There Is No Such Thing As The Lost Decade With Dollar Cost Averaging

by Hank Coleman

There has been a lot of talk lately about a lost decade of investing. The market has moved sideways or even worse declined over the past ten years. If that was true, it would make you wonder why we are wasting our time to even bother investing. But, like most statistics, that fact is only half of the story. Those stats are true in only a narrowly focused segment of the stock market. If you had invested $100,000 on the last day of 1999 in the S&P 500 index, the most important benchmark for the overall market, your investment portfolio would have lost 1.1% annually and ended with $89,200 in your account. If you had invested $833.33 every month of the first of each month using dollar cost averaging instead, you would have over $176,000 or a 5.8% gain ($833 x 12 x 10 = $100,000) in your investment account.

The S&P 500 index was at 1469 in December 1999, and the index was only cresting 1150 this month. We still are not back to the highs of this past decade, but if you had been dollar cost averaging throughout it would not have mattered. Investing consistently throughout the decade every month would have allowed you to purchases shares in the index during extremely low points such as 735 in February of last year and 815 during the Tech Bubble in September 2002. Would you invest over $800 per month in just the S&P 500? Maybe…maybe not. The numbers in this example are large for comparison. But, the same is true no matter what the denominations of your investments were. Dollar cost averaging has beat out lump sum investing over the past 10 years, hands down.

Dollar cost averaging is the systematic purchasing of shares of stock, a mutual fund, and index fund, or other investment every month. You spend the same amount of money every period and your cost averages out over time…hence the name. Some months you buy less shares of the security when the share price is high and other months you will buy a lot of shares when the prices take a dip. This method keeps you from buying shares at their peak and helps you follow the age old investing wisdom of, “Buy low, sell high”.

So, do not buy into the hype of the “Lost Decade” for investors. It all depends on the statistics and how you massage them. There is no such thing as a lost decade for disciplined investors who practice tried and true investing philosophies such as dollar cost averaging and diversification.

Grab Our RSS Feed! Receive Posts By E-mail

{ 1 comment }

ctreit March 24, 2010 at 9:46 am

You make a good point. There is only one assumption that investors may not be able to carry out: be disciplined and contribute in each period. Many unemployed people cannot keep up with their payments during rough times when stock prices are probably also lower, which makes them lose out on the benefits of dollar-cost averaging.

Comments on this entry are closed.

Previous post:

Next post:

Copyright © 2007–2023

WordPress Admin