Historical returns of Dollar Cost Averaging — Part 1
Read enough about investing and you’ll undoubtedly come across the strategy of Dollar Cost Average. The strategy is simple: divide the total sum you wish to invest into the market into equal parts and invest in the market at regular intervals.
I set out to do a study of the results to see how the strategy would have done historically if one were to have started investing a set sum over the course of three years with different starting in each month beginning in 1920.
For example, assume you had $108,000 to be invested over three years in the sum of $3,000 a month in the SP500. The study looks to see what if you started investing in Jan of 1920 until Dec of 1922? Or Feb 1920 until Jan of 1922? How does that compare if say you started investing in March of 1921 until Feb of 1923? And so on.
I then recorded the 5 year, 10 year and 15 year returns for each starting month.
Results
Full spreadsheet of results
Histogram of Returns
Best 5 Year Return since 1990
Start investing in April 1994:
- 5 Year Returns: 29%
- 10 Year Returns: 10%
- 15 Year Returns: 5%
Worst 5 Year Return since 1990
Start investing in March 2004:
- 5 Year Returns: -11%
- 10 Year Returns: 7%
- 15 Year Returns: 8%
Best 10 Year Return since 1990
Start investing in Jan 1990:
- 5 Year Returns: 10%
- 10 Year Returns: 20%
- 15 Year Returns: 11%
Worst 10 Year Return since 1990
Start investing in March 1999:
- 5 Year Returns: -2%
- 10 Year Returns: -4%
- 15 Year Returns: 5%
Best 15 Year Return since 1990
Start investing in May 1992:
- 5 Year Returns: 21%
- 10 Year Returns: 13%
- 15 Year Returns: 11%
Worst 15 Year Return since 1990
Start investing in November 1997:
- 5 Year Returns: -7%
- 10 Year Returns: 4%
- 15 Year Returns: 3%
Summary
Like most investment strategy, dollar cost averaging is a long term game. Short term 5 year results fluctuate but the longer term 10 or 15 year returns are positive with a high probability of getting a return over 7%.
Next post
Lump Sum vs Dollar Cost Averaging): a comparison of Dollar Cost Averaging vs investing in one big chunk.
