By the Numbers
“As far as investing is concerned, dollar-cost averaging suggests that slow-and-steady will likely win the race.”
In his great book “Bogle on Mutual Funds,” John Bogle (founder and chairman of The Vanguard Group) examines a study of the effects of dollar-cost averaging in the stock market during the stock market’s best 10-year period and its worst. The results are dramatic:
Clearly, the magic of compounding, combined with the normalizing effects of dollar-cost averaging, minimizes the volatility of investment returns. What is more, making regular annual Investment of $1,000 each year rather than an all-at-once commitment would have reduced your effective average annual total return by less than one percentage point during the best decade. But it would have increased your effective average return by nearly eight percentage points during the worst
decade. As far as investing is concerned, dollar-cost averaging suggests that slow-and-steady will likely win the race.
Dollar-Cost Averaging–Annual Rates of Total Return
Initial investment of
Annual Investment of $1,000
Best decade (1948-1958)
Worst decade (1928-1938)
(source: “Bogle On Mutual Funds”)
This chart shows your dollar-cost averaged investment gaining almost as much as a one-time investment in the very best years of the market while losing much less during the worst years. Dollar-cost averaging is lightning in a bottle!
In his modern-day investing classic “A Random Walk Down Wall Street,” Burton Malkiel demonstrates how using dollar-cost averaging
during a market with a mediocre return will still produce tremendous gains.
Illustration of Dollar-Cost Averaging with T. Rowe Price Growth Stock Fund*
Year Ended December 31
Total Cost of Cumulative Investment
Total Value of Shares Acquired
* $500 initial investment on January 1, 1974, and $100 monthly investment thereafter. All dividends and capital gains distributions were reinvested.
In good times or bad, dollar-cost averaging is the smartest way to build a portfolio’s value for long-term
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