation. I think a lot of people just assume DCA means monthly investing. In fact, investing regularly at any interval is also DCA. So if you are buying the same amount of the same fund every year, you are still dollar cost averaging, just on a different time frame. The argument for doing DCA of any sort is to take emotion out of investing, plain and simple. If you do not make regular investments at predetermined intervals you are left with emotion to base your investment decisions. This leads to trying to time the market and picking optimal times to buy. Generally this leads to worse performance over someone who invests regularly. So while I can certainly see the argument for DCA as not being optimal as your first example showed, it is still likely far better than someone who invests irregularly based on market conditions or how much money they have on hand to invest. Very nice data and presentation. I think a lot of people just assume DCA means monthly investing. In fact, investing regularly at any interval is also DCA. So if you are buying the same amount of the same fund every year, you are still dollar cost averaging, just on a different time frame.

The argument for doing DCA of any sort is to take emotion out of investing, plain and simple. If you do not make regular investments at predetermined intervals you are left with emotion to base your investment decisions. This leads to trying to time the market and picking optimal times to buy. Generally this leads to worse performance over someone who invests regularly.

So while I can certainly see the argument for DCA as not being optimal as your first example showed, it is still likely far better than someone who invests irregularly based on market conditions or how much money they have on hand to invest.

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