One Year Investment Performance: Why Dollar Cost Averaging Works
September 24, 2009 by Silicon Valley Blogger
Well, we’re back where we started. The Dow Jones is creeping towards 10,000 in the midst of an economic recovery — at least, that’s what the general consensus is right now. Today, the Fed has decided to keep interest rates unchanged and near zero, which is going to be the status quo for an undetermined amount of time.
Not a good thing for your cash savings (e.g. high yield savings accounts and certificates of deposit) which will continue to be saddled by anemic savings account rates and returns, but a positive thing for investors as stocks look more appealing and attractive in a low interest rate environment. Check out the historical chart showing the performance of the Dow Jones Industrials over the past five years from Yahoo! Finance (click to enlarge):
We’re almost where we were last year, which is coincidentally also where the market placed itself 5 years ago. The market has not made much progress, but if you had continued to invest regularly during the last year and had dollar cost averaged throughout this time, you’d be a happy (or relatively happier) camper.
One Year Investment Performance: Why Dollar Cost Averaging Works
I found this interesting example of how your investments would fare if you dollar cost average into a fluctuating market (the example is taken from Tomorrow’s Scholar College Savings Plan). They have a dollar cost averaging calculator where I plugged in a monthly investment amount of $1,000 as an example and got these results:
The monthly investment of $1,000 invested over a hypothetical one year period yielded some nice results even though the share prices shown during that year seemingly went nowhere. In this particular case, the return is 17%! Now applying this example to what’s happened this year — I would surmise that you may have achieved comparable returns (which could actually be more fruitful if you’ve doubled down when the market was at its lowest). If you haven’t been dollar cost averaging but instead did a rebalancing of your portfolio 6 months ago when the DJIA carved out a bottom, you’d also be sitting on some gains.
So did you make any money this past year? Here’s hoping this recovery continues and we avoid the double dip scenario.
For more on this topic, check out my articles:
- You’ve Got Money: Invest It All or Dollar Cost Average?
- Down Year Ahead? How It Can Be Good For Your Investments
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